Gold: It Was Fun While It Lasted

Mark Hulbert writes that gold market timers have become too enthusiastic.
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Gold’s recent rally, though undeniably impressive, is running out of steam.

That’s because gold market timers have become too enthusiastic in the past few days. That is a bearish short-term omen from a contrarian point of view.

To be sure, the gold timers can be excused for becoming enthusiastic. They have been waiting for nearly nine years for gold to surpass its September 2011 all-time high above $1,900, and it finally is mounting a significant effort to do so.

Regardless, though, there’s no denying that sentiment conditions are not favorable for an immediate run toward those highs. Only when the gold timers become a lot less enthusiastic will contrarians start looking for such a rally.

Consider the average recommended gold market exposure level among several dozen short-term gold timers I monitor (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 52%, which is higher than 79% of all daily readings since 2000.

Just two weeks ago, in contrast, on April 1, the HGNSI stood at minus 16.0%, which meant that at that time the average short-term timer was recommending that gold-trading accounts be 16% short. And just 10 days prior to then, on March 20, the HGNSI stood at minus 22.0%.

Hulbert Chart 041520

There are two significant aspects of these readings that are relevant to this discussion:

Gold’s rally over the past few weeks -- $200 since April 1, nearly $300 since March 20 -- should not have come as a surprise. The April 1 HGNSI reading was lower than 92% of all daily readings since 2000; that of March 20 was lower than 95% of such readings. Those readings represented extreme bearishness.

The situation now is far different. The increase in bullish sentiment over the past couple of weeks represents an awfully quick jumping onto the bullish bandwagon -- 68 percentage points higher in two weeks’ time, and 74 points since March 20. Such a quick increase in bullishness is not a good sign from a contrarian perspective.

To give you an idea how much the contrarian support for gold’s near-term has weakened over the past couple of weeks, consider the average return since 2000 for gold mining shares in the wake of readings as high as the HGNSI is now (79th percentile) and, in contrast, in the wake of readings as low as we saw on March 20 (5th percentile).

Average Gold Miners ETF [GDX] return over…Average Junior Gold Miners ETF [GDXJ] return over…

When HGNSI is…

Subsequent Month

Subsequent Quarter

Subsequent Month

Subsequent Quarter

In the 79th or higher percentile

-1.4%

-2.4%

-1.5%

-2.8%

In the 5th or lower percentile

+1.2%

+4.5%

+0.7%

+3.4%

The usual qualifications apply, of course. No market timing guide is perfect, and contrarian analysis is no exception. Sentiment is not the only thing that makes the investment world go around. And even when contrarian analysis is on target, it sheds light only on gold’s near-term prospects.

So it may very well be that gold in, say, 12 months’ time will succeed in eclipsing its September 2011 high. But if the future is like the past, the path gold takes to getting there will take it lower first.

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