Opinion: There’s still too many gold market bulls – MarketWatch

CHAPEL HILL, N.C. (MarketWatch) — Gold market-timers have yet to throw in the towel, and until they do, bullion is unlikely to stage a powerful rally.

This is one reason why gold’s rally earlier this week was so anemic. The stock market’s plunge certainly gave investors every reason to invest in gold

GCZ5, -0.21%

as a safe haven. But, according to contrarian analysis, the “wall of worry” that bull markets like to climb is not yet robust enough to support a stronger rally.

Just take how those timers reacted a month ago to gold’s falling to a new bear market low below $1,100. Surprisingly, they on balance remained more bullish than at many other times in recent years, even though gold on those occasions was trading at higher prices. (See chart above.)

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Since optimism normally rises and falls in lockstep with gold’s price, the timers’ recent relative bullishness is a bad sign. It means that they were clinging to hope in the face of gold’s new lows. Their mood was far closer to the “slope of hope” that bear markets like to descend than to the “wall of worry” bull markets like to climb.

This undercurrent of optimism among the gold timers became even more evident after gold began to rally from its early-August low: The average gold timer fairly quickly increased his exposure to the gold market. Yet if that low were the final low of bullion’s multi-year bear market, and if it were to adhere to the normal sentiment pattern, that rally would have been met with skepticism rather than belief.

Gold will stage a sustainable rally only when the timers stop behaving like Charlie Brown.

Consider the average gold timer’s recommended gold exposure level (as represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). At one point last week, as you can see from the above chart, this average was markedly higher (47 percentage points, in fact) than it had been just a few weeks previously. That’s a remarkable degree of eagerness to turn bullish.

I liken the gold timers’ recent behavior to Charlie Brown’s gullibility in trusting that Lucy won’t pull the football away at the last minute as he attempts to kick it. No matter how many times she lets him down, he is willing to give her the benefit of the doubt.

From the perspective of contrarian analysis, gold will stage a sustainable rally only when the timers stop behaving like Charlie Brown. That will come when, after being burned one too many times, they declare “never again” and actually mean it.

We’re not there yet.

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