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Friday, May 4, 2012

Bullish: The gold market’s steep wall of worry

Mark Hulbert
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.

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