Investors tend to make ‘contrarian’ investing choices too early in the cycle.
Basically, the price of an asset can be trending higher, lower or sideways. When an asset is declining in price, it remains in a downtrend until proven otherwise. The chance of a trend change is much smaller than the trend continuing. In other words, being ‘contrarian’ is difficult, and the pitfall is that an investor may be too early with his contrarian call.
Our experience shows that a good contrarian call is based on a set of indicators, including price and technicals, investor and media sentiment, and opportunity costs. More extreme indicators show the market is closer to the turning point. In our view, commodities and precious metals are very close to that point. Let us review our 3 indicators.
For price and technicals, we use the CRB index, a proxy for the commodities complex. Note that petroleum has a large weight in this index. As the two decade chart reveals, the CRB index touched the 1999 and 2001 lows in August of this year during a panic sell off. The CRB is trading 58% lower than its 2009 highs, while it is down 48% from its 2011 highs. These are huge corrections.
Moreover, from a technical point of view, we are going through a beautiful divergence between momentum and price, as indicated with the blue line in the far right green oval on the chart above. This has occurred after a drop into deeply oversold levels. Technically, this is a true contrarian opportunity.
Regarding precious metals, it is clear that $1,000 /oz will offer formidable technical and psychological support (no chart required to make that point). Given our focus on secular trends, we remain convinced that the peak of the previous secular cycle is the absolute bottom of the current cycle. Gold touched $1,075 /oz in July/August of this year, which is still 18% above the 1980 top, but there is little room left, given the current 45% correction in this cycle.
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