HGNSI Plunges

As a brief update to yesterday's missive on the gold sector, we wanted to appraise readers of the fact that the HGNSI (Hulbert gold newsletter sentiment index) yesterday plunged to a new low for the move of minus 15.7.

This means that gold timers now recommend a net 15.7% short position, which is actually quite rare. There have been forays into negative territory by this indicator before of course, but they were generally short-lived. A reading of 15.7% is among the most extreme seen in the course of the past several years. In fact, not since the depths of the 2008 crash have such extreme readings been recorded.

Since gold stock indexes have broken below an important support level, this deterioration in sentiment is understandable, but it is also a sign that the remaining downside potential is becoming more and more limited.







The break of lateral support in the HUI has turned gold timers mega-bearish. They last two times they were this negative on the sector were in October/November 2008 and March 2009. These dates should ring a bell – click chart for better resolution.



As the past examples of HGNSI plunges into double digit negative territory show, one needs to be alert to a potential turning point when they occur. The HUI's 200 week moving average in the 443 area is probably the level that will contain a putative 'worst case' decline, but a turn could easily happen sooner than that. If the market were to turn around very quickly and managed to close above  the broken support level again, we would regard that as a very bullish development.


Bond Market Sentiment

We were struck yesterday by a sudden proliferation of expressions of bearish sentiment on the US treasury bond market in the financial media. One market commentator proclaimed that the 'mother of all shorts has begun'. Investment banks were mailing out advice to their clients as to 'what to do if bond yields rise' (as an aside, we have a suggestion in this context: whenever t-bond yields rise, the developed world's best performing stock index is usually Japan's Nikkei).

In the FT Alphaville article on the topic (linked above), the following chart by HSBC was helpfully provided – it shows which stock market sectors are likely to do best when t-bond yields rise:



The 'what to do if/when t-bond yields rise' manual by HSBC. We would simply buy the Nikkei – click chart for better resolution.




Reuters meanwhile informs us that 'bond bears growl again as US yields surge':


The rout prompted investment bank UBS to declare the start of a long bear market and even prominent investor, and one-time bond bull, Jeffrey Gundlach says yields will rise further.

What has investors questioning the bond market's ability to sustain super-low bond yields is the steady improvement in U.S. economic data that has buoyed the stock market to four-year highs. It means the flight to safety that has underpinned capital flows to U.S. debt in recent months may be eroding.

"There appears to be an asset allocation shift out of Treasuries and into risk assets that includes equities," Tom Sowanick, chief investment officer at OmniVest Group LLC in Princeton, New Jersey, said on Friday.

News that a majority of banks passed the Federal Reserve's stress test is another reason for investors to gain confidence to take more risks. "Banks now have been given a green light from the Federal Reserve to return capital to shareholders. This is positive," Sowanick said.

Treasuries are the worst performing U.S. bonds so far this year. Barclays Capital's Treasury total return index was down 1.68 percent after a stellar 9.81 percent gain in 2011. As Treasuries prices drop, yields go up.


(emphasis added)

What, even Jeffrey Gundlach is turning bearish on treasuries? Shiver me timbers!

If we had a single cent for every time the bull markets in JGB's and US treasuries have been prematurely declared to have expired by a sheer endless parade of experts, we'd have bought the entire US by now and used it as decoration for our front lawn.

Let us see: the ten year note yield is at 2.35% at the time of writing, and a veritable herd of bond bears is suddenly crawling out of the woodwork? Color us unconvinced. Just because stock prices have risen for a few months, nothing has really changed fundamentally. Europe remains in as critical a condition as before. The probability of a US recession happening this year remains quite high. China has just created a fresh growth scare as well (more on this in a follow-up post).

As our readers know, we don't like government bonds as an investment vehicle for a number of reasons – chiefly due to the fact that the income one derives from them is obtained by coercion instead of voluntary exchanges in the marketplace. 

However, this does not mean that we have no opinion on the market's trend. As to that, please wake us up when the big bad bear has really arrived. As the long term chart of the 30 year bond depicted below shows, there could be quite a big correction in prices before the trend is actually in danger. Moreover, the cumulative net cash flows into the bearish Rydex Juno fund (which shorts treasury bonds) are currently higher by a factor of 11.5  than the cumulative cash flows into the Rydex long bond '1.2 times' strategy fund. Bond bears lost no time whatsoever to jump aboard the shorting train, as the cash flows into the Juno fund have jumped by more than 30% since the beginning of the year.

There is certainly room for treasuries to fall (and yields to rise) further in the short term – there could be a brief bounce as equity markets correct, followed by a new leg down in bond prices. That should create sufficiently oversold conditions to allow for the bull market to resume. Speculators are currently net short t-note futures, but their position is not yet at an extreme. We think it will get closer to such an extreme before the market actually turns up again. While we agree with Bill Fleckenstein and others that there will eventually be a 'funding crisis', i.e.,  a fiscal crisis in the US, we think we are still years away from that point (obviously we may be forced to reevaluate this view depending on future developments).



30 year T-bond price and yield since 1980. It will take a big price decline to endanger the long term uptrend – click chart for better resolution.



A weekly chart of the 10 year t-note yield. The recent fast move higher has brought bond bears out of the woodwork. Yields are now at a first level of resistance, but this could easily be broken in coming weeks. However, we would not expect to see much more than a test of the downward sloping long-term channel – click chart for better resolution.



It is a bit surprising to us that an increase in the t-note yield from 1.9% to 2.35% has created so much anecdotal bearish sentiment. We don't think that when the actual long term turn in the bond market finally comes it will be  advertised that well. It seems far more likely that it will sneak up on people who by the time will have become quite complacent about bonds, similar to the secular upturn in US yields that began in 1942.  The JGB market looks actually 'riper', as people have indeed become quite complacent about it. Japan is also quite likely to experience a fiscal crisis sooner than the US, as its public debt situation is already quite stretched, to put it mildly. 


Charts by: Decisionpoint, StockCharts, HSBC



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4 Responses to “A Brief Remark on Gold and Bond Market Sentiment”

  • StevenJonKaplan:

    Another excellent analysis by Pater Tenebrarum!

  • jimmyjames:


    While it’s never good to hear about any sector you’re invested in on CNBC- I have to disagree about public participation in the PM market-gold is still well below its highs and we have seen charts here that show MMMF’s have only a 2-3% exposure in PM’s and overall participation was not even 1% when this chart was posted-


    It’s doubtful by looking at mining stocks (HUI) etc. that there was any major buying surge since 09-
    I don’t think that the public in general has much selling power when it comes to gold and the miners-they have been ending up in stronger hands with all the nasty flush outs along the way in this 11 year bull market-

    really like your posts ..btw

  • I think Japan is the rub on it all. When Japanes finance is shown to be destructible, attention will turn to all over indebted governments, no matter how large and what country. Thus, longer term durations in Germany, the US, Britain (another canary in the coal mine) and probably China will come into play. I mention China because in some fashion there is public financial liability that hasn’t been tested to the point we would see it in a free market. This factor will break down the credit banking/government finance circle and terms will shorten and risk rates will increase. I have contended that regardless of inflationary efforts, the system will be foreced to deflate, because the circle of asset values and credit expansion are broken, held together by State slight of hand.

    I sense this time the gold short is real. Some of it will depend on how many of these shorts are naked and how many of them are hedges against actual physical positions, which can be delivered. A week ago, there were a lot of questions asked of guests on CNBC and I didn’t hear a bear among the crowd. The public is in with both feet, as far as the public can get in. Not that everyone that thinks they should be in is in. Just those that could be in that wish to be in are all in. We have a brewing liquidity crisis in risk assets, covered up with a lot of hype. Gold will be much easier to move than a lot of these assets. The vise on junk bond investors and funds will suddenly close and most won’t wish to take the loss, which in a lot of cases will be close to 100%.

    • jimmyjames:


      While it’s never good to hear about any sector you’re invested in on CNBC- I have to disagree about public participation in the PM market-gold is still well below its highs and we have seen charts here that show MMMF’s have only a 2-3% exposure in PM’s and overall participation was not even 1% when this chart was posted-


      It’s doubtful by looking at mining stocks (HUI) etc. that there was any major buying surge since 09-
      I don’t think that the public in general has much selling power when it comes to gold and the miners-they have been ending up in stronger hands with all the nasty flush outs along the way in this 11 year bull market-

      really like your posts ..btw

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