Crowd psychology and the flow of hot money into and out of asset classes are what make markets tick. Statistical indicators often give a good record of what has just happened, but – as discussed in last week’s piece in relation to unemployment readings being a lagging indicator – extrapolating a trend into the future is an unsatisfactory way of making predictions. Often – whether it be the peak of Y2K “new economy” enthusiasm, or the nadir of the early 1980s recession – reality has a way of confounding expectations. This is because once everyone is one side of a market, there’s only one way for the market to move: the other way.
With this in mind, it’s interesting to look at current COT data for gold futures in the context of the broader economic zeitgeist. As the charts on Jesse’s website show, small speculators are now at even lower net-long position in Comex gold futures than was the case in late 2008, following the collapse in gold during the summer and autumn of 2008. They are now basically even in terms of their long/short position. The same is also true, to a slightly lesser extent, of the money managers’ net position. Speculative fervour about gold is at its lowest level in years.
Then consider the dominant narrative: that central bankers are successfully managing economic recovery though their QE policies, that the American locomotive is pulling the world out of a rut, and that there is no prospect of serious inflation. Do economic fundamentals justify these views? We think not.
Trying to pick bottoms in any market is notoriously tricky, and it may be the case that we have further to fall in gold and silver before everyone is on the bear side of the market (including some former true believers). This merely sets the stage for longer-term appreciation, and an eventual mania.
