Gold is one of the most hated sectors in the world right now.
But this could soon create a great opportunity for speculative commodity traders.
Let me explain…
As regular Growth Stock Wire readers know, gold prices suffered a dramatic drop from August 2011 to July 2013. Prices fell 37% in a little less than two years.
Since then, prices have moved up and down with little change overall. They’ve been trading in a range between $1,140 and $1,400 per ounce.
This “sandpapering” period is incredibly frustrating for investors. If prices move down a little, investors flee the sector. When prices rise, they come back. This continues until investors eventually get exhausted and there are no sellers left.
[ad#Google Adsense 336×280-IA]But the “back and forth” creates a great opportunity for traders as they wait for the eventual rebound…
For example, in mid-March, gold prices fell from their January high of a little more than $1,300 to around $1,150 per ounce.
Frustrated investors wanted nothing to do with the sector.
We can see this by looking at Jason Goepfert’s Optimism Index (“Optix”).
Jason runs the excellent SentimenTrader website and his index is one of my favorite measures of sentiment.
The Optix shows extreme pessimism when it falls below 30. In mid-March, it hit a rare reading of 15.
But as Jason says, “When public opinion reaches a consensus, it is usually wrong – [investors] get too bullish after prices have risen and too bearish after they have already fallen.”
In other words, when sentiment reaches a negative extreme, the opposite tends to happen. When no one wants an asset, it tends to soar.
That’s exactly what happened in March.
After hitting a negative sentiment extreme in March, gold prices started to rise. They increased from $1,150 to $1,225 per ounce in just two months. Sentiment returned to more normal levels… and folks who bought in mid-March made a quick 6.5% gain.
And March wasn’t a one-off occurrence. In the past two years, investors would have made four trades if they bought gold at this level of pessimism, held until the Optix moved above 40, and exited when it reversed course. They would have earned an average 10% return on these trades. The average holding period was about 80 days.
We could soon see another opportunity like this…
Gold prices have been falling recently. As of Wednesday’s close, they were down 3% since mid-May.
And investors are once again extremely pessimistic on the precious metal.
You can see this by looking at the largest gold exchange-traded fund (ETF), the SPDR Gold Shares Fund (GLD). Last month, GLD fell off the list of the world’s 10 biggest ETFs as more than $900 million – 3% of GLD’s assets – flowed out of the fund, according to research firm ETF.com.
Except for eight trading days between November 2014 and the beginning of the year, GLD’s assets haven’t fallen this low since 2009.
We’re also seeing extreme negative sentiment from Jason’s Optix. Remember, the Optix shows extreme pessimism when it falls below 30. Today, the reading for gold is 26.
So investors aren’t as pessimistic as they were in March. But it’s likely they will be soon. As I write, the gold price continues to fall toward the March lows.
If that happens – and we start to see prices move up again – traders looking to profit in the sector can look to buy.
Good investing,
Brian Weepie
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Source: Growth Stock Wire