Hulbert -- This is What Needs to Happen for Gold to Rally

Mark Hulbert writes for Dow Jones MarketWatch.  Hulbert begins:  CHAPEL HILL, N.C. (MarketWatch) — The top-performing gold-market timers aren’t convinced that the yellow metal’s low earlier this month marked the beginning of a new leg upward.

To be sure, with bullion $70 higher now than in early June, it certainly looks as though a bottom of at least some significance was formed at that time. Believers in that story were especially emboldened last Thursday, when gold jumped more than $40 an ounce.

But try telling that story to market timers who have the best records at calling turns in the gold market. In fact, the gold timers who are most bullish today have the worst records.                                        

To bet on gold now, therefore, you have to believe that those who historically have been most wrong will turn out to be right — and vice versa.                                        

The accompanying table provides the supporting data behind this depressing conclusion. When focusing on the top timers, I chose the 25% on the Hulbert Financial Digest list with the best track records; the worst timers are in the bottom quartile for performance. The table reports this best-versus-worst contrast across six time periods, ranging from the past 12 months to the past 20 years.                                        

Notice that, regardless of the time period over which performance is measured, the best gold timers are far more bearish than the worst timers. In two of these performance periods, in fact — the past three years and the past 20 years — the consensus gold exposure level among the best timers is negative, which means they are advocating that clients be short the market.                                        

On average across all six time periods, the best timers are essentially out of the gold market, while the worst timers’ recommended exposure level is 57%.                                        

To be bullish right now, in other words, you have to accept some pretty odd bedfellows.                                        

What does contrarian analysis have to say?

Gold traders who are particularly eager to find a reason to be bullish might fasten on the bearishness of the best-performing gold timers — especially those who are actually bearish right now. According to contrarian analysis, after all, doesn’t the market like to climb a wall of worry?                                        

Don’t succumb to this line of thinking. Contrarian analysis works by going against the consensus among all advisers, not among the small subset with the very best track records.                                        

To find out what contrarian analysis is really saying right now, therefore, we must first determine what the consensus gold exposure level is among a broad group of gold timers. To do that, as past readers of this column know, I turn to the Hulbert Gold Newsletter Sentiment Index, or HGNSI, which reflects the average recommended gold exposure level among all short-term gold timers monitored by the Hulbert Financial Digest.                                        

The HGNSI currently stands at minus 16.7%, as you can see in the accompanying chart.

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There’s a good news/bad news story to be told here.                                        

On the one hand, the HGNSI’s current level suggests that there is at least some bearishness among monitored gold timers — which, other things being equal, would be a good sign. On the other hand, the HGNSI still hasn’t fallen to the extreme bearishness that over the past couple of years has accompanied a meaningful bottom. In late June 2013, for example, the HGNSI fell to minus 56.7%, and the gold market subsequently rallied 19%.                                        

One month ago, when I last wrote about gold sentiment, I speculated that gold’s next sustainable rally might not start until the HGNSI fell at least as far is it did in December, when it dropped to minus 36.7%. We got close earlier this month, when the sentiment index slumped to minus 30%. It’s not clear whether this was close enough to satisfy contrarians.                                        

Even if it was, however, my research has shown that contrarian analysis, at best, is only a short-term indicator, forecasting the market’s direction over, at most, the next month or so. So the most you could  conclude from current sentiment conditions is that gold is poised for a small rally over the next couple of weeks.                                        

If the best-performing gold timers are right, however, that small rally would occur within the context of overall bearish conditions that will eventually take gold’s price lower than the early-June lows of around $1,240 an ounce.                                        

Click here to inquire about subscriptions to the Hulbert Sentiment Indexes.                           

Source: MarketWatch

GGR comment:  Gold has not cut a new low price since June 28, 2013.  About a year now in other words.  It sure looks like it double bottomed in December, but only time will tell.  The chart below of silver (one post below this one) is very strongly bullish in my estimation.  The structure of the CFTC comitments of traders data is about as unusual as I have ever seen it, skewed short, especially in silver, and vulnerable to a squeeze… and so on. 

Managed Money traders built up a record high number of gross shorts in silver futures as of June 3, with then more than 42,000 contracts short.  This, at the same time as they more or less held onto their existing long contracts.  So I viewed the extraordinarily large number of shorts in silver futures as “insurance shorts”  in this June 16 offering.