Contrarian Analysis Of Gold--Mark Hulbert

An interesting piece from Mark Hulbert. For those who do not know, Hulbert has a popular newsletter tracking service and has developed many popular sentiment indexes. He is certainly no goldbug, but has a bullish contrarian analysis on gold. His main point is that despite gold's parabolic rally, bullish sentiment among newsletter writers is still low, indicating that we are nowhere near a major market top. From Dow Jones:

Consider the average recommended gold-market exposure among a subset of the shortest-term gold market timers tracked by the Hulbert Financial Digest (as represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 59.2%, which means the average gold timer tracked by the Hulbert Financial Digest is currently allocating more than 40% of his gold trading funds to cash.

There are several ways of appreciating how significant it is that the HGNSI would be this low. One is to compare the current reading to the HGNSI's all-time high, which is 90%. Since the normal pattern is for timers to become more bullish as the market rises, and more bearish as it declines, we would otherwise expect the HGNSI right now to be at least as high as 90%--if not even higher.

That this sentiment index today is nevertheless some 30 percentage points lower than the previous all-time high suggests the gold market is not suffering from the excessive bullishness that so often accompanies major market tops.
Another perspective on the HGNSI's current level comes to a similar conclusion: a comparison with gold sentiment late last year and earlier this year. In January, for example, the HGNSI got as high as 60.9%, and in November and December it rose even higher--to 68%. Yet on those prior occasions, an ounce of gold bullion was trading in the low $1,100s.

Gold may continue to decline in the short-term, but sentiment never got bullish enough to indicate a major top. From a longer term perspective this is a good thing because it shows how much skepticism remains in the gold market.

Black Swan Insights


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