Why Gold is going up...
ANNANDALE, Va. (MarketWatch) -- To understand the significance of gold's recent plunge, contrarians argue that we need first to understand the psychology of bull markets.
Their goal is to rise while attracting as few adherents as possible along the way. If the bullish bandwagon gets too crowded, the market must first scare as many as possible of those adherents away from the bullish camp before resuming its upward path.
Bear markets take place when the occupants of that bullish bandwagon stubbornly refuse to jump off. Corrections, in contrast, are characterized by relative eagerness to do so.
From this psychological perspective, we must characterize gold's recent decline as a mere correction rather than the beginning of a new bear market.
In the wake of recent plunge of gold bullion (38099902) - about $100 per ounce since hitting a high of $725 in early May, including $15 on Thursday alone - gold timers have been quick to run for the exits.
Consider the latest readings from the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Thursday's close, the HGNSI stood at 1.8%.
That means that, on average, these gold timers are almost completely out of the gold market right now.
As recently as late April, in contrast, the HGNSI stood at 73.2%, within shouting distance of its all-time high of 90%.
To place the gold timers' retreat into perspective, consider how they instead reacted in 1980 in the wake of gold's initial drop from the $875 level. That turned out to be the high of the great gold bull market of the 1970s, of course, and remains unbroken yet today, more than 26 years later.
But no one could have known that then. And the reaction of most of the gold-oriented newsletters I followed then was to treat the pullback from the $875 level as a wonderful buying opportunity rather than as a reason to run for the hills.
I remember attending a gold-oriented conference at the time in which the consensus was that the pullback represented the last chance to purchase gold at $750 or $800 before gold resumed its inexorable rise to being priced in the thousands of dollars per ounce.
In an ironic sense, of course, they were right: At least as far as the next 25 years were concerned, that time did represent the last chance to purchase gold at such levels, since bullion has been lower ever since.
But the consensus at the time also represented extraordinarily stubborn bullishness, the hallmark of what contrarians consider to be the preconditions for a bear market.
We're not seeing those preconditions today. Far from stubborn bullishness, advisers are exhibiting a quickness to get out of gold at the early sign of trouble.
To be sure, it's worth reminding ourselves that there are no guarantees. Sentiment is not the only thing that makes the financial world go round.
After all, several weeks ago the HGNSI had already fallen from its late April peak, leading to the contrarian expectation that gold's decline was just a correction - and gold nevertheless has continued to fall.
But if this is the beginning of a gold bear market, it would be one of those rare occasions in which the gold timers in large part anticipated that bear market. End of Story
Their goal is to rise while attracting as few adherents as possible along the way. If the bullish bandwagon gets too crowded, the market must first scare as many as possible of those adherents away from the bullish camp before resuming its upward path.
Bear markets take place when the occupants of that bullish bandwagon stubbornly refuse to jump off. Corrections, in contrast, are characterized by relative eagerness to do so.
From this psychological perspective, we must characterize gold's recent decline as a mere correction rather than the beginning of a new bear market.
In the wake of recent plunge of gold bullion (38099902) - about $100 per ounce since hitting a high of $725 in early May, including $15 on Thursday alone - gold timers have been quick to run for the exits.
Consider the latest readings from the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Thursday's close, the HGNSI stood at 1.8%.
That means that, on average, these gold timers are almost completely out of the gold market right now.
As recently as late April, in contrast, the HGNSI stood at 73.2%, within shouting distance of its all-time high of 90%.
To place the gold timers' retreat into perspective, consider how they instead reacted in 1980 in the wake of gold's initial drop from the $875 level. That turned out to be the high of the great gold bull market of the 1970s, of course, and remains unbroken yet today, more than 26 years later.
But no one could have known that then. And the reaction of most of the gold-oriented newsletters I followed then was to treat the pullback from the $875 level as a wonderful buying opportunity rather than as a reason to run for the hills.
I remember attending a gold-oriented conference at the time in which the consensus was that the pullback represented the last chance to purchase gold at $750 or $800 before gold resumed its inexorable rise to being priced in the thousands of dollars per ounce.
In an ironic sense, of course, they were right: At least as far as the next 25 years were concerned, that time did represent the last chance to purchase gold at such levels, since bullion has been lower ever since.
But the consensus at the time also represented extraordinarily stubborn bullishness, the hallmark of what contrarians consider to be the preconditions for a bear market.
We're not seeing those preconditions today. Far from stubborn bullishness, advisers are exhibiting a quickness to get out of gold at the early sign of trouble.
To be sure, it's worth reminding ourselves that there are no guarantees. Sentiment is not the only thing that makes the financial world go round.
After all, several weeks ago the HGNSI had already fallen from its late April peak, leading to the contrarian expectation that gold's decline was just a correction - and gold nevertheless has continued to fall.
But if this is the beginning of a gold bear market, it would be one of those rare occasions in which the gold timers in large part anticipated that bear market. End of Story