Don't be like Harry Hindsight: Why now is the time to consider gold

When markets are trading at or near all-time highs, it’s not normally that hard to see signs of investor exuberance. Whether it be speculative positioning, fund inflows, google searches for how to buy said asset class, talking heads on financial news channels or the infamous magazine cover indicator, there are always multiple warning signs of a top, even if most (almost none?) of us pay don't see them until Harry Hindsight comes along.

When it first traded in the USD $1,900-USD $2,000oz level back in 2011, gold fit the above description. 

Ten years of consecutive gains, a +400% return differential vs risk assets in the prior decade and the onset of ZIRP and QE all led to gold becoming the number one long-term investment choice for American investors, according to a Gallup Poll at the time.

Rather than rocketing to new highs, that period marked an almost 10-year top for the precious metal in USD terms, with gold falling back below USD $1,100oz by the end of 2015. It then spent the next three years struggling to meaningfully move higher (despite the Brexit and Trump effect), before gold finally got going again in late 2018, putting on seven straight quarterly gains to temporarily top USD $2,000oz just over three years ago in late 2020. 

Gold was also incredibly popular back in late 2020.

Move the calendar forward to today, and despite the fact gold is again knocking on the door of USD $2,000oz, sentiment could not be more different. There are multiple indicators of this, from Bloomberg story counts (it doesn't feature as prominently as it did in the past), to continued outflows from gold ETF investors for most of 2023.

But nowhere is the lack of excitement when it comes to gold more evident than in the futures market. Indeed, up until just over a week ago speculative short positioning was so elevated, and long positioning so absent, that this segment of the gold market found itself net short. This means more money was being bet that the gold price would fall, rather than rise.

Followers of these data sets will be aware that this is a very rare circumstance, as the following chart, which shows gross long and gross short positioning, as well as movements in the USD gold price from 2010 onwards illustrates. Note that in the chart, MM denotes managed money, or speculative positioning. 

Source: ABC Bullion, Y-Charts, LBMA

As you can see, when gold was first trading near USD $1,800oz back in 2011, there was almost no one short gold, while long positioning peaked at more than 220,000 contacts (each contract is for 100 ounces of gold, so 220,000 contracts equates to USD $40bn in money bet that gold would rise).

It was similar in early 2020, when gross long positioning peaked at more than 260,000 contracts (USD $47bn) vs almost non-existent short positioning.

Today, we find ourselves in a situation where the market is more evenly matched, with gross short positioning (120,000 contracts) exceeding gross long positioning (93,000 contracts) by the 10th of October, though this has begun to reverse.

The complete absence of froth from this segment of the gold market should be an encouraging sign for precious metal bulls, especially given previous periods short positioning exceeded long positioning turned out to be great buying opportunities.

The most obvious of these, which is also evident on the chart, was Q3 of 2018. As we highlighted earlier in this article, gold was trading below USD $1,200oz back then. It would go onto rally by more than 70% in less than two years from that point.

While there is never any guarantee history will repeat, and this is not a prediction per se, but a similar move in a similar timeframe from current levels would see gold trading north of USD $3,300oz by mid to late 2025.