Tags: gold

Hulbert: Gold Bugs Reacting Faster

Thursday, 28 Aug 2008 03:27 PM

Gold-timing newsletters are reflecting a new market trend: shorter market reaction times, says senior MarketWatch columnist Mark Hulbert.

Gold rallies are petering out more quickly now than they used to, says Hulbert. That means that the weakness contrarians now foresee for gold is probably relatively short term.

"That doesn't mean the weakness couldn't last longer. But such additional weakness would have to be forecast then, based on the sentiment readings that prevailed at that time," Hulbert says.

Gold prices have dropped by more than $100 an ounce, an occurrence that normally sends gold timers racing to sell. But newsletters have lowered their gold recommendations only slightly.

Hulbert wondered if the apparent disconnect is an aberration or a sign of increasingly quicker and shorter-lived reaction times.

To find out, he calculated the correlations between his index and subsequent movements in the XAU, the PHLX Gold/Silver Sector Index for the past 25 years. He found a notable shortening in reaction times.

"Between 1985 and 2003, we could draw no conclusions from gold sentiment about what the XAU would do over the subsequent two weeks," Hulbert notes.

"In the last five years, the situation has reversed itself dramatically," he says.

"Reviewing the relationship over the last three months between bullion and the sentiment among gold timers, I'd have to say that the big surprise to me was how short-lived were bullion's reactions to sentiment extremes."

Last month, Hulbert's Gold Newsletter Sentiment Index, which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest, suggested that gold price rises were ending.

Yet two months earlier, the average gold timer's recommended gold exposure level was more than 37 percentage points lower than it is now and the average gold timing newsletter advised betting that the gold market would decline.

As contrarians know, Hulbert points out, the market rarely accommodates the majority, especially at major market turning points, which gives staying power to rallies of which most investors are skeptical.

"Bull markets like to climb a wall of worry, and bear markets like to descend a slope of hope," Hulbert says.

Most investors head for the exit at the first sign of a decline even when the decline is a correction instead of the beginning of a major bear.

The Hulbert Financial Digest has rigorously analyzed the HGNSI back to the 1980s, studying the correlations that exist between high and low sentiment levels and how gold bullion has performed over subsequent weeks and months.

These correlations are statistically significant at the 95 percent confidence level that statisticians often use to assess whether patterns are genuine.

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Gold-timing newsletters are reflecting a new market trend: shorter market reaction times, sayssenior MarketWatch columnist Mark Hulbert. Gold rallies are petering out more quickly now than they used to, says Hulbert. That means that the weakness contrarians now foresee for...
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2008-27-28
Thursday, 28 Aug 2008 03:27 PM
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