Gold Is The Ultimate Contrarian Investment Right Now

30 June 2021
A single piece of pure gold is held by a person.
Global Investors from the United States

The ideal time to buy is when there is “most pessimism,” and the best moment to sell is when there is “maximum optimism,” according to legendary global investor John Templeton.
Contrarian investment requires a strong sense of conviction and steely nerves, but those who do it well—Templeton included—are rewarded handsomely. The key is to look for opportunities.
Gold, in my opinion, is the perfect contrarian investment right now. At the present, yellow metal is mainly unloved. It’s on track to have its worst month since November 2016, and the 50-day moving average is on the verge of falling below the 200-day moving average.
According to Bloomberg, the S&P 500/gold ratio is approaching its best level in over 15 years. As of this week, one “share” of the S&P 500 costs over two and a half ounces of gold. This is a huge increase from September 2011, when two-thirds of an ounce of gold was sufficient to get access.

The S&P 500/Gold ratio is approaching its highest level since 2006.
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All of this points to the fact that gold is currently tremendously undervalued, and no one seems to notice. I’m not sure if this indicates we’ve reached “peak pessimism.” What I do know is that all of the typical determinants of gold’s price are in place, making the yellow metal highly appealing, in my opinion. I’ll go over two of them in more detail below.
Central banks have taken unprecedented measures to prop up their economies during the last 18 months. This includes printing money at an unprecedented rate, which has the direct impact of dilution of the local currency’s purchasing value.
I recently informed you that since January 2020, roughly a quarter of all US dollars in circulation had been generated. What this indicates is that the dollar has lost a fifth of its worth as a result of Powell & Company’s conduct.
Such money creation has sparked a lot of interest in Bitcoin, which is completely decentralized and has no third-party risk, unlike the dollar. Every four years, the rate of new Bitcoin issuance is slashed in half. No central banker, then, can just press a button and manufacture millions more Bitcoin.
Physical gold is in the same boat. The absence of fresh major finds and firms’ reluctance to invest more in developing harder-to-mine deposits inherently limit gold supply growth.
One advantage gold has over Bitcoin is that there is decades of data demonstrating a near-perfect positive correlation between the amount of money circulating in the US economy and the price of gold, which has risen to new record highs as the value of the US dollar has declined due to higher rates of money printing.
Of course, this implies that gold may continue to benefit from the Fed’s loose monetary policy.

The price of holding has historically correlated with the expansion of the money supply.
The Federal Reserve, Bloomberg, and the United States Government Intelligence Agency (USGIA) are

The second element is inflation, which I’ve been writing about a lot lately. The consumer price index (CPI) increased 5% in May compared to the same month last year. Since August 2008, this is the highest rate we’ve seen.
However, real inflation could be far greater. According to auto auction house Manheim, the price of used cars and trucks has increased by more than 36% year over year, with some pre-owned vehicles selling for more than their original sticker price.
Consider the cost of a property. In April, they increased at their quickest rate on record, rising 14.5 percent year over year, breaking the previous high set in September 2005.

Home prices in the United States have risen the highest since the early 2000s.
USGI, S&P Dow Jones Indices

Despite the Fed’s assurances that the current round of inflation is “transitory,” Bank of America analysts anticipate prices will remain high for another two to four years. Central banks are unlikely to hike rates in the next six months to manage inflation unless there is a big financial catastrophe, according to the bank. According to the CME Group’s FedWatch Tool, rates are likely to remain near zero until at least the end of 2021.
Everyone has heard that gold is a fantastic inflation hedge at some point. That hasn’t always been the case, and it isn’t always the case now: In comparison to a year ago, the CPI is up 5%, whereas gold is effectively flat.
But that could be because we’ve reached “peak pessimism,” as Templeton put it. As markets reach fresh all-time highs, gold is losing favor. If Templeton were still living today, he might advise investors to buy now.
Furthermore, with bond yields currently trading below zero on a real basis, investors may have little choice but to consider gold and gold mining equities as a way to mitigate the impact of inflation on their portfolios.
Is gold oversold or overbought? How do you know? Click here to watch my video and find out!
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The Consumer Price Index (CPI) is a measure of the average change in urban consumers’ prices for a market basket of goods and services across time. M2 is a measure of the money stock in the United States that includes M1 (non-bank currency and coins, checkable deposits, and travelers’ checks) as well as savings deposits (including money market deposit accounts), small time deposits under $100,000, and retail money market mutual fund shares. The S&P 500 is a stock market index that tracks 500 large-cap firms in the United States. The Case-Shiller U.S. National Home Price Index is compiled by S&P CoreLogic. The NSA Index is a monthly aggregate of single-family house price indexes for the nine United States Census divisions. It’s part of the S&P CoreLogic Case-Shiller Home Price Index Series, which aims to track changes in the overall value of all single-family homes on the market./nRead More