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Contrarians weren't surprised by the huge air pocket that gold encountered on Monday.

Furthermore, they believe that, even in the wake of that air pocket, gold's near-term direction continues to be down.

On both counts, the culprit is the exuberance that short-term gold timers began exhibiting in recent sessions. And, as contrarians like to remind us, that's not the kind of sentiment foundation that typically leads to higher prices.

Even more worrisome, from a contrarian point of view, is bullishness that's stubbornly adhered to even in the face of a declining market. And there was evidence of at least some stubbornness in the wake of gold's stunning 2% drop on Monday: The average short-term gold timer did not run for the exits.

Consider the average recommended gold market exposure level among a subset of short-term gold timers I monitor (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). Prior to Monday's big drop, this average stood at 52.1%, a reading higher than 79% of all daily readings since 2000. This is why contrarians weren't surprised by Monday's plunge.

Though the HGNSI dropped to 35.4% in the wake of Monday's drop, it still stands higher than 61% of all daily readings since 2000. So Monday's decline, scary as it otherwise was, has not caused short-term gold timers to become particularly worried.

And that's why contrarians think gold has more downside work to do before the sentiment foundation will exist that could support a resumption of bullion's impressive year-to-date rally.

Gold's most tradable rallies in recent years have begun when the HGNSI is at much lower levels -- in negative territory, in fact, which means that at those times the average short-term gold timer was short the gold market.

The caution that contrarians now have about gold is different than the bullishness they had two months ago, when I last wrote about gold market sentiment. Gold at that time was trading around $1,460 an ounce, and I reported that, per contrarian analysis, gold could rally even higher. It did, tacking on another $80 per ounce.

It was in the wake of that rally, of course, that the gold timers became too exuberant. And, starting in early September, I warned that a gold decline was in store.

The usual qualifications are in order, needless to say. Contrarian analysis doesn't always work. And, even when successful, it provides insight only for the short-term-over a period of at most a month or two.

That means that the contrarians' current cautiousness tells us nothing about where gold might trade at next year and beyond. It might very well be, as some of the exuberant gold timers have recently predicted, that gold is on track to surpass its all-time high around $1,925 an ounce.

But, if the contrarians are right, the path gold takes to a new high will take it lower first.