Contrarians, who weren’t surprised by gold’s weakness in recent sessions, believe bullion will continue to suffer.
That’s because there still isn’t the widespread despair and pessimism that typically precede tradable gold rallies. That despite gold’s GCJ8, +0.19% disappointing performance during the stock market’s recent correction; bullion is down 4% since its late January high — including another $7 on Thursday of this week.
To appreciate what widespread despair and pessimism looks like in practice, consider the average recommended gold-market exposure level, as measured by the Hulbert Gold Newsletter Sentiment Index (HGNSI). March 2017 was the last time this average got close to the minus 30% level that have accompanied significant past bottoms. Gold bullion rose 8% over the subsequent three months. (See chart, below.)
In contrast, as you also can see from the chart, the lowest that the HGNSI fell to during gold’s recent weakness was to minus 1.9% at the end of February, far above that minus 30% threshold. And so far this month, in the wake of gold going essentially nowhere, the HGSNI has jumped dramatically to its current 43.8%.
The picture that is emerging is one in which the gold timers are reluctant to reduce exposure in the face of gold weakness, but quick to increase exposure in the face of gold strength. That’s just the opposite of the stubbornly-held bearishness that typically characterizes more significant bottoms.
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Though the chart above reflects only the past 15 months, recent experience is consistent with what has emerged over the last two decades. The table below reports the subsequent three-month performance following the 10% of highest and lowest HGNSI readings.
| Subsequent 3-month return following 10% of highest HGNSI readings | Subsequent 3-month return following 10% of lowest HGNSI readings | |
| VenEck Vectors Gold Miners ETF GDX, -1.29% | -8.3% | 2.2% |
| VenEck Vectors Junior Gold Miners ETF GDXJ, -0.97% | -10.2% | 0.8% |
To be sure, the current HGNSI reading is not quite so high as to make it into this dubious category of one of the 10% highest. But it’s close: It’s currently higher than 70% of all readings since 2000 — even in the wake of gold’s frustrating performance over the past six weeks.
The key thing to look for, if you pay attention to sentiment in gold trading, is how the HGNSI reacts in coming sessions to gold’s gyrations. It would continue to be a negative if gold bullishness is quick to jump when gold rallies, but falls slowly in the wake of any declines.
To become confidently bullish, gold contrarians will need to see evidence of stubbornly held bearishness. That would mean that the HGNSI drops deep in negative territory, and then stays there for a while — even after gold starts to show signs of life.
Contrarians see no need to jump the gun and guess when that eventual buy signal will come. They, and we, have the luxury of letting the story get told by the markets and the market timers themselves.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.