Opinion: There are too many bulls to make any money on gold

Posted by jbrumley on April 21, 2017 8:07 AM
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Strong sentiment for yellow metal is a contrary sign

By Mark Hulbert, MarketWatch

Gold is suffering from too many believers. A decent rally for the yellow metal may therefore need to wait for at least many of gold’s enthusiasts to throw in the towel.

The current sentiment picture stands in stark contrast to what prevailed in mid-March, the last time I devoted a column to gold market sentiment. That’s when there was a lot of bearishness in the gold-timing community and a contrarian-based buy signal was imminent.

Over the six weeks since then, as gold rallied nearly $100 per ounce, most of that period’s bears jumped on the bullish bandwagon. In the process they transformed a favorable sentiment picture into an unfavorable one.

Consider the average recommended gold market exposure level among a subset of short-term gold market timers that I monitor (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average earlier this week rose to as high as 57.7%, the highest level in nearly 12 months.

As recently as mid-March, in contrast, the HGNSI stood at minus 27.7%. So in six weeks’ time the average gold timer increased his recommended exposure level by more than 85 percentage points. No wonder gold’s rally ran out of steam earlier this week.

Some wonder if a higher-than-normal level of exuberance is justified right now because of heightened geopolitical worries out of North Korea and Syria. But I don’t think so. As I argued earlier this week, gold actually has a mediocre track record as a hedge against geopolitical risk.

None of this discussion means that it’s impossible for gold to rise from current levels. But if it were to try to do so, any rally would not be built on a strong sentiment foundation and is therefore likely to be short-lived.

Over the last several years, gold rallies lasting more than a week or two have started when the HGNSI has been as low as minus 30%, if not lower. We’re nowhere close to that level today.

To be sure, contrarian analysis, to the extent it works, applies only to the short term. It tells us nothing about where the gold market may be trading, say, a year from now. But if past sentiment trends are any guide, gold over the near term is likely to pull back before even trying to mount a sustainable rally.

Courtesy of MarketWatch