Will Gold's Rally Soon Come To An End?

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Feb. 3, 2012, 12:01 a.m. EST

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” Is gold vulnerable to a short-term pullback, if not worse?

/quotes/zigman/660065 GC2J 1,741.40, -17.90, -1.02%

It's seems counterintuitive, if not downright contrarian, to even be asking this question, with gold freshly minting an 11-week high.

But with gold rising more than 15% higher in just a little more than a month, it behooves short-term gold traders to seriously consider the possibility that the yellow metal has gotten ahead of itself.

And, unfortunately, that's just the conclusion reached by a contrarian analysis of current gold-market sentiment.

Consider the average recommended gold market exposure among the shortest-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). At gold's Dec. 29 low, this average stood at just 0.3%, which meant that the average short-term gold timer at that time was, for all intents and purposes, completely out of the gold market.

Today, in contrast, the HGNSI stands at 51%. That represents an awfully quick return to the bullish camp on the part of many of these short-term gold timers.

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Gold's 12% advance this year has encouraged increasingly bullish sentiment for investment newsletters. For contrarians, that's a cautionary sign, says MarketWatch's Mark Hulbert. Laura Mandaro reports. (Photo: Getty Images)

You might think that, given bullion's stunning rise since late December, the HGNSI's increase isn't that alarming from a contrarian point of view. But I'm not so sure.

Consider where the HGNSI stood on the seven other occasions since last August when gold bullion traded at close to where it stands right now. On no occasion did this sentiment index ever get as high as 51%.

Its highest reading on any of those seven times was 33.7%, and the lowest was 7%. The average was just 21.3%, less than half of where the HGNSI stands today.

In other words, relative to how the gold timers reacted before to gold trading around $1,760 an ounce, they are now markedly more confident that gold's trend is up.

That's why contrarians are so worried.

To be sure, even when contrarian analysis turns out to be is right (which, of course, it isn't always), it is sometimes early. This was the case during gold's correction in the last quarter of 2011, for example, when it was a number of weeks too early in concluding that it had become safe to increase gold exposure.

So it's entirely possible that, contrarian concerns notwithstanding, gold's rally will continue. But the sentiment data do suggest that risk has grown.

Furthermore, I hasten to add, contrarian analysis' conclusions apply only to the short-term "” over just the next 1 to 3 months, in fact. So contrarians' belief that gold's short-term trend is about to turn down is not inconsistent with the yellow metal being much higher later this year.

Click here to learn more about the Hulbert Financial Digest.

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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.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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It's seems counterintuitive, if not downright contrarian, to even be asking this question, with gold freshly minting an 11-week high.

But with gold rising more than 15% higher in just a little more than a month, it behooves short-term gold traders to seriously consider the possibility that the yellow metal has gotten ahead of itself.

And, unfortunately, that's just the conclusion reached by a contrarian analysis of current gold-market sentiment.

Consider the average recommended gold market exposure among the shortest-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). At gold's Dec. 29 low, this average stood at just 0.3%, which meant that the average short-term gold timer at that time was, for all intents and purposes, completely out of the gold market.

Today, in contrast, the HGNSI stands at 51%. That represents an awfully quick return to the bullish camp on the part of many of these short-term gold timers.

Gold's 12% advance this year has encouraged increasingly bullish sentiment for investment newsletters. For contrarians, that's a cautionary sign, says MarketWatch's Mark Hulbert. Laura Mandaro reports. (Photo: Getty Images)

You might think that, given bullion's stunning rise since late December, the HGNSI's increase isn't that alarming from a contrarian point of view. But I'm not so sure.

Consider where the HGNSI stood on the seven other occasions since last August when gold bullion traded at close to where it stands right now. On no occasion did this sentiment index ever get as high as 51%.

Its highest reading on any of those seven times was 33.7%, and the lowest was 7%. The average was just 21.3%, less than half of where the HGNSI stands today.

In other words, relative to how the gold timers reacted before to gold trading around $1,760 an ounce, they are now markedly more confident that gold's trend is up.

That's why contrarians are so worried.

To be sure, even when contrarian analysis turns out to be is right (which, of course, it isn't always), it is sometimes early. This was the case during gold's correction in the last quarter of 2011, for example, when it was a number of weeks too early in concluding that it had become safe to increase gold exposure.

So it's entirely possible that, contrarian concerns notwithstanding, gold's rally will continue. But the sentiment data do suggest that risk has grown.

Furthermore, I hasten to add, contrarian analysis' conclusions apply only to the short-term "” over just the next 1 to 3 months, in fact. So contrarians' belief that gold's short-term trend is about to turn down is not inconsistent with the yellow metal being much higher later this year.

Click here to learn more about the Hulbert Financial Digest.

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.

U.S. adds 243,000 jobs in January

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January U.S. jobs rise 243,000; jobless rate 8.3%

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Employment up nearly 2 million since summer

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Employment up nearly 2 million since summer

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Trading Strategies: Will the Bull See His Shadow?

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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