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Gold Timers Are Finally Throwing in the Towel

Mark Hulbert says gold traders should be encouraged by this contrarian analysis of sentiment among market timers.

Take heart, long-suffering gold traders: A sustainable rally is getting close.

I base this forecast on a contrarian analysis of sentiment among several dozen gold market timers. Collectively, they are now more pessimistic than at almost any other time over the past two decades. In effect, these timers have constructed an incredibly high and strong Wall of Worry that a gold market rally could climb.

The construction of this wall has been going on for some time, of course. Gold bullion has dropped nearly $400 an ounce since its high last August. Shares of gold mining companies have dropped even more in percentage terms: The VanEck Vectors Gold Miners ETF GDX has dropped 29% since August.

Contrarians were not entirely surprised by this decline. At the August top, the market timers were more bullish than at almost any other time since 2000, suggesting a major pullback was not unlikely.

This is shown in the accompanying chart, which plots the average recommended gold market exposure level among short-term gold timers (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average rose to 84% in August, which was higher than 99.7% of all daily HGNSI readings this century. That is as close to an all-out contrarian sell signal as you will probably see in a long time.

Hulbert Chart 030921
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The gold timers’ optimism from last August was so extreme that contrarians were still bearish two months later, even though gold bullion by then was $200 an ounce lower than where it had stood at the August high. The problem, as I wrote in these pages in mid-November, was that the gold timers had only begrudgingly reduced their recommended gold market exposure level -- and remained relatively too optimistic. As a result, I concluded, “contrarians continue to look for lower prices.”

Only in recent weeks have the gold timers become as aggressively pessimistic as they were optimistic last August.

How long should gold timers have to wait before this contrarian rally materializes? By way of an answer, consider the data in the following table.

Average return of VanEck Vectors Gold Miners ETF over subsequent…

One Month

Two Months

Three Months

Six Months

Following days in which HGNSI is in lowest decile





Following days in which HGNSI is in highest decile





As you can see, the greatest return spread in the wake of top and bottom decile HGNSI readings -- 9.10 percentage points -- exists at the three-month horizon. This suggests that the forecast with the highest probability is that gold and gold stocks will be higher than today in three months’ time.

The usual qualifications apply, of course. Don’t forget that contrarian analysis doesn’t always work. And, as the above table illustrates, even when it does it provides guidance only for the very short term.

For example, it would not invalidate the current contrarian optimism for gold to be much lower than today in, say, a year’s time. But if the contrarians are right, the road to that lower price will take gold’s price significantly higher first.