Why gold has performed so poorly even though stock markets are volatile

What’s it going to take for gold market timers to become so pessimistic that a contrarian buy signal is finally triggered?

The answer remains just as elusive today as it was a month ago, the last time I asked this question. All we know for sure is that gold’s

GCZ8, +0.66%

  plunge over the last couple of weeks is not enough. That’s because the gold timing community remains less bearish today than on the occasion of previous major lows — despite a plunging gold price.

Consider the average recommended gold market exposure level among a subset of short-term gold market timers (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at minus 18.2%. As I have indicated in past columns, previous lows have been accompanied by HGNSI readings at least as low as minus 30%.

To be sure, an HGNSI reading of minus 18.2% is lower than the 0% reading that prevailed a month ago, when I wrote my previous column on gold market sentiment. To that extent we’re closer to a contrarian buy signal than before.

But what is so surprising is that the HGNSI isn’t even lower. Over the past month gold has dropped more than $60, on top of an already-sizeable drop since bullion’s January high. As a result, the yellow metal is now more than $200 below that early 2018 high. And, yet, the gold timers as a group have yet to throw in the towel in a big way.

In fact, as you can see from the accompanying chart, the HGNSI’s underlying trend so far this year has been a surprisingly gradual and orderly decline. This is a textbook portrait of the so-called “slope of hope” that bear markets like to descend, and just the opposite of the “wall of worry” that bull markets like to climb.

Major lows are typically accompanied by panic selling in which any remaining bulls fall over themselves to climb onto the bearish bandwagon. That’s not what we’re seeing. On the contrary, the HGNSI has actually risen slightly over the last couple of days, as gold timers engage in bottom-picking.

This situation could change quickly, of course. A mad rush to jump on the bearish bandwagon could happen quickly. Yet there’s no reason to jump the gun, since as we’ve seen over the past month, the timers can behave in unexpected ways. Contrarians recommend that we instead let the market tell its story in its own time.

Meantime, the gold market could certainly rally for a day or two. But, absent a much stronger sentiment foundation, it’s all too likely that such a rally would be nothing more than a dead cat bounce rather than the beginning of a sustainable advance.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com . Create an email alert for Mark Hulbert’s MarketWatch columns here  (requires sign-in).


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