Hedge funds tend to jump on trends move quickly, so it is no surprise that they boarded the stock market express late last year, while others moved to take advantage of currency movements. For a contrarian, the fact that hedge funds have sharply reduced their gold holdings is a positive sign. Perhaps at the next budget impasse in Washington, they will exit stocks and move back to gold.
Another contrarian indicator is the rapid increase in short selling of gold. According to Standard Chartered, there are 168 tons of gold sold short, well over the five-year average of 100 tons. What has been sold short, has to be bought back eventually.
Lastly, various indicators have reached new extremes, including the oscillator indicator back to extremes last seen at the beginning of 2009, suggesting a near-term reversal.
Sell now and buy back cheaper?
One can’t be sure how much lower or for how much longer gold will fall, but we are closer to the bottom than the top, for both gold and gold shares. The fundamentals remain positive for gold, while valuation indicators for gold and shares are near long-term lows. The clear breakdown of budget talks may provide the trigger for selling the stock market and moving back into gold.
As for gold stocks, the seniors continue to face head winds, including rapidly rising costs and rapacious governments. Many exploration companies are running out of cash.
Certainly, if you own companies with weak balance sheets or for which there is no likely near-term trigger, you might re-evaluate. But every stock on our list is there for a reason, be they low-risk companies or high-risk speculations. As we have found, gold stocks can do very well, but they are volatile. Selling with the intention to buy back cheaper can backfire. The worst mistake is to buy for the long term, hold during the decline, only to sell at the bottom. You need to hold throughout the cycle to be successful.