It might appear that way to the casual viewer of the gold market's gyrations over the last six weeks. But, below the surface, gold's bull market has been strengthening.
One of the biggest improvements has been on the sentiment front: Even though gold bullion is trading at almost precisely the same level it was in late November, when I last devoted a column to gold sentiment, the mood among gold traders is markedly more subdued today than then.
From the perspective of contrarian analysis, this is a bullish development.
Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as reflected by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 33.6%, which means that the average short-term gold timer is allocating two-thirds of his or her gold-oriented portfolios to cash. Six weeks ago, in contrast, the HGNSI stood at 40.3%.
In other words, gold bullion's year-end rally to above the $1,400 level, and subsequent retreat over the last couple of weeks back to where it stood in late November, has succeeded in wrenching even more bullish sentiment out of the gold market.
According to contrarian analysis, major market tops are typically accompanied by excessive levels of bullishness that are stubbornly adhered to in the face of any market weakness. On neither count does the current sentiment picture qualify.
A similar pattern to what we've experienced over the last six weeks is the declining bullishness witnessed since mid-September, some four months ago. At the time, with gold bullion trading below $1,300 — more than $100 below its current price — the HGNSI stood at 59.2%. That's nearly double where it stands today, despite bullion today being much higher.
In other words, in the face of a four-month net increase in gold's price of over $100 per ounce, the average gold timer is today only slightly more than half as bullish.
This is a textbook illustration of the kind of wall of worry that bull markets like to climb.
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