WHEN I LAST WROTE ABOUT gold sentiment for Barron's Online in early August, I pointed out that the editors of gold timing newsletters were quite bullish, and that this in turn didn't bode well for gold bullion's near-term prospects. (See "Beware the Golden Slope of Hope," Aug. 6, 2008.)
This turned out to be one of those times in which contrarian analysis got it very right: By late September, an ounce of the yellow metal was trading for nearly 30% lower than where it stood in mid-July.
Unfortunately for gold, the editors of gold timing newsletters are even more bullish now than they were this summer. In fact, they currently are more bullish than they have been in three and one-half years. Contrarians do not consider this to be a good sign at all.
Consider the latest readings of 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 Tuesday night of this week, the HGNSI stood at 75.2%.
To put this into perspective, consider that the HGNSI this summer never got higher than 64.3%, even though bullion in July was a lot higher -- within shouting distance of the $1,000 level, in fact.
This is a noteworthy contrast, since the usual pattern is for bullishness to rise and fall with the market itself. But even though gold is some $150 per ounce lower than then, there is markedly more bullishness.
This is not reminiscent of the veritable wall of worry that bull markets like to climb. On the contrary, it appears to be more akin to the slope of hope on which bear markets thrive.
Some of you may object to this analysis on the grounds that contrarian analysis doesn't really work for gold the way it does stocks. After all, isn't gold manipulated by the monetary authorities and therefore not a free market?
This objection potentially is legitimate. However, the proof of the pudding is in the eating: Manipulated or not, the gold market performs better when the HGNSI is lower than when it is higher.
That at least is the conclusion that emerged after I submitted more than two decades of HGNSI data to rigorous econometric tests. The inverse correlation between HGNSI levels and the gold market's direction over the subsequent several months is statistically significant at the 95% confidence level.
This doesn't mean that the gold market isn't manipulated, I hasten to add. More than one factor can influence the market's direction, after all. But the results of my econometric tests do show that government manipulation of the gold market isn't the only factor influencing bullion's price.
Those econometric tests don't amount to a guarantee that gold will now go down, needless to say. But they do suggest that the near-term path of least resistance for gold is down.
