Gold Bullion: How to Profit from the Shift in Investor Sentiment

By Sasha Cekerevac

Of the many markets that I follow, gold bullion has seen the most significant shift in investor sentimentover the past year. From exuberance last fall to pessimism in late June, gold bullion has been nothing short of a roller coaster ride.

Because commodities can have such violent swings in investor sentiment, it’s important to look at several factors when making an investment decision. The more potentially positive factors you have behind an investment thesis, the greater the likelihood of success.

A couple of months ago, when gold bullion was at $1,241, I informed my readers that the risk-to-reward scenario was quite favorable for gold bullion at the time in the article “Investing in Gold Bullion Is All About Timing—Here’s How to Do It Right.”

While no one can predict the future, obviously, I did note that my belief for my bullish call was that investor sentiment had gotten far too pessimistic and that much of the selling was by exchange-traded funds (ETFs).

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It appeared to me that investor sentiment was about to shift for gold bullion, and since that time, this is precisely what has occurred. However, there are also seasonal factors that come into play, especially in India during the fall, which includes the festival season running from August until October and the wedding season from December into springtime.

India is a massive buyer of gold bullion and investor sentiment, especially amongst the retail consumer, never wavered. To that extent, the Indian government has yet again increased the tax on gold bullion imports. This is the third time this year alone that the Indian government has tried to limit the amount of gold bullion imported, as investor sentiment amongst Indians remains strong. (Source: Pradhan, B., “India Increases Gold Tax Third Time This Year to Cut Deficit,” Bloomberg, August 13, 2013)

The new tariff for gold bullion is now 10%, up from the previous amount of eight percent. Tariffs were also increased for silver, also now at 10%, up from six percent.

The Indian currency is struggling as the nation imports almost all of its gold bullion, in addition to energy such as oil. Remember, for an Indian to buy gold bullion, they need to sell their currency, the rupee, causing downward pressure, which is creating severe inflationary problems.

Naturally, this is creating a large premium for gold bullion, as investor sentiment still remains strong. Essentially, buyers remain committed to buying gold bullion in India, but will now have to face higher fees. Up until July 2013, imports of gold bullion were 383 tons, up 87% versus the same time in 2012. As the price of gold bullion has fallen, Indian buyers have stepped up to accumulate since investor sentiment became more bullish.

Chart courtesy of www.StockCharts.com

While the Indian government might try to curtail imports of gold bullion, investor sentiment has obviously begun to shift dramatically over the past month. We are now seeing a lack of selling pressure, which is a crucial factor that I outlined to my readers.

The range I determined at the time was for gold bullion to move into the $1,400–$1,500 area, which appears will happen sooner than many believed. At that point, especially the higher end of the range, it will be interesting to note how investor sentiment begins to shift. Gold bullion could either consolidate the gains or continue its bullish formation if it can break through the $1,500 area—a signal that market sentiment remains strong.

Price is the ultimate truth, and we will have to watch the price action in gold bullion to determine the extent of the move. If demand remains strong and there is no further selling pressure, this will open the door to an even higher price point for gold bullion.

This article Gold Bullion: How to Profit from the Shift in Investor Sentiment was originally published at Investment Contrarians