'Sell Gold!' They Say…

The WSJ reports that J. Paulson – James, not John – of Wells Fargo the 'tireless stock market bull' as the WSJ refers to him, who recommends that people should sell their gold:


„In a note this afternoon, he argues that while gold is nice as a portfolio diversifier, “gold weightings should be scaled back in most portfolios” as the economic recovery lifts confidence across the economy.

Mr. Paulsen trots out no fewer than six ways to value gold, a notoriously slippery exercise given the dearth of traditional investment metrics available on the barbarous relic. And in each one of those six calculations — gold vs. Stocks,  gold vs. Treasurys, gold vs. home prices, gold vs. worker pay, gold vs. CPI, gold vs. other commodities — gold comes out looking as expensive as it’s been in, oh, the past 50 years.

Mr. Paulsen admits that valuation metrics in general aren’t enough to actually cause a shift. After all, overly expensive things can stay overly expensive, and overly cheap things can stay that way too. But he argues that fear — to his mind, the single biggest reason to buy gold — is fading fast as the U.S. recovery steamrolls on.

Gold, he writes, “is an investment which today seems far too popular among the masses, appears extremely overvalued relative to most other asset classes and faces a challenging environment should economic confidence slowly improve in the next several years.”

Or…you can take Goldman’s advice and buy gold.“


(emphasis added)

As it were, gold's purchasing power against commodities and many other things has indeed vastly increased – as always happens during secular economic contractions. However, it has clearly been much higher relative to the stock market than it is today in the past. Contrary to Mr. Paulson, we believe that particular move probably has much further to go. Stocks could easily lose another 80% to 90% against gold before the gold bull market is over.

It is true that gold tends to struggle in the face of improving economic confidence. However, we happen to believe that the recent improvement in economic confidence may already have hit a peak and is bound to worsen again from here. Goldman Sachs bases its bullish call on gold on the fact that real interest rates continue to be deeply negative – and there is indeed a very good case to be made both theoretically and empirically that gold tends to rise when this condition pertains.

The idea that gold is 'too popular among the masses' meanwhile is risible. As you will see further below, the overall bullish consensus on gold has just hit the lowest point in a decade. Moreover, the 'masses' have certainly not bought gold at all – on the contrary, they have sold theirs to slightly dubious outfits like 'Cash-4-Gold'. In fact, of the entire universe of financial assets in the whole world, only between 0.2% to 0.8% (depending on whose estimates one believes) are currently represented by investments in gold and gold-related assets. That's just slightly above 'nothing'.


Gold Sentiment

Jason Goepfert at sentimentrader has constructed a new gold sentiment score, which consists of a mixture of survey data and positioning data (everything from futures CoTs to Rydex positioning to the HGNSI to Consensus Inc. is included).

This indicator has just recently hit its lowest level of the past decade, as incredible as that may sound. Here it is:



Sentimentrader's composite gold sentiment score: at the beginning of the year it has hit a one decade low and currently remains not far above it – click chart for better resolution.



Concurrently, the HGNSI (Hulbert Gold Newsletter Sentiment Index) has hit a new low for the move at minus 16. So we can probably say that sentiment on gold is currently as bad as it gets. This can not be based on gold's price action however, as both the chart above and those below reveal:



Gold in euro terms: tagging the 200 day moving average. This chart remains bullish – click chart for better resolution.



Gold in dollar terms looks only slightly less convincing, but to call this chart bearish would really be a stretch – click chart for better resolution.



The HUI's 'morning star' candle formation has failed to produce follow-through buying, but we note that the index has put in a bullish 'inverted hammer' yesterday – so it appears to continue to try to put in a low here:



The imperfect  'morning star' didn't work out – but maybe the 'bullish inverted hammer' will? – click chart for better resolution.



It seems highly likely that it is the action in gold stocks that has turned so many people bearish on gold (or perhaps the action in the gold stocks is a result of the growing bearishness on gold – most likely it is actually a feedback loop).

Meanwhile, sentiment on the sector remains at rock bottom as well:



There is still extreme pessimism on gold stocks. This is usually a bullish sign – click chart for better resolution.



However, there still is one reason to be worried about these recent developments in the sentiment data: as J. Goepfert points out, sentiment has made progressively lower highs while gold itself has made higher highs at the same time – this is the mirror image of the bottoming process in 1998-2000, when progressively higher lows in the sentiment score were recorded concurrently with lower lows in the gold price.

Another parallel to that time period is the 'double non-confirmation' with the silver price. In the late 1990's, silver and gold bottomed out at different dates – their lows were separated by almost two years. Recently, silver made a top in April of 2011 and gold in September of 2011.

So these are slightly worrisome facets, but the 'non-confirmation' could of course easily be erased in a rally. 


Charts by: StockCharts.com, SentimenTrader.com



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One Response to “Gold and Gold Sentiment”

  • roy_partridge:

    Since it’s the composite sentiment indicator that is making lower highs as gold made higher highs, I wonder if the sentiment figures for gold stocks (which did not rally and sentiment is at lows) are causing the lower highs in the composite indicator.

    At the start of the bull marker, gold and gold stocks were all making lows.

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