Gold dropped approximately 5 percent this week. In doing so, it broke through critical support at $1,130 per oz. From a technical point of view, that is really bad news for gold bulls.
Is the end of the bear market in sight or is there plenty of downside?
In order to get some clues about the answer to that question, let us review market sentiment during three critical moments in time. Why market sentiment? Because, at this point, with the price of gold below its production cost, it is mainly sentiment that is driving precious metals.
The first moment in time is August of 2011. We will illustrate our thoughts based on an article that appeared on Reuters, entitled "Banks race to raise gold price forecasts." In it, 8 major investment banks unanimously raised their gold price forecast. What do we call this? Complacency. When literally everyone believes that prices can only go up, it is very likely that a top is in place. Indeed, the day after the article appeared on Reuters gold made its all-time high.
The second moment in time is the gold price crash from April and June 2013? You will recall how the mainstream media became bearish, but gold bulls were more or less massively convinced that the technical breakdown was a non-event. There was not enough bearishness, so the decline of prices continued.
Fast forward to today, where gold has just broken through critical technical support. Sentiment is as bad as it can get. And everyone, including gold bulls, is unanimously agrees that gold will go lower. Case in point: Bloomberg released on July 22nd an article in which it says that several major investment banks are convinced that gold will go lower, and that it will break $1,000.
Does this smell like the perfect contrarian setup? We believe so! Although gold can go lower from there, it is probably close to bottoming out. When everyone is expecting gold to golower, we can expect the metals to turn into the other way.
If there is one important rule in investing, it is that assets do not endlessly trend in one direction.