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September 25, 2014 | Author Pater Tenebrarum
Mark Hulbert on the HGNSI
As an addendum to Dan Popescu’s article on the state of gold sentiment, we want to show an update of the indicators we follow. Coincidendally, Mark Hulbert has also just published an update on his HGNSI measure (Hulbert Gold Newsletter Sentiment Index). The Index measures the percentage newsletter writers recommend to allocate to gold-related investments on average – either on the long or the short side. As it turns out, the current level of the HGNSI stands at nearly minus 47%, which happens to be the second-highest bearish sentiment expression in 30 years (the highest was recorded in June 2013).
Mark Hulbert notes:
“[…] the average recommended gold market exposure level among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at minus 46.9%, which means that the average short-term gold timer is now allocating nearly half his clients’ gold-oriented portfolios to going short.
That is an aggressively bearish posture, which is unlikely to be profitable according to contrarian analysis.
There’s been only one time in the past 30 years when the HGNSI got any lower than it is today. That came in June 2013, when the HGNSI fell to minus 56.7%. As you can see from the accompanying chart, gold soon — within a matter of a couple weeks — began a rally that, by late August, had tacked more than $200 on to the price of an ounce of gold.
Notice that gold’s 2013 summer rally didn’t begin immediately after the HGNSI dropped to the levels we’re seeing today. That’s hardly a criticism, of course, since no trading system can pick the market’s turning points with pinpoint accuracy. Nevertheless, according to the econometric tests to which I have subjected the 30 years’ worth of my sentiment data, the gold market performs appreciably better following low HGNSI readings rather than it does high ones. Contrarian analysis hasn’t always worked, needless to say, but it’s more successful than it is a failure.”