MW: Gold timers increasingly see glass as half full
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Contrarian analysis continues to suggest that gold will face stiff headwinds in coming weeks.
This is the same conclusion I reached one month ago, when I last devoted a column to gold market sentiment. ( Read my Feb. 2 column.)
Over the intervening four weeks, despite a lot of volatility, gold is no higher today than then -- trading around $1,118 per ounce. Yet, the average gold timer is more upbeat than he was in early February.
That is a worrisome trend, according to contrarians, since it suggests that the gold timers are becoming more inclined to see the glass as half full rather than half empty.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing advisers tracked by the Hulbert Financial Digest. Its latest level is 46.6%, in contrast to 32.3% in early February.
In early February, in other words, the average gold timer looked at gold trading around $1,118 and decided to allocate around a third of his gold portfolio to investing in the yellow metal. Today, in contrast, with bullion at the same level, the average timer is allocating nearly half of his portfolio to gold.
What changed?
The answer is what has contrarians concerned.
This disturbing pattern of creeping optimism is also evident in an increasing resistance on the part of the gold timers to building up cash in the face of market weakness. I noted this pattern in my column a month ago, and since then it has persisted and gotten worse.
Consider how low the HGNSI fell in late December, when gold bullion dropped to around $1,088 an ounce. The HGNSI dropped as low as 10.9%.
In February's correction, in contrast, the HGNSI never got below 18%, even though gold bullion dropped to a much lower price than it did in December -- to below $1,060 an ounce, in fact.
Let me hasten to add the same caveats that I used to qualify the conclusions of my month-ago column: This analysis and discussion only applies to the short-term horizon -- the next couple of months. That's because contrarian analysis, to the extent it works, is only a short-term market timing tool; my econometric analysis of the HGNSI shows that it sheds little light on where the market will be in, say, one year's time, or even in six months.
So it may very well be that gold is headed to $5,000 per ounce, as some gold bugs currently are arguing.
But, if the contrarians are right, gold first will be headed lower.
