Gold: The Ultimate Contrarian Bet

People are going to see moves in gold that will shock them. Some of the advances will be spectacular, but right now people are focused on short-term weakness so they are missing the big picture. - John Embry, King World News

The longer the bullion banks and hedge funds try to sit on the price of gold/silver, the more violent and extreme will be the eventual upside counter-move. This market tendency has held tried and true for the entire 12-yr bull market in precious metals.

Much is being made in the financial media about the recent "huge" ongoing liquidation of gold from GLD and other gold ETFs. But what is not being reported and discussed is the fact that, in the past, big GLD liquidations have preceded a massive run-up in the price of gold. In other words, when investors dump GLD, it's the ultimate contrarian bet. I wrote an article for Seeking Alpha about this market fact:

the current drop in total ETF gold holdings is visually the largest on record. But in the context of the overall ETF gold holdings it is not significant. You can also see visually that when large drops in ETF holdings have occurred (late 2008, for instance), the drop correlates with a subsequent big move higher in the price of gold. Furthermore, the biggest liquidation of GLD began on February 20, when the price of gold was $1564. The price today is $1592. The point is, the price has actually climbed higher since GLD began heavily liquidating. This is actually very bullish, as the market has absorbed the 4 million ounces of gold liquidated from GLD while grinding higher. Makes you wonder who is buying the gold being liquidated.

You might be surprised by the difference between the actual facts and what is being reported in the media. In addition, The Got Gold Report published a report which comes to the same conclusion as I have, BUT it also points out that, while gold ETFs are selling out, silver ETFs are seeing big investor inflows. Please note that in the past, this investor behavior was not present and it further reinforces the bullishness implied by the liquidation in GLD.

With the gold/silver ratio currently at 54 vs. its very long term average of 16, this verifies to me that the retail investor - the "little guy" - is beginning to understand the importance of investing in precious metals. The fact that retail is selling gold and buying silver is a testament to the old adage that "silver is poor man's gold."

With only an estimated 2-3% of the public putting some money in to the precious metals sector, imagine what the effect will be when a lot more people figure out the truth about the dollar and start moving money into the precious metals sector. Let's put this in perspective. Assuming that the U.S. really has 8100 tonnes of unencumbered gold. The current market value of this about $435 billion. The total size of the U.S. retirement asset base is about $17 trillion. If U.S. investors were to move just 10% of their retirement assets into gold, it would buy the entire amount of gold owned by the U.S. Government three times over. Think about the price implications for gold/silver...