Sally French, MarketWatch
CHAPEL HILL, N.C. — Gold will have to decline even further before contrarian analysis flashes a buy signal.
This has to be particularly discouraging news for long-suffering gold bugs. They no doubt thought that bullion’s GCZ6, -0.50% drop of more than $20 on Wednesday would have been enough to completely rebuild the Wall of Worry that markets like to climb—especially because gold since midyear has been such a disappointment. Since its early July high above $1,366, the price of bullion has dropped more than 13%.
But Wednesday’s big plunge didn’t prompt the gold timers to throw in the towel. The average gold timer I track is only mildly discouraged right now. As a group, they are not exhibiting the thoroughgoing despair and pessimism that is the sentiment foundation on which a reliable contrarian buy signal gets issued.
Consider the average recommended gold exposure level among several dozen short-term gold timers who I monitor on a daily basis (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at minus 18.0%, which means that the typical short-term gold timer is allocating 18% of his gold trading portfolio to going short.
A bad omen: the Hulbert Gold Newsletter Sentiment Index didn’t budge after Wednesday’s fall in gold prices
To be sure, that means the typical gold timer isn't bullish right now. And, other things being equal, you’d think that contrarians would be encouraged by this reading. But, as you can see from the accompanying chart, gold’s rallies in recent years that lasted more than a few days typically began when the HGNSI was below minus 30%.
Another bad omen for gold came in the wake of Wednesday’s big drop in the price of gold. Since the normal pattern is for bullishness to rise and fall more or less in sync with the market, we would normally have expected the HGNSI to fall Wednesday. Contrarians consider it a bad sign that the HGNSI in fact didn’t budge.
The logical follow-up question, then, is what it will take to prompt gold timers to become excessively bearish. There’s no way of knowing, of course, but there’s no need to guess. Contrarians can sit back and wait for the market, and market timers, to tell their story.
Can Wall Street close this gender gap?
Women have only half the retirement savings of men, even though they control $5 trillion in investible assets. Can Wall Street get women to invest more?
It could be, for example, that the gold timers—upon reflection over Thanksgiving dinner—decide to throw in the towel after all. If so, a contrarian buy signal could be just days away.
But it’s also possible that the gold timers will engage in bottom picking, certain that gold’s bottom is at hand. In fact, I witnessed some of this behavior Wednesday afternoon among the gold timers I monitor. If this behavior doesn’t change, gold will have to fall even further to prompt contrarians to step up to the plate.
For now, all we need to know is that we’re not there yet. Stay tuned.
Read: Here’s when markets close on Black Friday
For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email [email protected]
