How some investors knew gold was about to slip

The excitement of the gold market captures the yellow metal. Gold prices fell more than 1.5% in trading on Thursday, building on previous losses.

All told, bullion

GC00, -1.62%

is now almost $ 100 lower than it was two months ago, when I argued that excessive optimism among gold timers meant that gold's short-term direction was down.

The companies in gold mining companies have been hit particularly hard. VanEck Vectors Gold Miners ETF

GDX, -2.97%

for example, is 1[ads1]5% lower today than it was at the beginning of September.

Unfortunately, the feel of the gold market is only marginally better today than it was when I wrote about it before. Although the average recommended gold market level among gold timers has declined somewhat this week, it remains high. In fact, it is still higher than 70% of all daily measurements since 2000.

This average exposure level is what is measured with my Hulbert Gold Newsletter Sentiment Index (HGNSI). This average stood at 56.3% when I wrote my column in early September about the sentiment for gold markets. It was as high as 64.6% earlier this month, before dropping back this week to 43.8%. This latest reading is on the 71st percentile of all daily readings since 2000.

Opponents, therefore, believe that gold will have to fall even further before bullish sentiment returns to sufficient to create a short-term opportunity.

How low should gold go? To find out, I included HGNSI's daily values ​​back to 2000 in the statistical software of the computer, along with the prices of various reference points for the performance of gold mining shares (for example, the PHLX Gold / Silver Index

XAU, -2.44%

VanEck Vectors Gold Miners ETF, and VanEck Vectors Junior Gold Miners ETF

GDXJ, -3.89%


In both cases, the reference points yielded significantly higher returns after 5% of the lowest HGNSI measurements than after the highest 5%. These thresholds are minus 23.3% and plus 66.5% levels.

The difference in subsequent returns following these thresholds is illustrated in the accompanying chart for VanEck Vectors Gold Miners ETF. As you can see, the spread between this ETF's average return of 3 months after these high and low thresholds is ten percentage points. This corresponds to an annual spread of more than 30 percentage points.

To be sure, with HGNSI currently lower than this upper threshold, the outlook is not as negative as suggested by the descending bars in the accompanying diagram. But it's still negative: On average, the GDX over the past two decades has fallen by the following measurements as high or higher than they are at the moment.

You can oppose this analysis by claiming that gold's price is influenced by many factors other than sentiment. . Bullion's fall this week seems to be in response to good news on the US-China trade front. Sentiment may not have anything to do with the release.

The contradictory answer is not that excessive habilitation causes a fall, but that it creates conditions where a drop is more likely. Just think about the many other occasions over the past two years where there was apparently good news on the trade front. Gold did not slip on all such occasions, especially not as much as it did earlier this week.

However, regardless of the usual qualifications: Contrarian analysis does not always work. And even when it does, it only sheds light on the market's immediate direction. Still, opponents won't be surprised if gold declines more in the coming weeks.

Mark Hulbert is a regular contributor to MarketWatch. Hans Hulbert Ratings tracks investment newsletters that pay a flat fee to be revised. He can be reached at

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