MARK HULBERTGold takes a restCommentary: Gold's short-term trend...

MARK HULBERT
Gold takes a rest
Commentary: Gold's short-term trend likely to be down
By Mark Hulbert, MarketWatch
Last update: 11:05 p.m. EST Jan. 27, 2009

ANNANDALE, Va. (MarketWatch) -- Gold certainly deserved a rest Wednesday.
After all, it had mounted an impressive rally over the previous two weeks, gaining some $100 per ounce. So we can definitely excuse gold bullion for forfeiting $9 in Wednesday trading.
The more crucial question, however, is whether the decline was merely the pause that refreshes, or the beginning of a more serious drop.
Unfortunately for those hoping gold's recent rally to continue, the conclusion of contrarian analysis is that the metal's short-term trend is more likely to be down.
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, the HGNSI stood at 60.9%.
This is identical to where the HGNSI stood at the end of December, when I last devoted a column to gold sentiment. ( Read my Dec. 29 column.)
Over the two weeks following that column, of course, bullion dropped by around $70 an ounce.
Contrarian concern about gold's short-term trend isn't just based on this one data point, however. I have more than 25 years of daily data for the HGNSI, and rigorous econometric tests show that the inverse correlation between HGNSI levels and the gold market's subsequent short-term direction is statistically significant at the 95% confidence level.
This is why the HGNSI's current level is so ominous.
To put it in context, consider that this sentiment gauge's average reading over the last five years has been 32.6%, only slightly more than half where it stands now. Over the last five years, furthermore, the HGNSI has been higher than where it is now just 13% of the time.
This does not mean gold can't go higher from here. But it does suggest that the odds are against it doing so.
Lest I incur undeserved gold-bug wrath by writing that, let me hasten to add that this bearish conclusion applies to just the next several weeks. Sentiment affects the short-term trend of the market, not the long term.
So my conclusion is entirely consistent with gold being in a major, long-term bull market.
But even if it is, the implication of my contrarian analysis is that gold is not ready, at this very moment, to commence on that march upward. End of Story

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.