Gold Still Glitters While Sentiment Grows to a Bullish Extreme

Gold has been one of the most glittering asset classes to own so far this year -- as global stock market turmoil, credit market turbulence, and persistent fears of inflation – combine to propel the yellow metal past $900 an ounce.

While other commodities have stumbled a bit in recent weeks, gold continues to surge for several reasons. Mainly, lower global interest rates and higher food and energy prices have investors talking about “stagflation” again. That’s the witch’s brew of stagnant economies, high unemployment and persistent inflation.

But gold has been on such a parabolic rush to the upside in recent months, some investors are beginning to question whether these big gains contain the seeds of large correction ahead. You see sentiment in the global gold trading pits has grown rather one-sided – solidly in the bullish camp – as the price has run higher.

Now Everybody’s Talking About $1,000 Gold

In fact, according to a recent article in the Financial Times, “speculators on the New York gold market hold 10 bets on higher prices for each one held on lower prices.” Investors in Tokyo and Shanghai’s brand-new gold futures market are similarly head-over-heels bullish.

Such an extreme in investor sentiment, that's 10-to-1 in favor of the bulls, typically ends badly in any market no matter how strong the underlying fundamentals.

The gold bulls suddenly have lots of company… but these are most unwelcome guests. The world’s major investment banks have taken a new-found shine to gold.

Firms including UBS, Citigroup, Barclays Capital and the Bank of Nova Scotia have all been pounding the table lately, with gold prices hovering at or above $900 per ounce. Now these investment firms are forecasting $1,000 gold is well within reach – a mere 11% above recent highs.

Where were these guys when gold was in the dog-house at $200 per ounce earlier this decade? At that time, most of Wall Street had thrown in the towel on gold, believing it might never shine again. When my colleague Eric Roseman said years ago that gold would top $1,000 an ounce on its way to perhaps $2,000 before the gold bull market ended – Wall Street laughed at the idea.

Eric’s subscribers are the ones laughing now… all the way to the bank.

Warning: The Majority of Wall Street Opinion is Typically Late to the Party

Now, with gold prices up over 250% since 2002 – the Wall Street crowd has suddenly seen the light and turned overwhelmingly bullish! One analyst recently wrote in a report: “prices could explode to multiples of these levels ($1,000 per ounce) in the event of a full-blown US recession.”

Talk about being late to the party! This is a classic sign that the gold trade is getting overcrowded with bulls. Whenever sentiment in any market or sector gets this one-sided, my natural contrarian instincts push me to the other side of the boat before it capsizes. There are other warning signs on the horizon too.

Gold price volatility has picked up in recent sessions, with wider swings in opposite directions.  This may be a powerful early warning that gold prices are in for a correction too. Stay tuned!

P.S. Check back again tomorrow for more of my thoughts on gold...