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Gold Sentiment Too Optimistic For Continued Rally at Trader’s Narrative

Wow, what a ride! The AMEX Gold Bugs Index (HUI) rallied 100% within two months. I was bearish on gold in October 2008 but saw technical support around 175 which is where the most recent rally lifted off from.

The funny thing is that gold has clearly shown itself to be just another commodity to be traded and not “real money” during this crisis. You can’t but help notice the resemblance of gold stock prices to general stock market prices. If you are still a dyed in the wool $2000 an oz. gold bug, then you have to re-examine your stance when the threat of total global credit and financial meltdown can’t push gold up.

In any case, looking at gold sentiment, it seems that this recent rally has given too many, too much optimism about the metal. And this usually means that it is the end of the ride.

According to the Hulbert Gold Newsletter Sentiment Index (HGNSI), the average exposure that market timing newsletters are suggesting for gold is 75.2%. To put that in perspective, that’s an almost 4 year high. It is even more gloomy when you consider that when gold was nearing $1000, this same sentiment measure was only 64.3%. Obviously gold is now much lower, but this 100% rally has made many people become “believers” yet again.

Another sentiment measure is also finding too much excitement for gold. The chart below shows the Central Gold Trust (GTU) share price with the premium/discount to NAV plotted below. Since the trust simply holds gold and silver, it is easy to calculate what it should be trading at. But right now, people are paying astronomical amounts over and above the real value of this security:

central gold trust premium discount graph Jan 2009

You can read more about Decision Point’s discussion of gold here.

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2 Responses to “Gold Sentiment Too Optimistic For Continued Rally”  

  1. 1 Johan Lindén

    Firstly, gold is surely real money! And that is actually and now more than ever is that shown in charts!

    Secondly, gold and gold stocks is not the same thing. No one ever said that gold stocks is real money.

    Since you like to use Sweden as a comparison, I can remind you that the gold price made an all time high in Sweden today.

    The US dollar has since Summer made the biggest appreciaition in history and it’s no wonder that gold has taken a pause in that currency. In euro it’s almost at an all time high.

    This while all other financial instruments and commodities has been destroyed.

    Depending on how you like to value gold on a relative basis it has been going pretty much straight up in a very high pace since 2000/2001.

    Now let’s end this discussion once for all that gold is like all other commodities and not real money.

  1. 1 Gold Sentiment Too Optimistic For Continued Rally - VicktorCapitalist

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