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Gold Sentiment Reaches 90% As Seasonality Winds Down at Trader’s Narrative

As I suggested last week, gold has enjoyed continued buoyancy with the spot price closing at $1319 this week. Year to date, gold has gained 20% with 12 record highs in the past 14 trading sessions. Positive seasonality will continue to provide wind to the back of gold bulls for two more weeks. So it is possible for gold to eke out an even bigger gain yet. But the incredible streak of positive days that has propelled the yellow metal higher as well as the rising bullish sentiment is telling us that we are near a top.

Gold Sentiment
The Daily Sentiment Index for gold hit the critical 90% level this week, as it did for silver (95% DSI) last week. While the 90% DSI doesn’t mean that gold has to suddenly reverse course, it is another sign that things are getting overheated in the short term. The whole commodity complex right now is arguably very frothy with major bullish sentiment accompanying rallies in silver, cotton, wheat, corn, sugar, oats, etc.

Bullish Percent Index
Also, the bullish percent index for the gold sector index has reached 80%. This is close to the 85%+ level which has corresponded with tops in the past. The bullish percent index for the Gold Miners Index has been acting like a very good barometer for the AMEX Gold Bugs index (HUI). And while it isn’t yet above 85%, it is high enough to add to the consensus that we are close to a top here.

Click graph to see larger version in new tab:
gold bugs HUI bullish percent index Sep 2010

Not surprisingly, the retail investor is clamoring to get on board the gold bandwagon. According to TrimTabs, the SPDR Gold ETF (GLD), year to date has had inflows of $6.7 billion which is a +35% increase in its asset base.

The Greenback
Something else to keep in mind is that gold and the dollar do have a mirror relationship to each other - even though it may be more tenuous now than it has been before. With the US dollar at an extremely low bullish sentiment level, it would not be surprising to see the massive sentiment gap between them close by gold falling and the dollar rallying.

If you’ve enjoyed gains by riding this latest rally, it is time to seek out target areas to pare positions and to move up your stop-loss levels. While gold may move higher, any further gains will probably be given back and then some. There will be better times to be long gold as it continues on its secular bull market.

The following weeks will not provide for a low risk environment for the gold bugs. Too many things are aligning for gold to be able to continue to rally strongly: technicals, sentiment, and seasonality.

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7 Responses to “Gold Sentiment Reaches 90% As Seasonality Winds Down”  

  1. 1 Perpe

    Not sure if you noticed already, but on Rydex Precious Metals mutual fund, which I am aware that you also track its assets, they have increased dramatically by 34 Million in just one day, on 30th Sep… Check it out. Looks like institutional?

    Date Time NAV ($) Total Assets Mil($)
    10/01/2010 PM 76.19 163.12
    09/30/2010 PM 75.09 161.14
    09/29/2010 PM 75.73 127.03
    09/28/2010 PM 75.87 127.61

    By the way, I wanted to ask you why you consider that Rydex fund can be a good sentiment indicator of investors, since there are quite a few funds in gold or precious metals.

    Thank you.

  2. 2 Babak

    Perpe, thanks for that. The increase you mention is noteworthy and it could be institutional, in which case it would be unfortunate since I’d prefer that Rydex remain a retail indicator. It is a $34 million jump in one day. There was a $69 withdrawal in late July that also looked like institutional money.

    But the increase does not really take the asset levels to extremes. We’ve seen them get up to $250-300 million recently. Rydex is a good indicator because it is predominantly retail traders who are trying to time the market.

  3. 3 DoctoRx

    Just saw this post, Babak. Thanks for the analysis. Yet anyone who uses the pejorative term “gold bugs” has a POV that is different from mine.

  4. 4 Babak

    Gold bugs are those that believe that gold has intrinsic value instead of being just another fungible commodity. Take a look at the very very long term history of gold and you’ll see that it is susceptible to manias and bubbles and perhaps more importantly, it is a horrendous store of value. Like any naming convention, it is a short cut to not have to explain that every time but it is not meant as a pejorative. Personally, I prefer to rent gold at appropriate times rather than marry it. But to each their own.

  5. 5 DoctoRx

    Not a “horrible” store of value. Which would you rather put in a safe for 100 years: $1340 worth of FRNs or an ounce of gold?

  6. 6 Babak

    That’s not the right question to ask. No single investment survives the reality of 100 years of time. That’s basically my point. I don’t mean to denigrate gold per se but the idea that any one ‘thing’ is the ‘thing’. Maybe I’m getting too philosophical but the only constant is impermanence.

  7. 7 MachineGhost

    Gold isn’t a horrible store of value, it just doesn’t offer a positive return as it is simply an inert asset valued for certain irreplaceable characteristics that make it best as a store of value in the long run. It is the worst form of money, except for all the others.

    Remember, pre-1971, pre-1965 or pre-1933, FRN’s/coins (excluding nickels) were exchangeable for or composed of gold or silver. So it’s not a simple binary decision between currency and gold when asking about the last 100 years.

    Gold has it uses post-1971 when the currency is being devalued, i.e. when real interest rates are negative.

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