Opinion: When investors turn maximum bearish on gold — which might happen soon — expect a big turnaround in prices
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“Gold will continue to struggle until gold market timers become significantly more bearish.”
That’s the lead sentence of the last two columns I’ve devoted to a contrarian analysis of gold sentiment, one at the beginning of July and the other at the beginning of May. It wouldn’t be much of a stretch to say the same thing today.
And struggle gold very much has over the last several months. Since its high of over $2,040 in March, the spot gold contract
GC00,
has fallen more than $300, including another $65 just this past week.
What will it take for the sentiment picture to support a major rally in gold? The answer is contained in the accompanying chart, which plots the average recommended gold-market exposure level among a subset of short-term gold timers monitored by my firm. (This average is what is represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI.)
Focus, in particular, on the shaded region at the bottom of the chart, which represents the lowest 10% of historical HGNSI readings. This is the range that, in prior columns, I’ve 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 to within this zone of extreme pessimism and then, almost as quickly, rose back above it. The HGNSI currently stands at the 12th percentile of the historical distribution, slightly above this zone.
That’s remarkable, given that gold is performing dismally in the face of the worst inflation in this country in over 40 years. Since you’d otherwise expect this paradigmatic inflation hedge to be soaring, gold’s dismal performance presumably should be leading to widespread despair and pessimism among gold traders. But, for the most part, it has not.
Before contrarians can confidently turn bullish, the HGNSI would need to drop deep into the bottom decile of its historical distribution, and then stay there for more than a few days. It would be especially encouraging for it to remain there in the wake of gold’s first attempt to rally. This, on the whole, has not been the case lately, with many gold timers eagerly turning bullish again at the first sign of strength.
Major bottoms often are characterized by capitulation, when traders completely give up 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 contrarians will attest, that’s when the bottom will likely finally be in.
We could be close. We’re just not there yet, so don’t jump the gun.
What about market timers in other assets?
The gold market is just one of the arenas in which my firm tracks market timers’ average exposure levels. Three others are the broad U.S. stock market (focusing on benchmarks such as the S&P 500
SPX,
), the Nasdaq stock market (the Nasdaq Composite
COMP,
and the QQQ
QQQ,
), and the U.S. bond market (the aggregate investment grade bond market). The chart below summarizes where the timers currently stand in all four arenas.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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