Contrarian Investors’ Positions after BAML Survey

Is gold undervalued?

A record number of fund managers in the BAML (Bank of America Merrill Lynch) September survey believe that gold (IAU) is undervalued, trading at a 17-year low. About 19% of them said gold was trading below its actual market worth.

The SPDR Gold Trust ETF (GLD) has fallen ~8.5% year-to-date and ~13% from its April peak. The overall positioning in commodities is at the lowest in a year. It turned underweight for the first time in six months.

Contrarian Investors’ Positions after BAML Survey

Gold’s odd behavior

For most of 2018, gold (GLD) has not been behaving as it ought to in a situation of escalating geopolitical and economic tensions. It’s usually considered a safe-haven asset in which investors take refuge in the event of uncertainty and risk. However, gold has not been able to draw safe-haven bids so far in 2018 since the strong US dollar (UUP) keeps weighing it down.

BAML survey as a contrarian indicator

Investors should remember that the BAML survey is usually taken as a contrarian indicator. After long US dollar trade in December 2015, the dollar plunged more than 8% in the next six months.

BAML’s view remains cyclically defensive on the Federal Reserve’s tightening in the late cycle. The most contrarian trade remains long emerging markets (EEM) compared to a short US dollar (UUP). BAML strategists also recommend long materials compared to short healthcare for investors willing to bet on China (FXI) stimulating its economy in the fourth quarter. According to strategists, “We expect sentiment-driven rallies to be short-lived and see only temporary factors supporting EU financials.”

For more on gold and why it might seem like a good idea in the second half of 2018, be sure to read Why the Bottom for Gold Could Be Close.