The Vanguard Group, an American investment advisor with over $5.1 trillion in assets, has given up on gold. The company has announced last month that its Vanguard Precious Metals and Mining Fund (VGPMX) will be renamed into the Vanguard Global Capital Cycles Fund. The structure of the fund will also be changed: the share of mining stocks will decrease from 80% to only 25%. In other words, the precious metal fund will turn into a diversified portfolio investment.
For everyone interested in commodity trading this is a massive signal. But it probably does not mean what you believe it does. What sounds like an awful news for the market can turn out to be one of the biggest bullish signals the market has received since the year 2001.
As of now, the price of gold has depreciated 36% since September 2011. As a result, a lot of mining companies — and gold funds comprised of shares of the said companies — have depreciated even more. It is, therefore, understandable that Vanguard wants to reinvent one of its funds. VGPMX has lost 2/3 of its value in the last 7 years. During the same period of time, S&P 500 has demonstrated a 130% increase. All of the above can be an indication of the upcoming reversal, as it happened back in 2001 when Vanguard renamed the Vanguard Gold & Precious Metals Fund to the Vanguard Precious Metals Fund. One month later the price of the yellow metal skyrocketed, surging 615% over the course of 10 years.
Of course, no signal is 100% accurate and nobody can guarantee that another reversal is just around the corner. Still, big players (including Vanguard) do not make suchlike decisions when there is still any potential left in the asset. And that’s the time when things can actually get better. As it happens in the financial markets, when all the hope is gone, there is a sudden beam of light. With another economic crisis long overdue, gold can be expected to appreciate (as it usually does during the recession). That, and the fact that Vanguard has given up on gold hints at a possible bullish trend in the foreseeable future.
Gold has lost 8% since the beginning of 2018. Records of the US Commodity Futures Trading Commission (CFTC) demonstrate that non-commercial traders have accumulated short positions in gold worth 670 metric tons. Sentiment is not bearish, it is outrageously bearish.
When everyone dislikes a particular asset that much, an unexpected buyer can turn the tables, identifying an opportunity to buy low and push the prices higher. Who knows, maybe now is the time to buy low in order to sell high later?
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