The madness of crowds

The market remains in a firmly “risk on” (complacent) mood, with the Dow Jones recording its tenth day in a row of gains yesterday – its most number of consecutive daily gains since 1996. Earlier this week the Volatility Index reached its lowest point since April 2007 – another indicator that hedge funds remain in “party on” mood.

The flip side of managed money’s bullishness on stocks is their bearishness on gold and silver. Over at King World News, Dan Norcini reports on some astonishing COT data that illustrates this point: hedge funds now have their smallest net-long position in gold since July 2007, and are currently holding a short position equivalent to over 10% of the entire Comex open interest in gold futures. Alasdair Macleod touched upon the surge we’ve seem in speculator short interest in gold since late last year, noting that in recent years, “as a contrary indicator, the short position of these trend-chasing money-managers has had a perfect track record.” Consider for instance that in July 2007, the gold price was trading in the low $600s/oz, but was on the cusp of a major rally that took it to over $1,000oz by mid-March 2008.

Norcini states that he doesn’t “recall seeing anything like this [current hedge fund short position] since this bull market began 12 years ago… The hedge funds are now essentially battling against Middle-East and Far-East central banks and commercial banks. The problem [for the hedgies] is these central banks are behemoths compared to the hedge funds.”

Casey Research’s Jeff Clark also has a similar piece out titled “The Very Best Advice to Ignore” – talking about the abysmal gold price forecast offered by major bank and brokerage commodity analysts. Consider for instance, the chart below.

It seems bizarre that these people are still paid good money to make these forecasts, and that the mass media still take them seriously.