This week’s steep losses for gold have prompted many once-bullish gold market timers to throw in the towel. That means contrarians should be on the lookout for a low-risk trading opportunity.
It’s been two months since I last devoted a column to gold market sentiment. At that time, the average gold timer’s exposure to the gold market
was in the middle of the historical range, and I interpreted that to mean that “the outlook for gold prices over the next several weeks is neutral.” Until earlier this week, gold bullion was trading almost exactly where it was then.
But then gold this week hit an air pocket, dropping a quick $70 per ounce in just a few days’ time. That was the final straw for a number of the previously bullish gold timers.
To understand the contrarian significance of this, it’s crucial to put the gold timers’ current mood in historical context. To do that, I rely on the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure level among a subset of several dozen short-term gold timers. This average currently stands at minus 22.6%, which means that the average short-term gold timer is advocating that his clients allocate nearly a quarter of their trading portfolios to shorting gold and gold-mining stocks.
That’s one of the most aggressively bearish bets the gold-timing community has made over the years, as you can see from the accompanying chart. In fact, only 5.6% of the HGNSI’s daily readings since 2000 were lower than where it stands now.
Some contrarians consider the
prevailing sentiment to be in the “excessively bearish” zone whenever the HGNSI
drops below the 10th percentile. Some contrarians therefore believe
the gold market now represents a low-risk short-term trading opportunity.
The table below summarizes the contrarian potential. It shows average returns over the past two decades of the VanEck Vectors Gold Miners ETF
in the wake of HGNSI top-decile and bottom-decile readings. Notice the large spread between the average returns following the lowest and highest HGNSI readings.
Notice that this table focuses on the gold market’s prospects over periods up to three months, but no longer. That’s because contrarian analysis is a short-term timing tool, shedding no light on where the market may be a year or more from now.
Stock and bond markets
The gold market is just one of four arenas in which I track market timers’ average exposure levels. The others are the broader stock market, the Nasdaq stock market and bonds. Each month in this space I will be highlighting one of them and analyzing what it’s saying from a contrarian point of view.
In the meantime, the chart above summarizes where the timers currently stand in all four arenas. Notice that there is even more excessive bearishness among bond market timers than in the gold market, suggesting from a contrarian point of view that bonds may rise over the next few weeks as interest rates fall.
The stock market timers are themselves a lot more bullish, with the HNNSI knocking on the door of the zone of extreme bullishness.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com.