Contrarians were not surprised by the recent surge in gold prices. Two months ago, when gold was trading at less than $1,850 an ounce, we reported that, according to contrarian analysis, both gold and gold mining stocks were poised for a significant rally.
Now, the yellow metal is trading at a record high, close to $2,100 an ounce, which is nearly $250 higher than its value in early October. However, contrarians believe that this rally is reaching its limit.
Throughout this two-month rally, short-term gold timers remained skeptical of gold's strength. It's only in the last week that they have begun to show excessive levels of optimism.
The accompanying chart illustrates this sentiment. It shows the average recommended gold market exposure level among several dozen short-term timers. Up until recently, this average stayed below the shaded box at the top of the chart, which represents the top 10% of the average's historical distribution. Any reading in that top decile is considered excessive bullishness.
The Decline of Gold Market Sentiment
December 1st Marks the Start of a Decrease in Optimism
On the first trading day of December, the HGNSI (gold market sentiment index) rose into the top decile, albeit just barely. However, this increase does not signify that the rally is nearing its end; it simply indicates that support for the rally is dwindling rapidly.
To provide perspective, we can refer to the data presented in the table below. This table highlights the average performance of gold mining stocks following days when gold timers displayed excessive pessimism or exuberance. This data encompasses all information since the creation of the VanEck Gold Miners ETF GDX in 2006.
Exploring Market Timers in Other Domains
The surge in optimism is not unique to the gold market. Similar trends have been observed in other sectors over the past two months. Our auditing firm also compiles sentiment indexes related to the broader U.S. stock market, the Nasdaq Stock Market, and the U.S. bond market. To truly grasp the extent of this optimism surge, compare the chart below with the one featured in my early-October column. The latter chart depicted all four areas engulfed in excessive pessimism.
In fact, our firm's sentiment index that measures the average recommended exposure level among S&P-focused market timers, known as the Hulbert Stock Newsletter Sentiment Index (HSNSI), recently reached its highest point since its inception in 2000.
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