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Gold Sentiment Cross Currents: Euphoria Or Meh?




Last week I couldn't resist the temptation to weigh in on gold and how it is going parabolic - this time in Euros, instead of US dollars. The price of gold has been reaching for the sky in almost every currency but the catalyst is no doubt, the European sovereign debt crisis. Greece and in turn the EU is boxed in.

Unlike the US or China, they can't spend their way out of this crisis, they can't borrow their way out of it and austerity measures, even if actually implemented in spite of riots, will shrink the economy and make debt servicing that much more difficult. The end game is dire indeed.

Not surprisingly then, last week the DSI for the Euro plumbed depths not seen for more than 10 years when it hit 2%. That means that a paltry 2% of retail investors have confidence in the Euro. That's a lot of skepticism, bordering on outright paranoia. I'll give you that the Euro has crashed to levels not seen since early 2006. But when the Euro made a multi-year low in late 2005, the corresponding DSI for the currency was 6% (mid-November 2005). That was still 3 times as high as now and the Euro is actually trading higher now than it was then.

euro index chart DSI readings May 2010

Does anyone else get the distinct impression that long gold, short Euro has become the trendy trade-du-jour? Usually when emotionally charged markets get this lopsided and pushed so far to one side we see a sharp counter-trend rally. So I wouldn't be surprised to see that although no market has to follow the dictates of a sentiment indicator like the DSI.

Gold Sentiment
Turning to the sentiment picture in gold, things are decidedly more murky. In the futures market the open interest spiked up to a new all time high for the commodity. While some believe this to be a contrarian measure, it is probably just a reflection of the strength in the market and if this is a secular bull market, the shattering of such records is par for the course.

Remarkably, two gold sentiment surveys show an actual reduction in optimism even at this high. According to the Hulbert Gold Newsletter Sentiment index, which measures a subset of gold stock newsletters that time the market, the recommended exposure fell last week to 32.2% (from 46.6% the week before). The maximum historical level the HGNSI has reached is 89.6% so this is very subdued in light of the rally we are seeing.

As well, Market Vane's Bullish Consensus sentiment indicator for gold fell by 3 percentage points to 74%. Although this is a tad on the high side, it is still not at maximum levels (above 80%). But the most important thing is that we are not seeing a drunken excitement in the gold market - at least from this measure.

The Daily Sentiment Index, from trade-futures.com, however is showing an extremely high level of bullishness for gold. At last Wednesday's high, the DSI for gold reached 98% - implying that basically everyone agrees that gold is going higher in price. This level is not only extremely high by its own regard, it is also the highest DSI reading for gold in the history of this indicator reaching back to 1987!

The last time we came close to this DSI level was on November 17th 2009 (97%), March 3rd 2008 (97%) and November 7th 2007 (97%). Having said that, Jake Bernstein, the creator of the Daily Sentiment Index indicator is the first to tell you that you don't just trade of it with your eyes closed.

Bullish Percent
The bullish percent index for the Gold Miners Index is 77.42%. That is relatively high compared to the historical averages but it isn't yet at an extreme that would correspond to market tops. I'd prefer to see the bullish percent above 85% before I'd feel comfortable shorting gold stocks. See this for a background on how I use bullish percent charts to time the market.

gold and bullish percent gold miners May 2010

Gold vs. Gold Shares
Last week gold shares were uncharacteristically strong while gold itself was weak. The Gold Bugs Index was up 7.34% for the week while gold squeaked out a 1.4% gain. While the metal has broken up gold shares (as represented by HUI) haven't. This worries many who see the divergence as a sign of weakness. But it may simply mean that there is less froth in the gold market than we think. Usually due to their higher beta gold shares are the go to vehicle for speculators, especially retail market timers who are unfamiliar with the commodities futures market.

If you've been long gold, first, congratulations! Second, here is a short video on where to place intelligent stops. Reading the cross currents of gold sentiment is very challenging right now. Previously we looked at Rydex traders and their subdued reaction. The above sentiment indicators unfortunately don't help to clarify the situation but provide a hodgepodge. In this light, I'd defer to the clearly parabolic nature of the charts and be cautious rather than bold.

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14 Responses to “Gold Sentiment Cross Currents: Euphoria Or Meh?”  

  1. 1 Daniel

    These intelligent, stretching of the viewpoint musings are more precious than gold, Babak.

    Here is my current rankings:

    -These musings

    -SLV

    -GLD

    ..that order. Please keep it up.

  2. 2 boatman

    excellent short term analysis.

    signed, long in gold

  3. 3 Arthur Hall

    I'm leery of all these wild forecasts of gold climbing another $500.00 by year end, doubling in price within two years and just discard all the forecasts of $5,000.00 gold. If these events were to happen I'm fearful the government would decide it's time to confiscate as Roosevelt did, and restore some balance to the deficits rung up by Obama's crowd. It might not happen but there is always the doubt. Arthur Hall

  4. 4 Wanda

    I don't think the government can confiscate some of the gold coins. The company I bought the coins from said the government can not get their hands on some of them like the Vienna Philharmonics gold coin. You can research to see which coins they can't get. However, like you, there is always doubt about everything we are told.

  5. 5 Mr. Verdi

    Until the naked short position with regards to silver and the JPMorgon FRAUD(making a naked short bet without holding one physical ounce of their bet) comes to light, I am all about that wonderous silver metal necessary for many industrial applications. JFK was most likely killed because he wanted to return us to the silver 2 weeks after his assination, and Bobby got the same treatment. The watchdogs at CFTC where literally given ALL the insider moves by one of their own who showed them how, where and when they would manipulate the metal and STILL they refuse to ACT. The government and the banks are all wearing the same pajamas folks. The only way to get them to own up is BUY PHYSICAL SILVER. If you need some real awesme info, go to either Ted Butlers or Jason Hommel Silver Stock Report(where u can read about the entire CFTC meeting and where the power was conviently cut when they knew who was going to be asking the most specific of questions and airing over a live audience. This same fellow and his wife where involved in a hit and run the next day where the bad guy was caught, yet no one can gather any info from police or anybody including insurance, as to who he was or from what he was acting on. The short position JPM holds is so huge, it would cause the currency grivious damage and be a matter of natioal security. Buy nothing with numismatic value. Buy 1oz. rounds or 10 oz. bars. They are a direct link to the spot silver price. This will be your last chance before it goes parabolic people. Its a triple from here and only the Lord knows how high after Christmas. If there is a frenzy.....like we expect in gold...lookout below mo.

  6. 6 Arthur Hall

    Is the rason the government can't get their hands on the Philarmonic coins that they are not U.S. coins, but are minted in Austria? How about the Canadian Maple Leaf , Chinese panda and Australian Kangaroos ? Would be in the same category as the Pholarmonic ? Arthur

  7. 7 MachineGhost

    The government can get its hands on anything it bloody wants to. All it takes is scribbles on paper and such is decreed as THE LAW.

    Roosevelt's Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, specifically exempting "customary use in industry, profession or art" -- a provision that covered artists, jewelers, dentists, and sign makers among others. The order further permitted any person to own up to $100 in gold coins.

  8. 8 Pal

    I wish to give some unsolicited advise.

    NEVER BELIEVE ANYTHING A COIN DEALER TELLS YOU!

    Did you get that?

    My gosh are people still that ignorant... sorry no insult intended.

    The US government using the Patriot Act is and has been seizing [since the TSA & Patriot Act were created] cash and valuables from airline passengers simply flying from Nashville to Atlanta for instance claiming the legal owners under the PA must prove where they got the cash and valuables before getting them back AND IN MANY CASES NEVER get the seized valuables back.

    This government has NO qualms about seizing Philharmonics, Maple Leafs or anything else they want. You better not kid yourself.

    You better do your research before you start buying and carrying around gold or silver ,for instance. You better be carrying the receipt of purchase proving your ownership and you better have a good story as to why you are traveling with PM in your possession.

  9. 9 Arthur Hall

    In my case I NEVER EVER discuss with anyone my interest in buying or selling precious metals or what I might possibly own. This is strictly a private matter . The less anyone knows the better off I am. I read somewhere a few years ago that as the laws are presently written the government cannot confiscate precious metals, but Roosevelt simply wrote an Executive Order, which seems to me to be able to override anything else. Arthur

  10. 10 Roy Cobden

    So, as ever, it looks like gold & gold markets will continue the up trend... but who knows for sure?

    As ever, DYODD.

  11. 11 Pal

    Hear ye, Hear ye on that brother DYODD and being hostest ...I have no idea where gold & silver are going. I am an Elliot Wave counter and the EW says gold and silver must go down now.....I simply fail to understand how that can happen short of massive deflation....which by the way is Bob Prechtor's stance.

    Good luck all as this is going to be nailbiter.

  12. 12 warren stouffer

    when you introduce a term not familar to some of us, it would be a good idea to define it to all of us

  13. 13 Arthur Hall

    I watch the commentaries on Kitco daily and most all of those predicting "To the moon prices") courtesy of John Nadler are newsletter writers hoping to sign up more subscribers. I am again skeptical of those whose interest is self serving. The one I have found to be most reliable are the comments by the Aden sisters. This not a plug, but sincere appreciation for their level headed approach to the entire area of investing.

  14. 14 Pal

    All these comments say what the US government 'cannot do'.. what a load of horse manure! This government can and is doing anything it wishes. You people are blowing dope if you think they cannot and will not confiscate Canadian or Austrian gold just because it is foreign. Have you people been a cave for the last 10 years. If you get caught flying from one US city to another with more than a couple grand in cash it can and has been confiscated by the TSA.

    Grow up people this government does anything it wants.

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