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A quick follow up to gold and gold stocks:
Although both the yellow metal and related equities have continued to rise, something is conspiring to keep a tight lid on the rally. And no, it isn’t a wide reaching and vast conspiracy involving central banks, hedge funds, the Easter Bunny and Mossad.
Last week, gold sentiment skyrocketed to 81% - as measured by MarketVane’s Bullish Consensus. That is the highest it has been this year and not too far off historic extremes.
According to contrarian analysis, there is way too much excitement about this little latest rally. When the vast majority of those who are interested are bullish (and act on the opinion by buying) the tragic conclusion is that there isn’t any real buying pressure left to propel prices higher.
This is what happened last May when bullish gold sentiment reached a crescendo of +90%. Gold peaked at $725 and the AMEX Gold Bugs Index (HUI) at 400. Neither have seen those levels again. And if the bullish sentiment continues, there is less and less probability they will.
The only argument that I can see for a continued rally in gold is the bullish percent index for the sector. According to the BP index kept by Dorsey, Wright & Associates, there is a possibility that we could see gold break out from this multi-year trading range.
In mid August, along with the rest of the market, gold got clobbered. That caused the bullish percent for the index to fall to 16% - a very, very low number. So far, it has recovered from this depth to 30%. As you can see from the chart (below), the BP index has quite a ways to go before it reaches overbought territory.
So take your pick: keep gold longs because bullish percent is still quite low or pare positions and tighten stops because sentiment is getting too bullish. Personally, I’m going with sentiment - via contrarian avenue.
Click To Enlarge Graph:
Thanks to Moises, a reader in Barcelona for the link (please have a bocatta on me and don’t forget the tomate drenched pan)
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