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Contrarians Foresee an Even Brighter Gold Market

Mark Hulbert writes that despite the recent rally in gold, the wall of worry is still intact.

The sentiment winds continue to blow in the direction of higher gold prices.

But they are not blowing as strongly as they did six weeks ago. That’s when I urged “long-suffering gold traders” to “take heart,” since a “sustainable rally is getting close.”

Since then gold and gold mining shares have mounted a strong rally. Gold bullion has risen as much as $100 an ounce, and gold mining shares — as measured by the VanEck Vectors Gold Miners ETF  (GDX) - Get VanEck Gold Miners ETF Report — have gained 11%.

In the wake of this rally, gold traders not surprisingly have become less pessimistic.

That’s why contrarians aren’t as bullish today as they were in early March.

Nevertheless, because gold market timers remain closer to the too-bearish end of the sentiment spectrum than to the too-bullish end, contrarians continue to give gold and gold mining shares the benefit of the doubt.

The basis for these forecasts appears 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 dropped in early March to minus 51.7%, which was one of the lowest readings on record.

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Hulbert Chart 042121

This early-March level meant that the average short-term gold timer was recommending that his/her clients allocate 51.7% of their gold trading portfolios to going short — an aggressively bearish bet. That HGNSI reading was lower than on 99.8% of all trading days since 2000.

No wonder contrarians have not been surprised by gold’s and gold shares’ rally in recent weeks.

I also reported in early March that contrarian analysis historically has the greatest explanatory power for gold and gold shares over a three-month horizon. Since we’re only half-way through that time period, odds continue to favor higher gold prices for a few more weeks.

Read: Barrick Gold on Track to Reach 2021 Production Targets

The one thing that would invalidate this expectation would be if the gold timers became too bullish. So far, at least, that has not happened. Currently the HGNSI stands at 25.0%, which means that the gold timers on average are keeping 75.0% of their gold trading portfolios out of the market.

That’s hardly excessive bullishness. In fact, 54% of all HGNSI daily readings since 2000 have been higher than the current level.

The bottom line? While the rally over the past six weeks has weakened the Wall of Worry in the gold market, it remains largely intact. It will take even more of a rally to turn that wall into its opposite — the Slope of Hope which market declines like to descend.