I have been following your technical analysis and find it very interesting and remarkably accurate. Your call on gold is particularly important to me. Barron's Online, this evening, has an article by Mark Hulbert, see below, that presents another view of what may be essentially the same foundation as your call. I would be very interested in your view of Hulbert's view.
Larry
"Climbing the Golden Wall of Worry
By MARK HULBERT
As gold trades at record highs, investor sentiment remains cautious. And that bodes well for continued price increases.
THE FIFTH TIME IS proving to be the charm for gold.
On four previous occasions over the last two years, gold rose to the $1,000 per ounce level. And on each of those occasions, it failed to keep going.
But, in recent sessions, gold has succeeded in decisively breaking the $1,000 barrier, rising to nearly $1,050.
Why did gold succeed this time, after failing before?
No doubt there are many factors. But a big one is sentiment: Unlike those previous four attempts, the recent one was met by abnormally high levels of skepticism which, as contrarian analysis tells us, is bullish.
As contrarians might say, today's gold market, unlike previous ones at gold at the $1,000 level, is characterized by a strong wall of worry -- the kind that bull markets famously like to climb.
Consider 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. The HGNSI currently stands at a very modest 32.2%, despite gold bullion trading at a new all-time record high.
To put this current level in context, consider that, over the three decades the Hulbert Financial Digest has been tracking newsletters, the highest the HGNSI ever rose to was 90%, or nearly three times higher than where it stands now.
For another perspective, consider where this sentiment index stood in early June, the last time I devoted a column for Barrons.com to analyzing gold market sentiment (see Hulbert on Markets, "Bullish Expectations Don't Bode Well for Gold," June 3, 2009). That was the last of the previous four occasions in which gold was knocking on the door of the thousand dollar level. The HGNSI then stood at 56.8%, or nearly twice as high as where this sentiment index stands today, even though gold is a lot higher now than then.
I concluded that early-June column by writing, "it appears as though the sentiment winds in coming weeks will not be blowing in the direction of a much higher gold price." Just as contrarians expected, gold did retreat over the subsequent month and a half, falling to around $900 an ounce by mid-July.
Gold's sentiment picture began to change in August, however. In the wake of a very modest correction that month of around just 3%, for example, gold timers ran for the exits -- sending the HGNSI down to just 4% by the end of August, which signified that the average gold timer was almost completely in cash. That quick retreat in the face of a tiny pullback suggested that a strong wall of worry was being built.
That wall was still alive and well in September. After briefly rising above the $1,000 level in the middle of that month, gold dipped slightly below that level -- though falling only to around $990. Again, though, gold timers were quick to declare that the rally was over, bringing the HGNSI down to the 18% level by the end of the month.
The HGNSI is higher now than 18%, but not by a lot. If a month ago I had been asked to speculate where the HGNSI would be if gold decisively penetrated $1,000 and got as high as $1,050, I would have predicted a much higher level.
If gold continues to follow a contrarian script, we will get a clue as to gold's short-term direction by paying close attention to sentiment trends. If, in the wake of any gold weakness, gold timers once again rush to the exits, just as they did in August and September, it would suggest that the wall of worry remains as strong as ever -- and suggest that the sentiment winds continue to blow in the direction of higher prices.
If, in contrast, gold timers quickly turn bullish in coming sessions, and then stubbornly hold on to that bullishness in the face of any weakness, then we will know that gold's wall of worry has crumbled. That will be the contrarian sign to short-term traders to begin taking some money off the table.
Fortunately, applying contrarian analysis in this way does not require us to predict which of these scenarios will play out, or when. Instead, all we need to do is watch carefully and see what happens.
In the meantime, however, gold's sentiment foundation suggests that higher prices are in store. |
