The golden slope of hope
Commentary: Contrarians worry because gold-timers are too exuberant
Hulbert, MarketWatch
Last Update: 12:01 AM ET Jan 30, 2007
ANNANDALE, Va. (MarketWatch) - At the end of December, I reported that contrarians were expecting gold to outperform stocks in 2007.
So far so good for that contrarian forecast, with gold bullion at more or less a breakeven. See Dec. 27 column
Nevertheless, gold timers have so quickly jumped on the bullish bandwagon in recent weeks that contrarians are beginning to wonder about their forecast for the entire year.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HGNSI stood at 67.9%. This is too high, no matter how you look at it.
For example, the HGNSI stood at 25% as of my Dec. 27 column. So, the editor of the average gold timing newsletter has become more than twice as bullish in the course of a month.
The high level of current bullishness is also evident in what happened to the HGNSI on Monday. Even though gold bullion fell during the day's trading session, the average gold timer became significantly more bullish. For the day, the HGNSI jumped more than 14 percentage points.
These developments are worrisome, according to contrarian analysis, because the markets rarely behave in the ways that the majority expects them to. Contrarians would be far more comfortable in forecasting a strong gold market if the gold timers on balance weren't so exuberant.
A good illustration of the wall of worry that bull markets like to climb is what happened to gold sentiment in early 2002, just as gold bullion was rising above the $300-per-ounce level. Between February and July of that year, during which gold bullion produced a net gain of around $10 per ounce, the HGNSI dropped from 90% to minus 23% (with the negative level indicating that the average gold timer was net short the market).
In other words, in the wake of a 3% rise in gold bullion, the average gold timer reduced his gold market exposure by more than 110 percentage points. Now that's a wall of worry, and contrarians were not at all surprised that gold thereafter entered into a multi-year bull market.
The contrast to today's situation couldn't be more complete. In the wake of a rise in gold bullion of similar magnitude to what took place five years ago, the average gold timer - far from reducing his exposure - has more than doubled it.
Unless the gold timers markedly reduce their exuberance, contrarians seriously doubt that the gold market will respond any where near as bullishly over the next year as it did following 2002's wall of worry.
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Sold about 35% of my CKG at C$6.75
