By: Myra P. Saefong
January 17, 2013
SAN FRANCISCO (MarketWatch) — Most investment banks aren’t expecting gold to rally this year — that’s why some investors are betting that it will.
It’s known as the contrarian approach to investing, and there’s a lot more talk about it after gold’s hefty 28% plunge last year and as analysts slash their forecasts on gold for the year. Investors are selling low and contrarians have an opportunity to buy cheap.
“The analyst landscape is uncommonly bearish,” said Dennis Gartman, editor and publisher of The Gartman Letter. “Even the ‘gold bugs’ are neutral of gold and that is stunning, really.”
His view: it’s “time to be quietly bullish.”.
Last year, gold prices dropped 28% for its worst year since at least 1984, when FactSet began tracking data.
And taking a look at 2014 average gold-price estimates from six investment banks, a fall of 14.5% from 2013’s average. Deutsche Bank’s estimate is among the lowest at $1,141 an ounce, while HSBC’s is among the highest at $1,292. Deutsche Bank set 2013’s average at $1,413.
Futures prices for February gold settled at $1,240.20 an ounce on the Comex division of the New York Mercantile Exchange on Thursday, and some of the 2014 average price forecasts are lower than that.
“There is a nearly unanimous consensus that gold is going to drop to somewhere around $1,000” an ounce,” said Steven Kaplan, chief executive officer of TrueContrarian.com. “Many investors have positioned themselves to benefit from lower gold prices with very few expecting the opposite, implying a lot of short selling” or an avoidance of the sector.
Kaplan is one of the few who expect the opposite to happen. He’s predicting higher prices.
“I am not negative on gold,” he said during a webcast on his 2014 market outlook late Tuesday. He sees gold going up to at least $1,350 this year and said he’s “on the long side” of the gold miners.
Of course, there are many who would argue with a prediction for higher prices, and for lots of good reasons.
Michael Lewis, research analyst at Deutsche Bank, said in a note this week that positive growth shocks in the U.S. are likely to assist the Fed in terminating its QE program by the end of 2014. That would “sustain the adjustment in U.S. real interest rates and encourage a strengthening in the U.S. dollar, both of which will introduce additional downside risks to the gold price.”
In the note, Deutsche Bank cut its 2014 forecast to $1,141, down nearly 15% from a previous forecast and almost 24% below 2013’s average.
Other investment banks offered similar reasoning for their cuts to gold-price predictions, and sentiment has been weak.Currently, the Hulbert Gold Newsletter Sentiment Index (HGNSI) shows a -30% reading, meaning that the average short-term gold timer is recommending that clients allocate 30% of their gold-oriented portfolios to going short.
Still, that’s an improvement from a -60% reading seen back in late June and early July of last year, which was the lowest since 1985, when the index began.
“Even though gold’s price is not that much different from where it was in the summer, gold timers are not as bearish as they were in June/July,” said Mark Hulbert, founder of the Hulbert Financial Digest. “From a relative point of view, that is curious” and “suggests that there may be some bullishness creeping in.”
However, from a contrarian analysis point of view right now, he said the market is still “seeing too much bullishness” and would probably “need to see more downside,” before sentiment moves higher.
But how much lower can sentiment go from here?
Last year, big banks didn’t really start cutting their gold forecasts in droves until April. This year, that’s already begun.
Only about 6% of analysts are bullish on gold right now, according to David Morgan, publisher of The Morgan Report on precious-metals investing.That “nearly guarantees a bottom,” he said, adding that he sees higher prices this year, not lower.
Peter Schiff, chief executive officer of Euro Pacific Capital, said he’s advising clients to buy both gold and gold-mining stocks at current levels.
The 30% selloff in gold in 2013 and the consensus expectations for an additional 15% decline in 2014 are unjustified, said Schiff, and with such negative sentiment on gold from the mainstream, “it’s a good time for a contrarian move.”
The central premise that drove the selloff in 2013 — that the economy has sustainably recovered and that the Federal Reserve will end quantitative easing in 2014 — is flawed, said Schiff.
But Schiff, who has reputation for making calls outside the mainstream, disagrees. Backing up his prediction that the stimulus program will persist indefinitely, Schiff said “evidence for the economic fragility can be found in the continued declines in the labor force, which would not be occurring in a real recovery.”
If the U.S. economy remains fragile and QE continues, that would be bullish for gold. But the metal’s not ready for a rally just yet.
“Timing is always tricky,” said Morgan. “Until gold can breech $1,550 to the upside and remain at that level, we cannot say gold is in rally mode.”
Gold Goliath is not your typical gold dealer.