The One Factor You Can't Ignore (Even When a Trade Looks Perfect)

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Warren Buffett jumped into the "gold rush" at exactly the wrong time...

It's hard to blame him. Back in mid-2020, the setup in gold seemed perfect.

It was a time of fear and unknowns. We were in the depths of the COVID-19 pandemic. And gold's hard-asset qualities made it a "no brainer" investment.

The Federal Reserve was pumping record amounts of money into the U.S. economy... which many knew would lead to inflation. Plus, those actions would hurt the dollar, making gold more valuable in comparison.

There didn't seem to be any end in sight, either. The first vaccines were months away. Uncertainty was the "new normal."

In short, we had all of the ingredients for higher gold prices. It was the obvious trade at the time.

Buffett certainly thought so. He put a few hundred million dollars into mining giant Barrick Gold (GOLD). But his timing was completely wrong...

Gold hit an all-time high in August 2020. It fell 17% through March 2021... Then it sputtered sideways for the rest of last year.

That has made a lot of folks question gold. But the "obvious" setup in mid-2020 wasn't so obvious if you really dug deep. Today, I'll share why.

Buffett wasn't alone in his bet on gold. Far from it...

The setup in gold was too good. It was the obvious trade. Everyone – from seasoned pros to rookies – was getting on board.

This is what happens when an asset stages a huge rally. Investors take notice and start to pile in. It seems like easy money. And it usually is... for a time.

That was the situation in 2020. Gold was up 76% from its 2018 bottom. That kind of boom will get everyone's attention.

With gold soaring and what appeared to be more tailwinds popping up, folks were "all in." Investors were buying gold hand over fist. One way to see this is by looking at the Commitment of Traders ("COT") report for the metal...

The COT report tracks what futures traders are doing with their money in real time. These are the speculators... They're looking to make a quick buck when times are good. And they tend to all turn bearish when the environment is bleak.

On a day-to-day basis, this data doesn't tell us much. We only want to pay attention when we're seeing speculative bets pile up to an extreme.

That's because collectively, these traders are bad market timers. They generally all bet in the same direction at the worst moments. And those bets tend to go against them...

After gold's impressive run-up into 2020, futures traders were more bullish on the metal than at any other time in history. Take a look...

These traders saw the same opportunity as Buffett. Money-printing was underway, and inflation was coming... It was the ideal setup for gold.

By early 2020, this was the most crowded gold trade we'd seen in history. And it stayed hot for most of the year.

That wasn't the only indicator that gold was the popular bet, either. Money was also pouring into the SPDR Gold Shares (GLD)...

As an exchange-traded fund, GLD can create and liquidate shares based on investor demand. That means when folks want to own gold, GLD makes more shares for those new buyers. When demand is low, it cuts shares.

In August 2020, GLD's shares outstanding were at the highest level since early 2013. Take a look...

In other words, it wasn't just futures traders betting on higher gold prices. Everyone was doing it.

GLD's shares outstanding started to move higher in 2019. And interest really picked up in early 2020, before peaking in August – right around the time gold topped out.

Demand for gold was the highest it had been in at least a decade... And again, the trade was the most crowded it had ever been, based on the COT report.

This is the important point to understand. It doesn't matter how perfect a setup looks. If everyone agrees, and everyone has bought into it, then there's nobody left to drive prices higher.

That's where gold sat in mid-2020. And it's why, despite the obvious trend working in the metal's favor, prices peaked.

Now, I understand that tracking sentiment seems like a daunting task. It's as much a feeling as it is numbers. But it's something you can't afford to ignore.

Extreme sentiment is one of the few factors that can cause a perfect trade to go against you. That's why you always need to consider it before putting money to work.

Good investing,

Chris Igou

Further Reading

"Sentiment is on a hair trigger these days," Chris writes. Right now, investors are keeping their money on the sidelines. And this could set the stage for massive upside over the short term... Learn more here: Investor Fear Points to More Upside in Stocks.

The market is full of uncertainty today with inflation rising and the Russia-Ukraine conflict still ongoing. But history shows this fear could lead to solid returns if we remain patient... Read more here: Stocks Are Becoming a Contrarian's Dream.

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Market Notes


Today, we're checking in on one of the world's best companies...

Longtime readers know we like to talk about "World Dominating Dividend Growers." These are the leading companies in their industries, enjoying steady sales growth and huge profit margins. And they share their success with shareholders by regularly raising dividend payments. Today's company is a prime example...

Coca-Cola (KO) is a $280 billion beverage titan. The company is best known for its iconic Coke soft drink... which consistently tops the charts as the world's No. 1 soft-drink brand. But it also sells popular beverages such as Minute Maid juice and Dasani water. And with more than 200 respected brand names under its umbrella, Coca-Cola is thriving despite today's market uncertainty... The company posted nearly $39 billion in net revenues for full-year 2021 – up 17% year over year. Plus, it's raising its dividend for the 60th consecutive year.

As you can see in today's chart, KO shares are up more than 80% from their pandemic lows, including dividends... And they recently hit a fresh all-time high. This is another example of why World Dominating Dividend Growers make reliable investments...