By Investment Contrarians
One of the keys to investing that I have tried to convey to my readers is the importance of market sentiment. Even if the long-term fundamentals remain strong, over the short term, shifts in market sentiment will cause prices to become quite volatile.
As I pointed out many times over the past couple of months, gold bullion was becoming increasingly attractive to me. While we continue to see strong demand for physical gold, the massive amount of selling through exchange-traded funds (ETFs) and hedge funds created a shift in market sentiment from positive to negative, causing a very large amount of selling pressure.
My point at the time was that the key to a reversal in gold prices would be to watch for a shift in market sentiment. We’ve clearly seen that over the past few weeks, in addition to international geopolitical tensions that are causing investors to flee to safety in gold bullion.
When tensions rise and the world becomes unstable, people will tend to move into areas of security such as gold bullion. With recent reports that chemical weapons have been used on civilians in Syria, the market is reacting.
With the U.S. contemplating attacks on Syria, various other nations are voicing concerns as to the possible blowback effects. These nations include Turkey, which fears retaliation by Syria. Russia is also voicing its opinion against any American attack.
All this instability creates an upward swing in market sentiment for gold bullion, which is one safe asset that is international in nature.
All of these geopolitical tensions are creating an upward bias in market sentiment for the yellow precious metal, adding to traditional demand for physical gold from such nations as India and China.
In fact, recent reports indicate that consumer demand in Indonesia will hit a four-year high, with the nation consuming 40 tons of gold bullion in 2013, an increase of 30% versus 2012. (Source: “Gold’s Rout Spurs Surge in Indonesian Demand,” Bloomberg, August 23, 2013.)
As the market sentiment for exchange-traded gold bullion declined, physical buyers emerged and have continued to accumulate gold bullion at its lower price levels. Of course, in countries that have extremely high inflation rates such as Indonesia, with July’s consumer price index (CPI) coming in at 8.6%, gold bullion is even more appealing.
Chart courtesy of www.StockCharts.com
I previously discussed market sentiment in these pages when gold bullion was $1,240. As I stated then, “I do think that gold bullion might have hit a bottom and could move up into the $1,400 to $1,500 area.”
The reason for my bullish call on gold bullion was that market sentiment for exchange-traded gold bullion had become too bearish in relation to the physical demand at that time. At some point, the selling pressure by ETFs would end and a shift in market sentiment would come.
The next level to watch for gold bullion prices is approximately $1,500, at which gold bullion will likely see some degree of resistance, especially with the 200-day moving average nearby.
While some people might be upset by the volatility over the short term, long-term investors can actually use these extreme market sentiment shifts to their advantage. And this doesn’t just apply to the yellow precious metal, but any asset.
Stocks go through the same market sentiment shifts, from enthusiasm to pessimism and back. Determine your long-term investing goals and look to accumulate when market sentiment is negative, taking your profits when market sentiment is overly optimistic.
Physical demand for gold is creating a floor in the price, and market sentiment by the ETFs and hedge fund managers is now shifting into positive territory; combining these factors and adding the catalyst of geopolitical tensions, this could drive gold prices much higher.
~ by Sasha Cekerevac, BA
This article was originally published at Investment Contrarians.