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Contrarian investing can seem super sexy. You take the rebellious perch above the sheeple, you feel like you’re part of a smarter more elite crowd of thinkers, and when you’re correct the payoff can be incredible.
Unfortunately, ever since the dotcom bubble, contrarian investing has become as ill informed and herd-like as any other widely followed investing technique. The newest and best example of this has been betting against gold (NYSE:GLD).
First, let’s examine the contrarian argument. In the fall of 2009, gold (NYSE:GLD) busted through $1,000 an ounce and made headlines around the world. “Ah-ha!” yelled contrarians. “This is an over crowded trade according to my trusty ‘magazine cover’ indicator.” At the same time, infomercials were littered with ‘We Buy Gold’ ads. “Ah-ha, again! Gold is a craze! Time to short,” exclaimed the gold haters.
The problem with this type of reasoning is it overlooks much more powerful drivers for gold (NYSE:GLD). The most important driver — which contrarians ignored to their portfolios’ peril — was demand. Not demand from home gamers buying thousands or even hundreds of thousands of dollars worth of physical gold (NYSE:PHYS) or the SPDR Gold Trust ETF (NYSE:GLD). I’m talking about demand from huge sovereign nations — the type of whales that can move markets for years or decades when they support a specific thesis.
These are the whales which keep eating all the minnows swimming upstream in an attempt to short gold. More specifically, countries like China (NYSE:FXI), India (INF), and even Mexico (NYSE:EWW) are diversifying their assets into more gold. Add a once a century global sovereign debt crisis coupled with a loss of confidence in paper currencies, and you are staring in the face of what could be one of the greatest demands for gold we may see in our lifetimes.
As long time Wall St. Cheat Sheet readers know, we always look for investments where “Support is Provided By Institutional Investors & Company Insiders” (the S in our CHEAT SHEET investing framework). When it comes to gold, the commodity is not just supported by large funds … it’s supported by governments that are like black holes when they set their sites on purchases. So, until the sovereign debt crisis is resolved and paper currencies regain investor confidence, shorting gold is about as good a bet as going sleepless for a week, drinking an entire bottle of liquor, then sitting down to play poker with the best players in the world. It’s not more complicated than that … as contrarians learned the hard way.
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