The price of gold is consolidating aroud 5-year lows, between $1060 and $1080 /oz. However, optimism towards gold has reached the lowest level ever! As seen on the next chart, the latest Optimism Index readings for gold has dropped to 10, “the 3rd-lowest reading since 1990, next to 1997-12-16 (when it dropped to 8) and 2015-06-13 (it dropped to 9).” According to Sentimentrader, two months after those dates, gold was higher by +4.8% and +7.7%.
A low level of optimism should not come as a surprise, given the tone of voice of mainstream headlines from this week, for instance:
- “Gold slips as market starts debating a drop to $1,000”
- “Gold gains but investors cautious as U.S. rate rise looms”
- “Top Forecaster Gan From OCBC Sees Gold Declining Through 2016”
That said, a collapse of optimism to multi-decade lows is very extreme, no matter from which angle you want to look at it. Although we do not anticipate a raging gold bull market in 2016, we have our doubts that will continue to decline at this pace. Let’s not forget the yellow metal already lost 50% of its value since it peaked.
A bear market can last for a long time, but not endlessly. For contrarian investors, this time period is ideal to look at select gold miners, as that is the most oversold segment in the markets. That is for investors with a long term horizon obviously.