Gold Sentiment

 

Gold has created quite a fuss over the past couple of days.  It finally cracked its 200-day moving average for the fist time in three years.  That tends to garner some attention.

 

So let's take a stroll through some sentiment measures for Gold and see where we stand.  Because some of these are weekly, and a few have a built-in delay, the latest drop in the metal won't necessarily be reflected in some of the indicators just yet.  But overall we can still get a pretty good feel for where sentiment is.

 

Speculators in Gold futures have been trimming their positions since August, but they rebounded over the past few weeks.  Compared to the range over the last decade, their current positioning is about neutral.  It's on the low side compared to the last two years.

 

We'll get the latest update on Friday, which will include their positions as of December 13th.

 

 

Rydex traders, on the other hand, have pretty much given up.  Assets in the Precious Metals fund have sunk to $122 million, which is nearly the lowest amount in a decade.  It dropped under $100 million for a couple of months in late 2008 as everything was in turmoil, but other than that the current level of assets is extremely low.

 

As a percentage of total assets in the sector funds at Rydex, Precious Metals holds about 16% of the assets.  That's about average, and means that traders are leaving other sector funds, too (not just Precious Metals).

 

 

Part of the outflow from Rydex could be a structural shift, as traders move money out of mutual funds and into exchange-traded funds like GLD.

 

Speaking of GLD, options traders have started to buy some puts on the fund, as the put/call ratio over the past week has climbed above 1.0.  That's on the high side over the past few years.

 

 

The underlying Net Asset Value (NAV) of GLD is actually higher than where the fund is trading.  It's been rare to see such a large discount lately.

 

 

Longer-term, we can see that the current discount of around -2% is still fairly large.

 

 

This kind of drop in Gold will tend to scare professionals, even if they hold long-term convictions about higher prices.  They still have to answer to investors.

 

So we're seeing Commodity Trading Advisors aggressively trim their positions, and they're now near the lowest level of bullishness of the decade at right around 60%.  That figure has kissed 50% during the run of the past 10 years, so sentiment can still get even worse from this group.

 

 

That's especially the case if we look really long-term.  In that case, what we're seeing now is nowhere near as bad as it can get in terms of sentiment, as it dropped to 20% prior to the bull market.

 

 

While they may not have investors, newsletters still have to try to be right for their subscribers.  And the recent dip in Gold has scared these guys and gals.  They're now close to recommending a net short position in Gold, which is extremely unusual.

 

 

Longer-term, we can see that they've gone net short (by 20% or more) a few times, so once again sentiment can get worse than what we're seeing now.

 

 

Brokerage firm analysts had been a very optimistic bunch.  More than 80% of them were bullish on Gold's prospects earlier this year, but that has since dropped to just under 60%.

 

That's not very extreme, even when just looking at the past few years.

 

 

Taking a very long-term view, this group has gotten very, very bearish.  Nowhere near what we're seeing now.

 

 

Lastly, traders and strategists who use the Bloomberg terminal tend to be peripatetic when it comes to Gold.  They switch from bullish to bearish in a hurry.

 

In early November, more than 95% of the respondents to Bloomberg's weekly survey were bullish, the highest-ever reading.  That obviously didn't work so well, but so far they have been slow to reverse their opinion.  We're still seeing nearly 70% of them with a positive outlook.

 

 

 

So what's the bottom line?

 

From a sentiment point of view and ignoring any fundamental or technical developments, there isn't really a strong argument to be made for a bottom in Gold.  A few measures are showing an amount of pessimism that could be considered extreme compared to their recent ranges:

• Rydex mutual fund traders

• The discount of GLD to its Net Asset Value

• Newsletter writers

• Commodity Trading Advisors

All of those have gotten even more bearish in the past, but it's unrealistic to expect all-time lows in sentiment now, compared to 2001 when it had been mired in a years-long bear market.

 

The rest of the indicators are just kind of "meh" - not showing anything too exciting in terms of sentiment extremes.  From a strictly sentiment-based point of view, I don't see a massively compelling argument for Gold.

 

 

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