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Gold has fallen, and it can’t get up
By: Mark Hulbert | December 4, 2020

The outlook for gold prices over the next several weeks is neutral, assuming the yellow metal continues to follow the contrarian script as it has since summer.

Consider how bullish gold timers became last summer, as judged by the average recommended gold market exposure among a subset of several dozen gold timers. (This average is what’s reported as the Hulbert Gold Newsletter Sentiment Index, or HGNSI.)

As you can see from the accompanying chart, the HGNSI in July rose to near its highest level since data began being collected in 2000 — far into the zone that in previous columns I’ve identified as extreme bullishness.

As I reported at the time, contrarian analysis forecasted tough times for gold in subsequent weeks and months. From its August high to its low last week, gold bullion lost nearly $300 an ounce in value. Gold shares, as represented by the VanEck Vectors Gold Miners ETF fell 25%.

At last week’s low, in contrast, the summer’s excessive bullishness had finally been worked off, and the HGNSI briefly dipped into the bottom 10% of the historical distribution — the zone that contrarians consider extreme bearishness. Since then gold has rallied. Because the HGNSI has jumped along with gold since last week, it is at the 35 percentile of the distribution — squarely in the neutral zone.

To be sure, gold’s experience since the summer is just one data point. The table below summarizes the average returns over the past two decades of the VanEck Vectors Gold Miners ETF in the wake of HGNSI top-decile and bottom-decile readings. Notice that the ETF did well, on average, amid the lowest HGNSI readings, and lost ground after the highest readings.

Notice that this table focuses on the gold market’s near-term prospects — no further out than the subsequent three months. That’s because contrarian analysis is a short-term timing tool, shedding no light on where the market may be a year or more from now.

What about market timers in the stock and bond arenas?

The gold market is just one of four arenas in which I track market timers’ average exposure levels. The others are the general stock market, the Nasdaq stock market and bonds. Each month in this space I will be highlighting one of them and analyzing what it’s saying from a contrarian point of view.

In the meantime, the accompanying chart summarizes where the timers currently stand. Notice that the stock market is the arena in which the average market timer currently is closest to an extreme. The average market timer who focuses on the broad stock market is more bullish than 81.3% of the days since 2000, while Nasdaq-oriented timers are more bullish than 86.9% of the days. Those readings are just shy of the 90 percentile threshold that I have been using to define the zone of extreme bullishness.

Things could change quickly. But contrarians right now are especially alert to the possibility than in coming days the stock market timers will become excessively bullish.

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