Gold's rally has nearly run its course

By Mark Hulbert

The monthly contrarian update of market timer sentiment

Contrarians expect gold to remain stuck in its trading range for a while longer.

That's because gold market timers are neither excessively optimistic (which would suggest gold would break down) nor excessively pessimistic (which would suggest gold would break out to the upside).

Gold's trading range, which extends roughly back to the beginning of December, is bounded by $2,000 on the downside and $2,100 on the upside.

The beginning of December is the last time I wrote about gold timer sentiment; I reported then that contrarians believed gold's rally over the prior two months was "close to running its course." Gold bullion is 0.7% higher today than when that column was written; shares of gold mining companies (as represented by the VanEck Vectors Gold Miners ETF GDX are now nearly 10% lower.

These contrarian observations are based on the average recommended gold exposure level among a subset of several dozen short-term gold timers. This average, which is represented by the Hulbert Gold Newsletter Sentiment Index (HGNSI), is plotted in the accompanying chart.

You will notice that there have been a couple of times since early December when this average came close to entering the zones of excessive optimism or pessimism that trigger contrarian signals-but in each case the HGNSI reversed course.

Late last week was the most recent illustration of this pattern. On Wednesday (Jan. 31), the HGNSI rose to a level that was higher than 84% of all daily readings since 2000-high, but just shy of the 90th or higher percentile readings that in prior columns I have used to identify the zone of excessive optimism.

On Friday (Feb. 2), gold bullion fell by nearly $30 an ounce, and the HGNSI began a retreat.

To forecast when gold will break out of its trading range in a big way, contrarians are focusing on these zones of excessive optimism and pessimism. If and when the HGNSI enters either of these zones and stays there for more than a day or two, they expect gold to do the opposite of the prevailing consensus.

What about market timers in other arenas?

Stock market timers, in contrast, are either excessively optimistic right now or getting close to that extreme. The reason for this split judgment is that my firm produces two sentiment indexes, one which reflects the average recommended exposure level among S&P 500 SPX-focused market timers (the Hulbert Stock Newsletter Sentiment Index, or HSNSI) and another which reflects a similar average for timers who focus on the Nasdaq COMP market in particular (the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). The former is currently higher than 98% of its daily readings since 2000, while the latter is at the 73rd percentile.

In previous columns I have suggested that a contrarian sell signal requires both of these stock market sentiment indexes to rise to be within the top deciles of their respective historical distributions, and to stay there for more than just a day or two. Notice that, while we're close to that perquisite, we're not there yet. That is an awfully fragile foundation on which to expect a continuation of the market's recent rally.

Meanwhile, below is a summary of where my firm's four market-timer-based sentiment indexes currently stands.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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02-05-24 1110ET

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