There’s one market-timing indicator that beats all others—stupidity.
You can always bet on the crowd to do the WRONG thing with their money.
It’s uncanny. Every time a big enough group of people believes the same thing, it turns out to be a load of B.S.
Dot-com stocks… The Y2K bug… The housing bubble…
Put simply, crowds are dumb. You can make them do just about anything and follow all sorts of stupid advice.
That’s why being a contrarian investor is so important. A true contrarian sells hysteria and buys despair. And history clearly shows that this is the one of the only proven ways to make money over the long haul.
As legendary resource investor Rick Rule puts it, “You’re either a contrarian or a victim.”
One simple way to invest like a true contrarian is to keep an eye on sentiment.
Sentiment tells you what the crowd is thinking.
There are two main types of sentiment indicators. Both are useful signals as to whether investors have become over optimistic…or over pessimistic.
- The short ratio – This tells you how many investors are short a stock or/and an entire market. That is how many investors are betting that a stock or a market will fall in price. (This is calculated by dividing the short interest by average daily trading volume.) An unusually low short ratio is often a sign of complacency and a signal to sell. An unusually high ratio is a signal to buy.
- Investor surveys – There are a number of surveys that record the bullish versus bearish percentage of investors. One is from Investors Intelligence. It tells you what percentage of investment advisors are bullish and what percentage are bearish. Another useful measure is published by the Hulbert’s Financial Digest. This tracks the sentiment of newsletter editors. When newsletter editors are at bullish extremes it’s time to sell. When they’re at bearish extremes it’s time to buy.
Right now, Hulbert’s Gold Newsletter Sentiment Index shows a 59% drop in bullish sentiment among the short-term gold market timers.
Some gold bears claim the recent pullback in the gold price from its record top of $1,433/oz to where it is today at just below $1,384/oz is a sign the gold market has “topped out” (gone as far as it’s going to go, in other words).
The problem with this view is that bull markets don’t end when the crowd is pessimistic.
They end when the crowd is overly optimistic. They end in hysteria. Not in despair.
Debt Default Will Keep Gold Prices High
As I wrote on Wednesday, the U.S., Japan and Europe are on a collision course with massive debt defaults because of too much government borrowing.
This will happen—as soon as this year—in one of two ways:
- A straightforward default – A government either refuses to pay back creditors or forces creditors to accept less than they are owed (most likely involving an IMF intervention and widespread market panic).
- A default by way of inflation – A central bank devalues the currency the debt was issued in, to a level that’s affordable for the debtor nation.
We’ll likely see the first kind of default in Europe. That’s because the Spanish, Portuguese, Irish, Italian and Greek governments issue in euro. And none of these countries has the power to print euro. That’s done by the European Central Bank in Brussels.
We’re more likely to see the second kind of default—default through inflation— in Japan and in the U.S. That’s because both the Bank of Japan and the Federal Reserve have the authority to simply print money to buy the debt issued in Tokyo and Washington D.C.
Neither America nor Japan can ever hope to pay off their debt piles. Japan owes twice as much as an entire year’s economic output (or GDP). And America owes about fives times its entire yearly economic output, including “off books” and unfunded liabilities.
The only option these debt addicts have is to print. And the Bank of Japan and the Fed are already doing exactly that.
Under these circumstances, gold is one of the best assets to own because it rises as major currencies fall. It stores value, in other words, far better than dollars or yen or euro.
Don’t believe the bears. The bull market in gold is far from over.
Major market tops are accompanied by excessive levels of bullishness. Right now, the crowd is more bearish than it has been in months.