Gold Sentiment Not High

I have had several conversations with investment professionals over the past few days regarding gold.  I have been asked by people in the investment business what they should do with their money, given the low prospective returns for most asset classes.  I ask them if they are invested in the pretty much the only bull market going, gold?  The response?  Skepticism.  All but one said "No." They don't get it, they tell me.  I tell them that it is much easier to make money in a bull market than in a bear market, but no dice.  They have no interest.

I can also tell you that most fund managers do not own gold.  And those that do, own a very small portion of their fund.  Except for some hedge funds and vocal gold bulls, generally the professional money manager is not there.  Nor is the retail investor.  Despite gold pushing all-time highs, and despite what the gold bears might say, investors are not All In on gold. 

From Barron's

GOLD'S NEXT ATTEMPT AT breaking through its previous all-time high is likely to be successful.

That at least is the conclusion reached by a contrarian analysis of gold market sentiment. The gold timers are remarkably subdued right now, even as gold bullion trades within shouting distance of that previous high.

This suggests to contrarians that there's a robust wall of worry out there for a gold-bull market to climb.

Consider the average recommended gold-market exposure among a subset of short-term market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). As of the middle of last week, HGNSI stood at 30.5%, which means that these timers on average are recommending that their clients have some 70% of their gold-oriented portfolios in cash.

To put this high-cash position in context, consider that the HGNSI in January stood at 60.9%, double where it is now. At the time, gold bullion was trading around $1,130 an ounce.

In midday trading Monday, gold was trading at around $1,240 an ounce, near its all-time high.

In other words, the net effect of the gold market's gyrations over the last six months has been to add more than a hundred dollars to gold's price while simultaneously leading the average gold timer to cut his recommended gold-market exposure in half.

It's rare to see such a marked divergence, since the almost universal tendency is for market timers to become more bullish as the market rises and more bearish as it declines.

The current sentiment situation is therefore quite different from what prevailed in early December, the last time I devoted a column to a contrarian analysis of gold's prospects. On that occasion, the HGNSI stood at 68%, even higher than where it was in early January.

Contrarians therefore were not surprised that gold struggled over the next couple of months. At its February low, in fact, bullion was 12% lower than where it stood when the HGNSI was as high as 68%.

To put the gold timers' sour mood into perspective, imagine how bullish and exuberant stock market timers would be if the Dow Jones Industrial Average were trading within shouting distance of its all-time high above 14,000 -- four thousand points higher than where it is now. To match gold timers' current mood, though, the stock market timers in that otherwise happy scenario would have to have the bulk of their equity portfolios in cash.

Hard to imagine that happening, isn't it?

Witness, Robert Prechter

Prechter said at the Reuters Investment Outlook Summit in New York that recent readings of gold market psychology showed a 98 percent bullishness in the metal, the highest ever recorded for any physical commodity.

He said, however, that technical momentum was stalling for gold as the rate of increase had peaked in 2006, and that each subsequent rally since then has risen at a slower rate.

"That is not a guarantee of change but a sign that one is likely."

In January, he had forecast that gold could drop at least 40 percent from its peak value because of deflation and over-ownership.

Asked if Prechter still expected gold to correct 40 percent, he said that extremes in technical indicators still "leave gold vulnerable to that large of a decline."

"I still feel that gold is not going to the moon here. It's not a market that you want to be long, just as you didn't want to be long stock in the first quarter."

Frankly, I have no idea where Prechter gets his data showing that gold psychology was "98 percent bullish," given the skepticism I see.  Gold tends to be owned by people who see it as a religion, not as an investment.  We are nowhere near the euphoria seen in the Housing or the Tech Bubbles.

Nor do I understand Prechter's comment about momentum slowing.  In fact, gold has taken only eight months to hit new highs after hitting all-time highs last year, compared to ~18 months after the peaks in 2006 and 2008.

I see this chart as being very bullish.

However, Prechter has a poor record as a near and intermediate term prognosticator.  Of the 58 "investment gurus" tracked by the CXO Advisory Group, Prechter ranked 57th, getting it wrong three quarters of the time.

I noted a week ago that relative to other bubbles, gold has some ways to go.  Barry Rosenberg of Gluskin Sheff notes the same thing.

(HT: The Big Picture)

What does worry me is that gold has been going up recently because of fear.  In this 9 year gold bull market, liquidity and currency debasement have been the primary drivers of the price of gold.  Both are long-term structural issues that are difficult to reverse.  Fear is different.  Fear can change on a dime. 

However, I will not quibble with the market.  It appears to me that gold wants to go higher.  Who am I to argue?

I am very long gold.

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