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The commodity boom is quickly turning into a bust…
Energy prices are down big. Agricultural commodities are falling. And metals are dropping as well.
Gold is no exception. It fell as much as 17% in recent months. And with that decline, sentiment is crashing as well.
Gold hasn't been this hated since 2019. That's based on one of the most useful contrarian tools in the commodity markets.
All told, we've only seen three other cases like this since 2010. It's darn rare. But according to history, it could mean 15% gains over the next year.
Let me explain…
It's a simple story. The same market dynamics play out over and over again.
When times are good, folks chase performance and pile into a trade. Most of them buy at the worst possible moment. And sure enough, losses follow.
Then, when investors can't take any more pain, everyone floods out in unison. And wouldn't you know it… that's just when the bad times tend to let up and prices recover.
This cycle of fear and greed drives sentiment in the markets. And it's playing out right now in gold.
We can best see this in the Commitment of Traders (“COT”) report for gold. The COT is worth watching because it shows what futures traders are doing with their money.
These speculators are the opposite of the smart money on Wall Street. They fall prey to the same swings of passion that everyone else does. So their bets are a powerful contrarian indicator at extremes.
Right now, these folks are incredibly bearish on gold. Take a look…
You can see that futures traders loved gold in March. That's when the metal peaked. And with its decline since, futures traders have all but given up.
Again, speculators haven't been this bearish on gold since 2019. We're still above the lowest lows of the last decade… But hitting a multiyear low is still a powerful setup.
Specifically, I examined each time the COT hit a new two-year low. This has only happened three other times since 2010. And the returns that followed were impressive. Check it out…
Gold's performance since 2010 hasn't been great. It's up only 3.6% per year over that time. But buying when it's hated crushes that return.
Buying after pessimism like we're seeing today led to 2.3% gains over six months. That's only slightly better than a buy-and-hold approach… But over the next year, those gains jumped sixfold to 15%.
That's dramatically better than the typical buy-and-hold strategy. And in all three cases, gold was higher a year later.
This is setting up a powerful contrarian setup in gold. The metal has been falling. And now, futures traders hate the idea of owning it.
That tells us a move higher is likely. We just need to wait for the uptrend to start before we take advantage of it.
We're not there yet. But good times are on the horizon for gold.