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As gold tumbles amid the coronavirus crisis, contrarians start to smell opportunity
By: Mark Hulbert | March 19, 2020

Now the debate shifts to when to buy



CHAPEL HILL, N.C. — Gold’s near-term outlook is improving. A contrarian buy signal may not be that far off.

That’s because gold market-timers have begun to throw in the towel on their erstwhile bullishness. In fact, the average gold timer I monitor has now completely eliminated any long-side exposure to the precious metal US:GC00 and has established a small short position.

Contrarians are beginning to sit up and take notice.

The contrast with the situation a month ago is stark. Consider the average recommended gold US:GLD exposure among several dozen gold timers I track (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). On Feb. 24, this average got as high as 72.9%, which was higher than 98.4% of all other daily readings since 2000. As I indicated at the time, these high levels of bullishness did not bode well for gold’s near-term prospects.

What a difference a few weeks make. With gold bullion some $170 lower than where it stood then, the HGNSI now stands 74 percentage points lower, at minus 2.1%, as you can see from the accompanying chart. As a result, contrarians have stopped forecasting a much weaker gold market.

But have the contrarians become bullish enough to confidently issue a buy signal?

Not quite.

The HGNSI currently stands at the 20th percentile of all readings since 2000. Contrarians typically wait until bullishness drops to the 5th percentile before turning bullish. For the HGNSI that would mean waiting until it drops to minus 23.3%.

What must happen for the HGNSI to drop to this lower level? It’s impossible to know for sure, but contrarians feel no pressure to predict, instead letting the market tell its story in its own time. It might be that a quick break in gold’s price to lower levels would do the trick, or it might be that a frustrating period of backing and filling would turn the gold timers more bearish.

In the meantime, the contrarians’ message to short-term gold traders: Even though things are looking up, hold your fire a while longer.

Why gold hasn’t risen during the COVID-19 pandemic?

One of the reasons the gold timers were so bullish earlier this month is their belief that gold should thrive during economic and geopolitical crises such as the one we’re now facing with the coronavirus that causes the COVID-19 disease. So it’s worth reviewing the historical record to show that their belief rests on a shaky foundation.

Consider gold’s performance during the darkest days of the 2008 financial crisis. From its high in the week in which Lehman Brothers’ bankruptcy brought the financial system to the brink of total collapse to its low two months later, gold lost more than 20%.

Nor was this disappointing performance particularly unusual. The relevant data were gathered several years ago in a study conducted by Campbell Harvey, a finance professor at Duke University, and Claude Erb, a former commodities portfolio manager at TCW Group and circulated by the National Bureau of Economic Research. To focus on periods of geopolitical and economic stress, the researchers isolated those months over the last five decades in which the S&P 500 index US:SPX lost ground, on the theory that there must not be much stress if the stock market is rising.

The authors found that in 46% of those months in which the S&P 500 fell, gold also lost ground. Those odds are close to those of a coin flip, of course. This is why the researchers concluded that “gold may not be a reliable safe haven asset during periods of financial market stress.”

The usual qualifications apply to contrarian analysis, of course. Sentiment isn’t the only thing that makes the markets turn, and even when it is accurate, it sheds light only on the market’s near-term direction.

But insofar as it is on target, you’ll regret buying now instead of sitting on your hands a while longer.

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