The Gold Rush is Over: Contrarians Rejoice as October's 'Flash Crash' Offers a Buying Opportunity
The gold market has experienced a significant shift in sentiment, with contrarians now viewing gold as an attractive investment. This change is attributed to the market timers' response to gold's 'flash crash' in late October, which caused them to quickly abandon their positions. The average gold timer's enthusiasm, which had previously concerned contrarians, was revealed to be short-lived and weak. This development is particularly notable as contrarians had previously predicted that the gold rally was 'living on borrowed time' and that they would 'get the last laugh'.
The Hulbert Gold Newsletter Sentiment Index (HGNSI) provides insight into the shift in sentiment. Over the six trading days through October 28, the HGNSI fell by 45.8 percentage points, one of the steepest drops since 2000. This decline is significant, as it has historically been followed by strong gains in gold-mining stocks. In the months following past sharp declines in the HGNSI, gold-mining stocks have averaged a 3.8% gain over the subsequent month, an 8.1% gain over two months, and a 13.8% gain over the following quarter. These returns are in stark contrast to the average gains of just 1.2%, 1.2%, and 1.0% respectively during periods of high sentiment.
While sentiment is not the only catalyst for gold, and contrarian analysis is not always immediately rewarded by the market, the current sentiment winds are blowing in the direction of higher gold prices. This shift in sentiment is further supported by the performance of gold-mining stocks in the wake of past occasions when the HGNSI fell as sharply as it did in late October. However, it is important to note that there are no guarantees, and sentiment is not the only factor influencing the gold market.
The Hulbert Gold Newsletter Sentiment Index is one of four sentiment indices calculated by the author's firm, which also tracks the broad U.S. equity market, the Nasdaq, and the U.S. bond market. The table below shows how each of these four indices compares to its historical distribution since 2000.
As the gold rush subsides, contrarians are finding themselves in a favorable position. The October 'flash crash' has provided a buying opportunity, and the sentiment winds are blowing in their favor. However, it is important to remain cautious and consider the broader market context, as sentiment is not the only catalyst for gold.
