A lot of bull

Commentary: Bullish optimism at worrisome levels in gold market

By Mark Hulbert, MarketWatch
March 29, 2011, 12:01 a.m. EDT

CHAPEL HILL, N.C. (MarketWatch) — As expected, gold quickly recovered from the $50 plunge it suffered over a two-day period immediately following the Japanese earthquake.

Unfortunately, because of abnormally high levels of bullish sentiment, gold’s near-term direction is now more likely than not to be down rather than up.

Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). It currently stands at 67%, which means that the average gold timer is allocating two thirds of his gold portfolio to gold and gold-related investments, keeping only one third in cash.

To appreciate just how much bullishness this represents, consider that the highest the HGNSI has risen to over the last two years is 71.9%, only slightly higher than today’s reading. Over the last five years, furthermore, the HGNSI has never gotten higher than 75.2%.

In other words, the current HGNSI reading is within close shouting distance to what in recent years has been the highest level to which bullish sentiment has risen in the gold market.

According to contrarian analysis, of course, the odds are against the majority point of view — especially a majority as big and strong as the one that exists currently in the gold market.

If you find this conclusion to be upsetting, I have a couple of things to say. First, you evidently are part of this strong bullish majority that is, from a contrarian point of view, part of the problem.

Secondly, and perhaps more importantly, bear in mind that contrarian analysis is a very short-term trading tool. To the extent it works, it anticipates market moves of just a couple weeks’ duration.

So you can still harbor longer-term hope.

For example, it may very well be that gold will rise to the $2,000 level by year end, as fellow columnist Peter Brimelow earlier this week quoted Jesse’s Cafe Americain website as saying.( Read Brimelow’s Mar. 28 column.)

But if contrarian analysis is correct, gold’s path to that year-end level involves at least a short-term detour first.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.