COTW: Buy When There's Blood in the Streets?

June 4, 2019

On October 1st, 2018 there was a record of over 80,000 gold futures contracts that had been sold short by investors (i.e. traders that are “non-commercial”) according to data compiled in the CFTC’s weekly Commitment of Traders report. At the time, we suggested similar extremes in sentiment tended to coincide with turning points in markets. Then record bearishness in gold - much of which was simply the inverse of near record economic optimism - reversed shortly thereafter. Not only has the price of gold advanced over 11% since October 1st, the yellow metal has since outperformed both global and U.S. stocks by approximately 17%. Reviewing non-commercial futures positioning today, sentiment appears neither overly bearish nor bullish, which is interesting considering how well gold has performed.


Sometimes contrarian signals like this don't work and sentiment extremes continue further than we all think are possible, but more often than not, they do. Baron Rothschild, of the British banking dynasty, said the best time to buy was "when there is blood in the streets." - i.e. when everyone else was selling. We pay attention to sentiment and use it as an input in decision making for a simple reason: when everyone who can sell has already sold, there are no more sellers and everyone is a potential buyer.


The chart below can be downloaded here



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