A New Multi-Year Low in the HGNSI

There would be little need to write this update if not for a rather remarkable new sentiment record. After having been stuck for a while at minus 12.5, the Hulbert Gold Newsletter Sentiment Index (HGNSI), which measures the average recommendation of gold market timing advisers, has reached a level that hasn't been seen in a very long time, if ever (it definitely has never occurred since the beginning of the bull market in 1999/2000).

The average recommendation is now to be 31% net short. Given that this is an average and considering that there are probably a handful of permabulls in the newsletter business, this is pretty extreme – especially as neither gold nor silver have broken the major lateral support levels that have been in force since the beginning of the consolidation period in 2011. Of course they still may break said supports. The point is that this has not happened yet, while sentiment is at levels that would normally suggest otherwise. That is quite astonishing.




The HGNSI, via sentimentrader.  The chart there wasn't updated yet at the time of writing, so we have added the latest reading – click for better resolution.


The action in gold meanwhile actually suggests that the lateral support level is likely to hold for now. After an overnight test of the 1540 level in Asian trade last week (the major lateral support level is situated at approximately $1520-$1540), gold reversed following the release of disappointing weekly claims data and then rallied quite strongly on Friday when the payrolls report turned out to have been a huge 'miss' as well (of course we tend to believe that it would have rallied regardless of the report, given that there seems to have been so much fear ahead of it).

This is what the reversal looked like on a daily continuation chart of the front month futures contract:




Gold daily, continuous front month. The inverted hammer on April 4 includes the overnight test of the $ 1540 level in Asia – click for better resolution.



Here is the action on a 5 minute chart – as can be seen, there was plenty of volatility attending the reversal:




A 5 minute chart of the gold futures contract during the final three trading days last week plus the open in Asia on Monday – click for better resolution.



No Shortage of Bearish Opinions

So why are the gold timers so bearish? For one thing, there is no shortage of bearish opinions. From a purely anecdotal perspective, we cannot remember when we have last seen a similar avalanche of bearish articles, sell-side reports, and so forth. Another reason is probably the continued poor performance of the gold mining sector. Indeed, the sector's performance on Friday was rather disappointing – it failed to reflect the rally in the gold price altogether, in spite of the fact that it is more 'oversold' on a weekly basis than at anytime since the year 2000.




The HUI Index of unhedged gold mining stocks. It failed to be impressed by the $28 rally in gold on Friday. The weekly RSI has now declined to levels last seen in 2000, right near the end of a 20 year long bear market – click for better resolution.



As a result it is probably no big surprise that sector sentiment has not changed at all. Closed end ETFs holding either gold or gold and silver (such as GTU and CEF) meanwhile all briefly traded at slight discounts to their NAV last week, a situation that only changed after the reversal shown above occurred. This is noteworthy as well, because it doesn't happen very often. Usually short term lows in the metals have been characterized by such dips in the prices of the closed-ends below their NAV (note though that this is by no means a guarantee of anything – history doesn't have to repeat).

Also worth pointing out, the bullish divergence between the price of the Rydex precious metals fund and the cumulative cash flows into the fund has persisted –  in spite of the additional weakness in precious metals stocks.



sector sentiment

Sentiment on various market sectors. The precious metals sector remains the most hated (not surprisingly).



Rydex pm fund

The Rydex precious metals fund. There is a persistent divergence between its price and the cumulative cash flow index – prices have made lower lows, while the cash flow index remains above the lows of 2011/12 – click for better resolution.



The fact that gold stocks have been so consistently underperforming the metal is a good reason to remain worried; they need to rise and overcome near term resistance levels (make higher lows and higher highs) in order to confirm that there a valid trend change in gold is underway.

On the other hand, the above noted divergences (between the Rydex CF index and prices, as well as the HGNSI and the gold price) provide a reason to remain on the  lookout for such a trend change.


A few Words on Fundamentals

We have read a number of the bearish editorials and sell-side reports that have been published recently, and there seems to be a common theme to them, namely that gold somehow 'needs QE' and that the US economy is in such fine fettle by now that 'QE' will soon end.

We should perhaps also mention that some of these reports refer to mine supply and related issues. If you see a report on gold that mentions the words 'mine supply', you can immediately stop reading it and fell free to delete it from your hard drive. Just as a reminder: the total supply of gold in the world stands at approximately 170,000 tons. If the mines were to increase their supply by 10% per year (a tall order), that would add 0,14% to the total supply of gold. That is what is also known as a rounding error. It matters not one whit.

As regards the economic backdrop, due to its large domestic economy, the US can indeed 'decouple' to some extent from the rest of the world, but one should stress here 'to some extent'. Generally we don't believe in decoupling theories – it's a case of 'we've heard it all before' (only last time it was China that was supposed to decouple). Moreover, the Fed and the US treasury combined are engaged in a major effort to ruin the economy by means of money printing and deficit spending, neither of which seem likely to end anytime soon. It is our considered opinion that the era of Anglo-Saxon central banking socialism in which we currently live will not end up producing less, but even more insane monetary experimentation. Recurring bouts of economic weakness are likely to provide the required fig leaf.

Lastly, we wonder from where all these pundits get the idea that gold 'needs QE'. There are a number of fundamental drivers for gold, and loose monetary policy is undoubtedly one of them, but policy would be extremely loose even in the absence of 'QE'. All of this is hypothetical however, because 'QE' is in train, not likely to end anytime soon and since the middle of last week it has once again gone global with the BoJ joining in as well (or rather, continuing where it left off, only at a much faster pace). It should perhaps also be noted in this context that the Fed's currently underway 'QE' program is its biggest yet.

None of this means that the gold price cannot decline; financial markets often do unexpected things, usually based on expectations that may or may not turn out to be correct. Extended moves in defiance of underlying fundamentals are quite common. However, many of the above mentioned pundits do make arguments based on fundamentals. As Bill Fleckenstein recently remarked, this seems to be a case of 'the market writing the news'. In other words, because prices have been in a downtrend, people make up reasons to explain the trend and to justify extrapolating it. Once the trend turns, we will witness the exact opposite phenomenon (indeed, nearly all the sell-side analysts that have recently turned bearish have been very bullish in mid 2011 when they should have turned cautious). Meanwhile, if we look at gold priced in several major currencies, all that can be seen so far is an extended consolidation (except in  gold in yen terms, which has broken out to the upside):




Gold in terms of several major currencies – click for better resolution.




It is always possible that a bigger correction has in fact begun; what argues in favor of this view is the persistent weakness in gold stocks. One must keep in mind that e.g. during the 1970s bull market, there was at one point a 50% price correction. No doubt said correction made it appear as though the bull market was over, just before it went into overdrive. One can therefore not rule out that the current correction will become deeper. However, neither the technical condition of gold itself nor the sentiment backdrop, nor the fundamental backdrop really confirm this idea at this point. In fact, it all looks exactly like what one would expect to see near the next major trend change.

Lastly, similar to many other commodities, gold is not known for ending its bull markets with a whimper. Rather, it is to be expected that the final wave up of the bull market is going to be an emotionally charged blow-off move to unexpectedly lofty levels. Even if the current correction is not over yet, this is  likely to eventually happen.



Charts by: StockCharts, Sentimentrader, BarCharts, Decisionpoint



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3 Responses to “Gold – Technical and Sentiment Update”

  • Peter– Thank you for this excellently written essay!

  • zerobs:

    Although I have nothing nice to say about the US Treasury, the effort to ruin the economy is coming mostly from Congress and the rest of the executive branch. The Fed is essentially bailing out those dens of thieves; while true that Treasury isn’t merely “following orders” they are in fact the low department on the totem pole. I would say from Reagan’s second term on, the executive branch has continuously lowered its regard for the department; if anything they’ve become more enamored of the central bank. Forty years ago the average American, if he or she could name any of them, would be more likely to be able to name the Treasury Secretary than the Federal Reserve Chairman. By the time Clinton left office it was the exact opposite. Nowadays the average American looks at the Federal Reserve as an executive-level agency.

    • jimmyjames:

      However, neither the technical condition of gold itself nor the sentiment backdrop, nor the fundamental backdrop really confirm this idea at this point. In fact, it all looks exactly like what one would expect to see near the next major trend change.


      Bighting the back of one hand and gingerly hitting the buy with the other (cough) “averaging” down-
      A fool and his money are easily parted?

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