Mostly: Classical

[amarksp]

Mark Hulbert
CBSMarketWatch.com
Tuesday, July 6, 2004

http://cbs.marketwatch.com/news/story.asp?guid=%7B44E5F348%2D191B%
2D4DC4%2D8B55%2D8DEF3FF80B0D%7D&siteid=mktw

Gold was out of the limelight last week.

That's because the stock and bond markets occupied
center stage, as investors focused on what would
happen to those asset classes in the wake of the
Federal Reserve's interest-rate hike.

Now that the dust has settled from the Fed's decision,
perhaps gold will make it back onto investors' radar
screens.

It wasn't as though gold didn't try to capture investors'
attention last week. On June 29, the day before the
Fed's move, gold bullion dropped by some $10 per
ounce -- more than enough, if last week had been a
normal week, to get investors to sit up and take
notice.

But, to state the obvious, last week was not a normal
week.

In the expectation that this coming week will be one
in which investors do sit up and take notice, I'm
devoting this column to a contrarian assessment of
sentiment among gold-timing newsletters.

Not to bury my lead too much: Gold market sentiment
has deteriorated in recent weeks. Contrarians would
be much more confident that gold is in a bull market
if gold timers were more skeptical than they currently
are.

I base this assessment on the latest readings from the
Hulbert Gold Newsletter Sentiment Index (HGNSI),
which reflects the average recommended portfolio
exposure to the gold market among a subset of
gold-timing newsletters. As of last Friday's close, the
HGNSI stood at 46.2 percent.

To be sure, while this 46.2 percent reading is higher
than where the HGSNSI has been on almost all other
days over the past seven months, it still is lower than
the HGNSI's all-time high reading of near 90 percent.

But the source of concern is not the HGNSI's
absolute level but how it has reacted during recent
market corrections. For example, the HGNSI didn't
budge last week, despite gold's break. Nor did it move
down in early June, when gold suffered a similar break.

This represents a big change in the underlying mood
of many gold timers, and is not an encouraging sign.
It suggests that at least a core group of bullish gold
timers have dug in their heels. And, as contrarians
constantly remind us, stubborn bullishness is more a
sign of a market top than a market bottom.

Contrast what happened last week and in early June
with how gold-timing newsletters reacted in April and
the first half of May, when bullion dropped by more than
$50 per ounce. Then the HGNSI dropped nearly 40
percentage points -- from 46.9 percent to 7.7 percent.
That suggested that gold timers were relatively quick
to throw in the towel on their gold investments.

Or consider what happened late last year. Between
early December and early January, while gold bullion
was RISING by some $20 per ounce, the HGNSI was
DROPPING by some 40 percentage points. That's the
sort of action that makes a contrarian turn into a
passionate bull.

Unfortunately, the HGNSI's recent behavior is markedly
different from those two earlier instances.

Let me hasten to add that, even if this analysis turns
out to be correct, it doesn't mean that gold must enter
into a primary bear market. The market weakness that
is foreshadowed by the sentiment data might turn out
to be relatively short-term, after all.

It will be key to see how advisers react in the wake of
coming weakness. If the stubborn bulls relent and
throw in the towel, that would be an encouraging sign.

But if they continue to remain bullish come what may,
and especially if more timers become stubbornly
bullish with them, then a more significant decline in
the gold market becomes increasingly likely.