The gold bugs are throwing in the towel

By Mark Hulbert

CHAPEL HILL, N.C. (MarketWatch) — Gold bugs over the last two weeks have become even more discouraged than they were at the end of November.

And that’s saying something, since they were already quite dejected.

As a result, contrarians detect a very strong wall of worry forming in the gold market, one which could very well be the springboard for bullion rallying into new all-time high territory.

Consider the average recommended gold market exposure among a subset of the shortest-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI).

Two weeks ago, when I last wrote in this space about a contrarian analysis of gold sentiment, this average stood at 13.7%.

Today it stands at 0.3%, which means that the average gold timer is essentially keeping all of his gold-oriented portfolio out of the market.

To be sure, I reported two weeks ago that, on the basis of the HGNSI being as low as 13.7%, contrarian analysis was already bullish on gold’s prospects. And yet, far from rallying, the yellow metal since then has fallen by more than $100 per ounce. Read Nov. 30 column.

What assurances do we have that contrarian analysis will be any more successful this time around? We don’t, of course.

But it’s worth stressing that contrarian analysis is right more often than it is wrong. For example, I have been measuring gold market sentiment for three decades, and have subjected the HGNSI to rigorous econometric tests.

At the 95% confidence level that statisticians often use to determine if a pattern is genuine, gold bullion tends to do better following low HGNSI levels than high ones.

There’s another reason to expect bullion to soon begin rallying: The end-of-year period historically has been a strong one for gold. Indeed, Ned Davis senior equity analyst John LaForge told me that the bulk of gold’s return over the last decade has been produced in the last several weeks of the calendar year.

We haven’t seen any such seasonal strength this year, needless to say. But gold’s seasonal tendencies are yet more evidence pointing in the same direction as contrarian analysis: Gold is due for a strong rally.

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.