cheers,
john
http://www.marketwat...l...&dist=msr_1
MARK HULBERT
False rally?
Commentary: Contrarians concerned about amount of gold bullishness
By Mark Hulbert, MarketWatch
Last update: 11:00 p.m. EST Dec. 8, 2008Comments: 126ANNANDALE, Va. (MarketWatch) --
Two weeks ago, when I last focused on the prevailing gold market sentiment, I reported an uncomfortably high level of bullishness among the editors of gold timing newsletters.
As a result, I wrote that contrarians considered it "unlikely" that the rally in gold that was then two weeks old "will meet any better fate than other rallies of recent months."
Gold bullion fell by some $70 per ounce, hitting a low last Friday of just above $750 per ounce, before jumping $17 on Monday.
Unfortunately for those who are bullish on gold, the sentiment picture is today less favorable than two weeks ago.
Consider where the Hulbert Gold Newsletter Sentiment Index (HGNSI) stands. The HGNSI 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 37.9%.
To put that reading in context, consider that two weeks ago, when bullion was some $50 per ounce higher, the HGNSI stood at 30.7%. So, in the wake of a net drop in bullion's price of around $50, the average recommended gold exposure level has jumped by more than seven percentage points.
That's unusual, and significant. The typical pattern is for sentiment levels to rise and fall in step with gold itself. When it does not live up to that pattern, it suggests that investors are adhering to their positions with an abnormal amount of stubbornness. In such cases, contrarians believe it to be a warning sign that the position being stubbornly held is likely to be proved wrong.
So, as I did two weeks ago, I conclude from a contrarian analysis of gold sentiment, that any rally that begins from current levels is unlikely to meet any better fate than other recent rallies.
When my previous columns reached a more or less similar conclusion, many reacted with incredulity: How can one not be bullish right now, given the inflationary consequences of the federal government's bailout of the financial system -- and apparently, as of this writing, the automobile industry too?
But the issue at hand is not whether those federal bailouts will be inflationary. They undeniably will be. Instead, the issue is whether that inflationary potential has already been discounted into gold's price. If so, then gold's price in theory should go continue to go up only if and when there is any surprise revealing that potential to be even greater than previously thought.
That's a far different question, of course.
Another theme that emerged from the comments to my previous gold columns is that the gold-market sentiment doesn't cause the market to go up or down. Instead, the argument goes, the trend of gold's price is being determined by hugely more powerful global forces.
Indeed.
But contrarians typically don't argue that sentiment determines the longer-term trend. Instead, sentiment measures help you to determine whether the current price is above or below that trend -- regardless of its direction. And, at least according to my contrarian analysis of gold market sentiment, gold right now is above that longer-term trend.
In the end, of course, the proof of the pudding is in the eating: And my econometric tests show that the gold market performs better when the HGNSI is lower than when it is higher.
But, because sentiment is at best a short-term market timing tool, the conclusion I am reaching here is consistent with the longer-term trend being up. But, if the conclusion of my analysis is correct, the gold market will have to wait a while for that longer-term trend to catch up with where gold is now trading.
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, 10 December 2008 - 12:04 AM.
