Here’s what is holding gold back


Gold is unlikely to mount a sustainable rally anytime soon just as it failed in June to build on its strong May performance.

Thats because there remains too much bullish enthusiasm in the gold market GCQ7, -0.93% . According to contrarian analysis, a rally that lasts more than a couple of weeks isnt likely until there is a lot more pessimism and despair among gold investors a Wall of Worry, in other words.


Golds inability to sustain its May strength is a textbook illustration of what happens when a rally begins on a foundation of too much bullishness. Gold in June gave back all of the $80 it gained in May, and is now almost exactly back to where it stood in early May.


How much bearishness should you require before betting on a sustainable rally? One clue is provided by the chart above, which plots the average recommended gold exposure level among a number of short-term gold market timers (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). Positive HGNSI levels mean that the average timer is recommending a long position in gold, while negative levels mean the average timer is short.

Notice that rallies rarely amount to much when they begin when the HGNSI is above zero. This was the case for the rally that began in early May, just as I suggested in a May 5 column on gold market sentiment. The HGNSI then stood at plus 19.2%, and I concluded that sentiment to spur a decent gold rally does not yet exist.


Significant rallies become much more likely when the HGNSI drops to around minus 30%, though I hasten to add that even then they are not guaranteed. Notice from the chart that the HGNSI fell to minus 33.3% last October, and it wasnt until mid December two months laterthat gold began to rally in earnest. When it did, gold gained more than 14% over the subsequent three months.

The HGNSI currently stands at plus 16.7%, only slightly lower than where it stood in early May and nearly 50 percentage points higher than the minus 30% level that appears to have presaged significant rallies in the past. Thats why contrarians remain skeptical about golds near-term prospects.

As always, however, the usual qualifications apply: Contrarian analysis, to the extent it works, applies only to the short term telling us nothing about where the gold market may be trading, say, a year from now. But if past sentiment trends are any guide, the gold-timing community over the near term will have to become a lot more bearish before gold is likely to mount a sustainable rally.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.