THE ONE rule for successful investment that I've found usually works is to buy or sell when market sentiment is at an extreme. When everyone, or almost everyone, tells you an investment is a dud, that is almost certainly the time to put your money into it. Gold recently confirmed this rule in spectacular fashion. In the first half of this year the world's gold mining companies were so negative about the outlook for their product that they speculated against it on a massive scale. They borrowed more than 250 tons from central banks to sell in excess of their own production, or six times as much as in the first half of 1998.
Trouble is, such hedging is a self-fulfilling process as it helps to drive down the price of gold.
At first it looked as if the mines were clever. When the Bank of England foolishly announced its intention of selling more than half its gold reserves in a series of public auctions over several years, the price of the yellow metal plunged to less than 253 an ounce in July. Pessimism was universal. What triggered the dramatic reversal in market sentiment was an announcement by 15 European central banks that they would limit their sales of gold. This was not as much of a surprise as it might have seemed, as three European central banks, those of Germany, France and Italy, with the US, together hold more than half the world's central bank stocks of gold, and those four have always made it plain that they don't intend to sell bullion.