Retest Turns Into Nail-Biter

On occasion of our last update on gold's technical and sentiment condition (slightly overoptimistic, as it turned out), we wrote:

 

“All in all, the sentiment and positioning data give us however no unequivocal 'buy signal'. They merely tell us that the downside is probably limited. If we were to guess, there could easily be at least one more 'shakeout' in order to get small speculators in gold futures to capitulate and bring the sentiment gauges to new extremes. This would also provide an opportunity for the gold stocks to re-test their 2012 low. It is possible that such a retest is required in order to put in a durable low (preferably a retest at lower volume, following Tim Ord's rules for successful tests).”

 

In the main, the downside turned out to be a lot less 'limited' than we thought, as various technical support levels were breached with ease. Not even the lower rail of the triangle shown here  survived the assault, although the first of the lateral support levels drawn in did (so far that is; at the time of writing, gold is oscillating around its vicinity). Yesterday the January Fed minutes were greeted with a heavy dose of renewed selling, on the widely held view that they indicated a sooner than hitherto expected return to a somewhat less expansive monetary policy. Bridges in Brooklyn come immediately to mind, but of course we cannot know the future with certainty.

Gold itself remains above a few major near term support levels (barely), but the gold stock indexes actually breached their equivalent supports and are now poised above what looks like a lot of empty space.

Not surprisingly, already bearish sentiment has turned even more bearish. For instance the daily sentiment index (DSI), a survey of futures traders, clocked in at 3% bulls yesterday. That is an all time low and is incidentally equivalent to the percentage of SPX bulls found at the March 2009 low in terms of the DSI.  We wanted to show a few charts that illustrate the situation further:

 


 

sector sentiment

Sector sentiment according to sentimentrader: the gold bugs pendulum has finally arrived at what looks like the worst possible reading.

 


 

gold public opinion

The public opinion indicator has now plunged below the 2008 crash low (this indicator merges several surveys). The red line near the bottom of the chart indicates the lowest level this indicator reached in 2008 – click for better resolution.

 


 

Hui-Gold ratio

We see something analogous with the HUI-gold ratio: this is roughly where it was at the 2008 crash low (of course both gold and the HUI were at far lower nominal levels) – click for better resolution.

 


 

Conclusion:

To a large extent sentiment is simply following prices; one must therefore be cautious not to read too much into it. Price action itself remains the most important market datum. However, there are two things that can be said about sentiment extremes: first, they tell us that the recent trend is getting very stretched. Secondly, the more pronounced they are, the more likely the eventual rebound will be lively and possibly of the durable (medium to long term) variety. Note though that if a cyclical bear market has begun – and one could certainly argue for this view in the context of the gold stocks – then extreme bearish sentiment will be a recurring feature. In other words, until price action invalidates the recent bearish trend, it is only of limited importance. However, if and when such a reversal occurs (indicated by higher highs/higher lows and the retaking of previously breached support/resistance levels), then it will be meaningful that such extremes have been recorded.

 

 

Charts by: Sentimentrader, StockCharts


 
 

 
 

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8 Responses to “Gold – A Brief Remark on Sentiment”

  • jonnfaircrest:

    Thank you Peter for you article,,I enjoy reading and learning as much as possible about economy and finance,,
    I do not know about sentiment,,but I think recent currency wars has something to do with Gold going down,,
    my thought is that the vast printing of other countries fiat paper money (Japan) and others has given the perception that the dollar is stronger, thus driving Gold down….And if this is true we can expect Gold to continue going down because people will thing that the dollar is stronger????? How long this will last I do not know,,,I would be interested on your view on this….THANK YOU

  • Rob:

    Oh really? Just to produce an ounce of gold on average costs 1450 USD. Your analysis is most, most incomplete and frankly speaking, completely nonsensical.

  • tyroneosoros:

    What is the significance, if any, of the fact that gold’s inflation adjusted price from 1934 is under $700/oz?

    At $1585/oz how much more paper can the fed print?

  • jimmyjames:

    I’m of the personal belief that there is simply less need of a flight to safety with bottoming and improving economic data to *require* the flight to safety of both gold and bonds. The break of the 100wk SMA is quite disheartening to say the least.

    ***************
    Improving economic data?
    You must have missed the euro flash pmi data that the author just finished posting–you must have missed Arthur Ramsey’s posting of US real estate data-what it portrays and his conclusions-which I agree with-
    Gasoline consumption has crashed in the US (a good thing) but not indicative of an improving economy-
    England down graded today-
    Walmart sales are crashing–
    Copper is crashing-

    Not sure where you’re coming from here-

  • Forgive me as I do not wish to sound like a troll, however I have always been skeptical of any chart w/indicator reflecting a 5 year history. Upon first glance, one might assume that public opinion is at it’s lowest but then again there may be more to the larger picture which we’re not being shown. Can you provide a 15-20 year chart to give more of a historical perspective with the Public Opinion overlay?

    I’m of the personal belief that there is simply less need of a flight to safety with bottoming and improving economic data to *require* the flight to safety of both gold and bonds. The break of the 100wk SMA is quite disheartening to say the least.

    This is the first time I’ve encountered your blog and I’m intrigued. I will be returning.

  • I suspect that weak gold is a sign of other weakness to come. In 08, it followed the market down. I suspect that gold is easy to sell and the stock bulls aren’t prepared to get out, so they are selling gold instead to pile in. Prechter says gold is the leader down this time. Of course, he has been bearish the last $1000 plus of the run to the top. The crunch is coming out of the blue. Again, no one but us idiots will see it coming.

  • zerobs:

    In the US, sequestration may have something to do with it. I don’t know though, sequestration amounts to merely one month of Bernanke’s QE at his present rate. I just get this feeling that sentiment is finally coming around to admitting that maybe we really do have a spending problem, maybe the large banks really are too large, maybe QE is perpetuating denial… Seems like there was a lot of rah-rah leading up to the elections, the inauguration, and the state of the union and now that those stage acts are over we can get back to reality.

  • mihir.28290:

    talking about sentiment indices,what about the hulbert gold newsletter sentiment index ?
    lot of bulls out there seem to be capitulating.
    please post the latest read on the Index.
    cheers.

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