The following is a summary of our recent Financial Sense Newshour podcast, which aired on Saturday here and on iTunes here.
In direct contrast to the "euphoria days" of 2011, most investors have now turned bearish on gold after experiencing a multi-year bear market. Contrarian investors—who generally invest against the consensus or the crowd—argue that's a good sign and believe the bear market in gold has likely reached an end.
One way to determine this is by looking at the behavior of retail investors, who are much smaller, speculative buyers, vs. the wholesale market, who buy much larger quantities and, often, when prices are more attractive.
Retail Sentiment Bearish
“I promise you, phones are not ringing,” says Kathy Derbes, a bullion dealer we recently spoke to on Financial Sense Newshour. “No one even wants to talk about gold. That’s where we are now … and it’s the mirror opposite of where we were in 2011.”
Derbes says the current investor psychology towards gold is extremely bearish. While it was difficult to source coins and bars at the peak of the market in 2011, the opposite is true now.
“Prices have come down dramatically,” she said. “There is little buying (and) clients are selling back to us.”
Also, premiums have collapsed, especially in numismatic coins. Dealers are awash in inventory and selling off what they’re buying back from clients.
Wholesalers Stepping Back In
If we look at gold in a global sense, things are different, Derbes noted. While the “ounce market” in the U.S. is bearish, what really matters is the wholesale or tonnage market.
In 2011, as gold prices rose, wholesale aggregated bid levels were way below where the speculators in the paper gold market pushed the price, Derbes noted.
“They were positioned and waited for the price to come to them,” she said.
The wholesale market is primarily made up of central banks, sovereign wealth funds, and buyers that purchase gold in extremely large quantities, essentially in tonnage, she noted.
“This is the market we should pay close attention to … because it’s the market that’s going to propel us forward in the next phase of the secular bull market,” she said. “Markets turn up when no one cares and when everyone is disinterested. .... That’s where we are now.”
Supply Issues and Future Action
When it comes to the fundamentals, i.e. gold supply and demand, Debes noted that gold producers have experienced more headwinds, which always happens when prices fall. They’ve had to sell off gold, and new projects have failed to materialize in this environment.
“That tells me supply has been slowly declining,” she said. “There are other headwinds from miners … that include political headwinds … operational headwinds, that sort of thing.”
Since November of last year, Derbes has seen the exhaustion in the ounce market.
“This bear market was longer than anybody could have (foreseen),” she said. “People are saying, ‘When is it going to turn? When are we going to resume the secular bull market?’”
Though it isn’t a foregone conclusion that we’ll resume the bull market, Derbes believes we are close, especially when looking at political and investment risks.
“Do we really think the political risk, the geopolitical risk, the risk of Fed policy and portfolio risk have diminished? To me, it’s all increased.”
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