“Gold will continue to struggle until gold market timers become significantly more bearish.”
This is the main thrust of the last two columns I have devoted to a contrarian analysis of gold sentiment, one in early July and the other in early May. It wouldn’t be too hard to say the same thing today.
And gold has been struggling a lot in recent months. From its high of over $2,040 in March, the spot gold contract GC00,
it has fallen over $300, including another $65 in just the past week.
What will it take for sentiment to support a major rally in gold? The answer is contained in the accompanying chart, which plots the average recommended level of exposure to the gold market among a subset of short-term gold timers tracked by my firm. (This average is the one represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI.)
Focus, in particular, on the shaded area at the bottom of the graph, which represents the lowest 10% of historical HGNSI readings. This is the range that, in previous columns, I have used to denote excessive pessimism — which is bullish from a contrarian point of view. Notice that the HGNSI in July only briefly and modestly fell into this zone of extreme pessimism and then, almost as quickly, rose above it again. The HGNSI is currently at 12u percentile of the historical distribution, just above this band.
This is remarkable given that gold has underperformed in the face of the worst inflation in this country in 40 years. Since one would otherwise expect this paradigmatic inflation hedge to be soaring, gold’s dismal performance should probably lead to widespread despair and pessimism among gold traders. But, for the most part, it hasn’t.
For contrarians to confidently turn bullish, the HGNSI would have to fall deep into the bottom decile of its historical distribution and then stay there for more than a few days. It would be especially encouraging if it stayed there in the wake of gold’s first attempt at a rally. This, on the whole, has not been the case of late, with many gold timers eagerly turning bullish again at the first sign of strength.
Big bottoms are often characterized by capitulation, when traders give up completely and throw in the towel. That’s when they say they’ll never trust gold again, having been burned by it so many times before. Ironically, as naysayers will attest, that’s when the bottom will likely hit.
We could be close. We’re just not there yet, so don’t jump the gun.
What about buy timers on other assets?
The gold market is just one of the areas where my firm monitors the average exposure levels of market timers. Three others are the broad US stock market (focusing on benchmarks such as the S&P 500 SPX,
), the Nasdaq stock exchange (the Nasdaq Composite COMP,
and QQQ QQQ,
), and the US bond market (the overall investment grade bond market). The diagram below summarizes the position of the timers in all four arenas.
Mark Hulbert is a regular MarketWatch contributor. Its Hulbert Ratings tracks investment prospectuses that pay a flat fee to be reviewed. You can reach him at email@example.com.