Gold Sentiment Is Just Plain Ugly

Gold Sentiment Is Just Plain Ugly

The headlines are dramatic, ugly and depressing to anyone who holds gold right now. Broad market sentiment has shifted from disdain to highly negative. Hedge funds are shorting gold aggressively, other hedge funds that own gold are being "outed". The market pundits are are sticking the proverbial knife in and twisting it with glee. The Financial Times published an interesting article over the weekend by Mohamed El-Erian. He is one of the world's most respected investors and market commentators. In his piece he makes a number of interesting observations.

According to El Erian gold is falling because:

• In a world of ETFs investors can mange risk more effectively and therefore do not need a traditional safe havens such as gold.

• Gold does well in inflationary environments, as we don't have one right now, ergo, gold does poorly.

• Central banks are not buying gold as aggressively as they once did; lower demand, lower prices.

• Gold has not reacted as a safe haven as it should. Greece should have sent the price soaring but it did not.

• Official and institutional demand for gold has not materialised.

• Physical market demand at lower prices is not strong enough to create a firm bid for gold, there are not enough small guys in the market.

• Gold's recent price move up $1,000 from $700 in 2008 was the outlier and not the norm and gold is now priced more correctly then it was then.

But then he drops the biggest bomb of all. He states that gold could buck its recent trend and the reason he gives should give you all reason to take notice.

“This situation is unlikely to change soon but it need not be terminal. A shift would probably require a broader normalisation of financial markets, including a diminution in the direct and indirect role of central banks in determining asset prices and their correlations.”

If you are foolish enough to trust in the markets' internal risk pricing mechanism, efficient market theory, think again. If you need proof look at the number of market mechanisms that have been wholesale rigged for the past 15 years.

ENDS

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