Mark Hulbert: The bull trade in gold has become uncomfortably crowded

Gold’s near-term outlook has taken a turn for the worse.

That’s because the gold timers on balance have become quite bullish. In fact, the last time that the average gold timer was more bullish than today was almost exactly one year ago, when gold GCG9, +0.47% traded for around $1,355 an ounce. The yellow metal proceeded to fall some 13% from then until the summer.

That is just one data point, of course, but it is consistent with how the gold market has responded to sentiment extremes over the past couple of decades. This suggests that both gold and gold-mining shares are likely to struggle in coming weeks.

Consider the average recommended gold market exposure level among a subset of short-term gold timers monitored by my Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 54.2%, after earlier this week rising to as high as 62.5%. (See accompanying chart.)

To put these recent readings into perspective, consider that the HGNSI was at 0% as recently as the end of November. So the average gold timer has reacted to gold’s rally over the last six weeks by becoming much more heavily invested in gold and gold-related investments. This jumping on the bullish bandwagon is not a good sign, from a contrarian point of view.

In fact, the 62.5% HGNSI reading that was registered earlier this week was higher than 92% of all daily readings since 2000. As you can see from the table below, gold mining stocks over the past dozen years have performed quite poorly whenever the HGNSI got this high or higher.

Whenever the HGNSI was at least 62.5%

Performance of VanEck Gold Miners ETF GDX, -1.50%  

Subsequent week

-1.3%

Subsequent 2 weeks

-2.1%

Subsequent month

-3.9%

Subsequent 3 months

-8.5%

The usual qualifications apply, of course. Contrarian analysis doesn’t always work. Even when it does, it is only a short-term timing tool, shedding no insight into where gold and gold-mining stocks might be in six months’ or a year’s time.

So it might well be that gold is headed much higher, as many gold bugs currently argue. But if contrarian analysis is right, gold’s path higher will first take it lower.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .

More: The stock market just got off to its best start in 13 years

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