May 4, 2012, 12:01 a.m. EDT
More and more gold traders have thrown in the towel
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Take heart, gold traders!
While bullion’s listless behavior over the last couple of months is
undeniably frustrating, a very robust wall of worry is being built.
Eventually, gold will begin to climb it.
I emphasize “eventually” because it’s been two months since I first
reported that gold market sentiment conditions had begun to improve. (
Read my Mar. 7 column, “Gold market sentiment finally improving.”
)
Since then, of course, gold on balance has gone virtually nowhere, stuck
instead in a relatively narrow trading range between $1,600 and $1,700
an ounce.
Gold traders’ increasing impatience has led even more of them to throw
in the towel than before — which, in turn, is why contrarians are
confident that gold’s next major move is most likely up.
Consider the average recommended gold market exposure among a subset of
the shortest-term gold market timers tracked by the Hulbert Financial
Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or
HGNSI).
When I wrote about gold sentiment two months ago, this average stood at
16.7%. Today, in contrast, it is at minus 14.8%, which means that the
average gold timer is now allocating about a seventh of his
gold-oriented portfolio to shorting the market.
That’s a relatively aggressive bet on lower gold prices.
In fact, except for a couple of days in late March when the HGNSI
dropped marginally lower to minus 15.7%, its current level is the lowest
it’s been since March 2009, more than three years ago.
And that’s really quite amazing, given that gold at that time was trading only slightly above $900 an ounce.
In other words, gold traders today are just as pessimistic about gold’s
prospects as they were when gold was trading for more than $700 less. No
wonder contrarians are impressed by the wall of worry that exists in
the gold arena these days.
How long must traders wait for gold to begin to respond to these
positive sentiment conditions? Assuming the market responds the way it
typically has done in the past, the wait could be as much as several
more weeks.
I say that because of econometric tests I have run on the HGNSI over the
last three decades. Its greatest explanatory power in predicting the
market’s subsequent direction existed at the three-month horizon.
In the big scheme of things, of course, that’s not very long at all.
