Gold Timers Are Discouraged

Gold's sentiment foundation continues to get stronger and stronger.

That should provide at least some solace to beleaguered gold investors, who have grown increasingly frustrated as gold has languished for several weeks now.

To be sure, some will be inclined to dismiss the sentiment data, since it's been a month now since contrarian analysis turned bullish on gold.

Yet, far from rallying in the wake of that contrarian support, gold has remained stuck in a fairly narrow trading range between $1,600 and $1,700 an ounce -- and far below its all time high from last year above $1,900 an ounce.

But a frustrating month is not a good reason, in and of itself, to give up on contrarian analysis altogether. After all, no system is right all the time.

Furthermore, my analysis of gold market sentiment over the last three decades has shown that, at the 95% confidence level that statisticians often use to assess whether a pattern is most likely genuine, gold tends to do better in the wake of low levels of bullish sentiment (like now) than in the wake of excitement and enthusiasm.

And, over the last month, the contrarian case for a higher gold price has gotten even stronger.

Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average dropped to minus 15.7% in late March, which meant that the typical short-term gold timer was betting a sixth of his portfolio that gold would continue to decline. It has bounced around since then, but is today still in negative territory.

These negative readings are bullish in their own right, according to contrarian analysis. But they are in relative terms as well.

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Consider how far back in time we have to go to find another occasion when the HGNSI was as low as minus 15.7%: March 2009, more than three years ago. So the average gold timer is more discouraged and dejected today than he has been in three years, even though gold's current price is nearly double what it was in March 2009.

The normal pattern is for timers to become more bullish as the market rises and more bearish as the market declines. So, other things being equal, we would expect the HGNSI to be a lot higher today than where it stood in March 2009. That it is not is testament to how powerful the climate of discouragement is right now in the gold market.

That's precisely the kind of sentiment environment in which powerful rallies are borne.