With gold rallying to new record highs above $1,600 per ounce, sentiment toward the yellow metal has turned substantially more bullish.
From a contrarian perspective, the latest surge in bullish gold sentiment is a cause for concern, according to Mark Hulbert. The founder of the Hulbert Gold Newsletter Sentiment Index (HGNSI), which measures market timers’ recommended exposure to gold, noted this morning that the HGNSI increased significantly in recent days.
At its current level of 67%, the HGNSI stands relatively close to the 73.7% multi-year high that it reached in late April of this year, just days before the price of gold reached a then all-time high of $1,577.40 per ounce. In addition, this level in the HGNSI proceeded a more than $100 plunge in the yellow metal, therefore serving as an accurate contrary indicator.
As for the present set of circumstances, Hulbert noted that “The wall of worry that the gold market has been climbing in recent weeks is close to disintegrating, in other words.”
However, he noted that “The deteriorating sentiment picture doesn’t mean gold’s run is over…The bull market’s longer-term future depends in no small part on how sentiment reacts to coming market weakness.”
“It would be a positive sign, from a contrarian point of view, if the gold traders were to quickly run for the exits in the face of that weakness,” Hulbert continued. ”That would suggest that there remains an underlying climate of skittishness about gold, which would allow the wall of worry to be quickly rebuilt.”
Lastly, he pointed out that “In contrast, it would be a negative sign if the gold traders cling to their new-found bullishness in the face of market weakness. Contrarians believe stubbornly held bullishness to be a particularly bad sign, suggesting that more downside action is necessary before a sustainable rally can once again begin in earnest.”
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