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May 9, 2021, 12:27 p.m. EDT

Gold has rebounded — and investors are now close to being excessively bullish

By Mark Hulbert

This column, my regular monthly focus on market timer sentiment, focuses on gold, which has risen more than $130 in the past month.

I’ll start by following up on my two previous columns this year that also focused on gold timer sentiment. Both, one in early February and the other a month ago , concluded that gold’s path of least resistance was up.

The gold market didn’t respond immediately to the sentiment conditions outlined in those columns, we now know in retrospect, but it did eventually — especially in recent weeks.

As this is written, the VanEck Vectors Gold Miners ETF (PSE:GDX) , the benchmark mentioned in both previous columns to measure the performance of contrarian analysis in the gold market, is 6.2% higher than where it stood in early February and 9.4% higher than in early April. (You can follow gold’s price (NYM:GC00) here .)

It’s not unheard of for the gold market to take a couple of weeks before finally succumbing to the pressure created by excessive sentiment. In fact, my econometric studies of several decades’ worth of gold sentiment data show that its greatest explanatory power exists at the one- to three-month horizon. So recent strength is right on schedule.


Turning to where we stand today, consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure level among a subset of several dozen short-term gold timers. This average currently stands at 46.8%, which means that the typical short-term gold timer is allocating about half of his gold trading portfolios to going long gold and gold-mining stocks — and keeping the other half in cash.

That average may not seem particularly high, but it’s higher than 74.5% of all daily readings since 2000. That’s getting uncomfortably close to the zone of excessive bullishness, which I define as being higher than 90% of all past readings.

That’s not what has contrarians most worried. More concerning is the speed with which the erstwhile bears have jumped on to the bullish bandwagon in recent weeks.

Just one month ago the HGNSI stood at minus 28.3%. So the average gold timer has increased his gold exposure by more than 75 percentage points in just one month. That’s a faster increase in bullishness than in 99.6% of all periods of similar length since 2000.

On average in the wake of those few past occasions when the HGNSI grew as quickly as it has over the last month, the GDX declined — over periods from as short as the subsequent week to as long as the subsequent month. So, at a minimum, the odds would suggest that the sentiment winds in the next couple of weeks will not be as strongly in gold’s back as they were over the last couple of months.

Perhaps the most bullish scenario for gold, from a contrarian point of view, would be for the yellow metal to pull back modestly in coming sessions and for gold timers to react by quickly jumping back on the bearish bandwagon. That would create the sentiment foundation for a more sustainable rally.

A more bearish scenario would be for gold to continue holding its own for another few days and the gold timers to react by becoming even more solidly bullish than they are now.

We’ll find out soon enough. One virtue of contrarian analysis is that you don’t have to guess, instead letting the market and sentiment measures tell their story in real time.

What about market timers in stocks and bonds?

The gold market is just one of four arenas in which I track market timers’ average exposure levels. The others are the general stock market, the Nasdaq market, and bonds. Each month in this space I highlight one of them and analyze what it’s saying from a contrarian point of view.

In the meantime, the chart above summarizes where the timers currently stand in all four arenas.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com .

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