The gold sector is peopled by a high concentration of contrary indicators because it is a relatively (to the vast world of equities and bonds) small market that offers refuge from some of the damaging aspects of the spectrum of investment products that are supported by the manipulation of interest rates and printed (and digitally created) money supplies. Thus, gold has moral high ground if an asset can be thought to have morality.
More accurately, the people bullish on and promoting gold take high moral ground and that is where the emotional power comes from in this market. This power feeds upon the desires of regular people to not suffer the consequences of the 'evil' actions of those running a system that many do not agree with. Readers of this site know of course that I certainly don't agree with the setting and manipulation of interest rates by decree of man (and woman) in service to engineering desired outcomes in financial markets.
Hence, I am a gold bull on the big picture until I see the system change for the better, which would mean a significant reduction of intensive interest rate micro management in play for 5+ years and counting. But within the big picture view are myriad smaller gyrations filled with volatility. Gold makes strong surges and gut wrenching declines. I have to believe that much of this volatility is the result of conviction that so many people hold toward the 'honest money' asset.
Decent people are coded to hope for and even fight for what is right and good. This is emotionally powerful. Decent people naturally deplore evil and dishonesty. Team Gold Bug… meet Team Evil Entity, AKA the Fed, the Fed/Wall Street Banker conspiracy, the covert operators within COMEX or whoever else is antagonistic to the price of the 'honest money' metal in the minds of gold bulls.
But it is often the emotional power of the gold 'community' itself that swings momentum so far one way or the other. 'Ukraine harkens a dark age of war, famine and plunder… BUY GOLD!' 'The Fed is going to BLOW the system… BUY GOLD!' Or, the last great damaging event for gold's price… 'The Euro is imploding… BUY GOLD!', as the global knee jerk into the monetary metal blew off the last cyclical bull and brought on a strong bear market, which gold still finds itself within at this moment.
I said it then and I'll say it now, it was the sudden acquisition of masses of unhealthy holders (those driven by fear, hysteria and hype) that terminated gold's last cyclical bull market and brought on a cyclical bear. The bear is and has been addressing that distortion for over 2.5 years now. Tune out those who want to paint evil entities as the enemy of gold. We have seen the enemy and he is – more than any external evil – us (or more accurately the unhealthy, unsavory elements within the 'community').
During the up phases those promoting gold tend to play hero or troubadour in heralding those bullish phases when finally, right and good shall triumph over evil.
Stop right there!
Gold is lump of pretty and heavy metal dug out of the ground. It has been used as a monetary retainer of value for centuries upon centuries. But it is not an idol. Aside from physical holding considerations (which is personal and beyond the scope of this post) it is a wildly volatile asset to own. Both gold bulls and bears should be prepared for this.
One way to prepare is to keep an eye on sentiment. Among gold sentiment indicators, Mark Hulbert's HGNSI (Hulbert Gold Newsletter Sentiment Index) is right up there in value with respect to gauging when the time is right to be bullish or bearish on gold. In his latest report, Hulbert shows an HGNSI that is dropping toward – but not yet fully settled at – a bullish backdrop for gold. Are the goldbugs finally crying ‘uncle’?
This data point marries up nicely with our own technical analysis that sees gold near, but maybe not quite yet at a bottom for the current corrective leg that began so predictably off the Ukraine/Crimea/Russia hype. See…
March 3: Ukraine, Time to Be Careful
Regardless, the bottom line is that the next time those advising about gold start to trumpet war or any other non-monetary event en masse as being bullish for gold, speculators and traders should take that as a sell signal. Conversely, when legions of bearish trend followers come out of the woodwork late in a downtrend well, you know the drill; it’s time to get bullish.
Gold contrary indicators, whether bullish or bearish, tend to be quite reliable due to the nature of this asset and emotions it stirs up.