Gold Sentiment Negative……Hulbert Says Sets Up Contrarian Pattern
Posted By thestatedtruth.com on July 2, 2010
Gold and gold stocks look absolutly terrible, so this makes a lot of sense! The Hulbert Financial Digest has been tracking this kind of thing for over 30 years.
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Friday July 2, 2010
ANNANDALE, Va. (MarketWatch) — Gold’s huge drop on Thursday is not the beginning of a new major leg down for the yellow metal.
That at least is the conclusion reached by a contrarian analysis of gold market sentiment. There does not currently exist the kind of stubborn optimism among gold timers that is the hallmark of major market tops.
Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). In the wake of Thursday’s 3.2% decline in gold bullion’s price, the HGNSI dropped 14.3 percentage points to 23.5%.
This not only is a big drop for just one day, which would, in and of itself, be a bullish omen, according to contrarian analysis. It’s also bullish that the HGNSI level that prevailed going into Thursday’s session was already surprisingly low, given how close gold bullion was to its all-time high reached earlier in June.
To put the current HGNSI level in context, consider that the HGNSI’s all-time high is 89.6%. So by no stretch of the imagination can current sentiment levels be described as excessively high.
This same conclusion is reinforced by comparing the HGNSI’s current level with where it stood six months ago. In early January, when gold bullion was trading for as low as $1,120 an ounce — more than $80 below the current price — the HGNSI stood at 60.9%. And early last December, furthermore, when gold bullion was trading for about $60 an ounce less than where it is today, this sentiment index got as high as 68%.
It’s most unusual for gold timers to become more bearish in the face of a rising market. But that, in essence, is exactly what they’ve done over the last six months. The far more typical pattern, of course, is for the HGNSI to rise as gold bullion rises, just as this sentiment index almost always tends to decline as the market falls.
That the gold timers didn’t adhere to this general pattern suggests that they are stubbornly clinging to a mood of skepticism, if not outright pessimism. And that’s bullish, according to contrarian analysis.
Bull markets, the saying goes, like to climb a wall of worry. And there definitely is a very strong such wall out there right now.
To be sure, since contrarian analysis was already reaching a bullish forecast prior to Thursday’s plunge, it’s worth stressing that sentiment is not the only factor that influences the market’s direction. And, I hope it goes without saying, no one indicator is always right.
But, over the three decades I’ve been tracking investment newsletters, the gold market has — on average — adhered to the contrarian pattern. That is, bullion has turned in far higher returns in the wake of low HGNSI levels than in the days and weeks following high readings.
The bottom line? The sentiment winds will be blowing strongly in the gold market’s sails in coming sessions.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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