Contrarian concern
Commentary: Gold timers apparently aren't worried about gold, a bad sign
By Mark Hulbert, MarketWatch
Last update: 10:45 p.m. EDT July 7, 2008
ANNANDALE, Va. (MarketWatch) -- Almost all commodities fell markedly on Monday, and gold was no exception.
Unfortunately for the gold market, contrarians would not be surprised to see more of the same. That's because sentiment among gold timers remains too frothy to support a significant rally. See story
Consider the latest readings from the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HGNSI stood at 64.3%. That's the highest level for this sentiment gauge since March, when gold bullion 38099902 916.75, +916.75, 0.0%) was above the $1000 level. At that time, the HGNSI rose to a marginally higher level of 65.4%. Over the six or so weeks following that reading in March, of course, gold bullion fell by more than $100 per ounce.
To put this contrast another way: The average gold timer is, for all intents and purposes, just as bullish today as when an ounce of gold bullion was trading for more than $100 more. This suggests that the gold timers are more accurately described as being stubbornly bullish than as pessimistic.
Another indication that the gold timers are stubbornly bullish: The HGNSI remained steady on Monday, despite the turmoil in the gold market. This is not the kind of sentiment reaction we would be seeing if there were the kind of wall of worry that bull markets like to climb.
The magnitude of the break in commodity prices early in Monday's session appeared to some to be more reminiscent of a bubble popping than normal day-to-day volatility. Does the sentiment picture support this suspicion?
I wish the HGNSI would allow for a clearer answer. As it is, it is unable to tell us whether or not we are even in a commodity price bubble and, if so, whether it has just popped.
But what the HGNSI can tell us is that sentiment would not provide the gold market with a safety net if indeed it were to begin a bigger decline. The HGNSI's record high, according to the Hulbert Financial Digest, is 90%, or just 25 percentage points higher than where it stands now. That means that the majority of the in-and-out traders that affect the shorter term trends are already invested in the gold market; relatively few of them remain on the sidelines to propel the market higher by turning bullish in the future.
Another way of putting this: Risk in the gold market is at above-average levels right now.
The ideal scenario, from a contrarian point of view, would be for the gold timers to completely throw in the towel, becoming so fed up with the gold market's recent volatility and weakness that they refuse to bet on the next short-term rally. Ironically, that would be the rally most worth betting on, according to contrarian theory.
That's nowhere close to the kind of sentiment environment that exists now.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Edited by SilentOne, 08 July 2008 - 12:09 PM.
