Expect gold prices to be intensely volatile
New York (Feb 20) Gold market timers today are more bullish than at any time in the past two years. And that’s a bad sign, according to contrarian analysis.
To be sure, their enthusiasm is entirely understandable, since gold has been one of the few bright spots in an otherwise dismal couple of months for investors. When the S&P 500 Index earlier this month was groaning under a 15% year-to-date loss, for example, the yellow metal was sporting a nearly 20% gain.
Yet, just as the stock timers’ deep pessimism spawned a powerful rally in recent sessions, the gold timers’ exuberance led to a breathtaking decline. Earlier this week, for example, gold hit an air pocket and fell more than $50 an ounce in a matter of hours.
That turbulence was widely blamed on the release of a Goldman Sachs analyst recommendation to sell gold short — to bet on a decline — and no doubt that played a role. But contrarian analysts also argue that Goldman’s recommendation wouldn’t have had such a big impact if sentiment weren’t already so unfavorable.
Just how unfavorable? Consider the average recommended gold-market exposure level among short-term gold timers (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). As you can see from the chart at the top of this column, this average is now higher than it’s been since early 2014.
Expect gold prices to be massively volatile© Provided by MarketWatch Expect gold prices to be massively volatile
Notice also, ominously, how prior HGNSI levels even close to current readings have almost always coincided with peaks in gold’s price.
Of course, sentiment is not a fool-proof contrarian indicator. In mid-January, for example, when gold was trading around $1,100 an ounce, I reported that contrarian analysis was negative on gold’s near-term prospects. An ounce of the yellow metal today is trading for about $100 more — including more than $20 on Thursday of this week.
But, upon subjecting three decades’ worth of gold sentiment data to a number of econometric tests, I confirmed that — far more often than not — gold struggles whenever bullishness is as high as it is today. This contrarian pattern is significant at the 95% confidence level that statisticians often use to determine whether a pattern is genuine.
Bear in mind, though, that — even when it works — contrarian analysis is only a short-term timing tool. My statistical tests have found that sentiment’s maximum explanatory power is at barely more than a one-month time horizon. That means it’s entirely possible, as some gold bugs are forecasting, that bullion is headed much higher in coming years.
But, assuming the contrarians are right, the path to that higher price will first take gold lower in coming weeks.
Source: MSN
