The Contrarian Case For Gold

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April 10, 2012, 12:01 a.m. EDT

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” Gold's sentiment foundation continues to get stronger and stronger.

That should provide at least some solace to beleaguered gold investors, who have grown increasingly frustrated as gold has languished for several weeks now.

/quotes/zigman/661661 GCM2 1,659.80, +15.90, +0.97%

To be sure, some will be inclined to dismiss the sentiment data, since it's been a month now since contrarian analysis turned bullish on gold. ( Read my Mar. 7 column, entitled "Gold market sentiment finally improving." )

Yet, far from rallying in the wake of that contrarian support, gold has remained stuck in a fairly narrow trading range between $1,600 and $1,700 an ounce "” and far below its all time high from last year above $1,900 an ounce.

But a frustrating month is not a good reason, in and of itself, to give up on contrarian analysis altogether. After all, no system is right all the time.

Furthermore, my analysis of gold market sentiment over the last three decades has shown that, at the 95% confidence level that statisticians often use to assess whether a pattern is most likely genuine, gold tends to do better in the wake of low levels of bullish sentiment (like now) than in the wake of excitement and enthusiasm.

And, over the last month, the contrarian case for a higher gold price has gotten even stronger.

Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average dropped to minus 15.7% in late March, which meant that the typical short-term gold timer was betting a sixth of his portfolio that gold would continue to decline. It has bounced around since then, but is today still in negative territory.

Click to Play $(function () { $("#video_006233CC-86C5-4B3F-97CE-F8F68DF8AE80").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('006233CC-86C5-4B3F-97CE-F8F68DF8AE80', 'video_006233CC-86C5-4B3F-97CE-F8F68DF8AE80', '287', '162'); }); }); Stocks fall sharply on Friday's weak jobs data

Stocks fell in a delayed reaction to Friday's report that employers added far fewer jobs last month than economists expected.

These negative readings are bullish in their own right, according to contrarian analysis. But they are in relative terms as well.

Consider how far back in time we have to go to find another occasion when the HGNSI was as low as minus 15.7%: March 2009, more than three years ago. So the average gold timer is more discouraged and dejected today than he has been in three years, even though gold's current price is nearly double what it was in March 2009.

The normal pattern is for timers to become more bullish as the market rises and more bearish as the market declines. So, other things being equal, we would expect the HGNSI to be a lot higher today than where it stood in March 2009. That it is not is testament to how powerful the climate of discouragement is right now in the gold market.

That's precisely the kind of sentiment environment in which powerful rallies are borne.

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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