Gold is continuously suffering from too much optimism amongst short-term market timers. This is the result contrarian analysts are facing upon analyzing gold market sentiment.
Gold, in other words, is still looking for a strong and enduring “Wall of worry.” Think about the normal recommended gold market exposure level that surrounds short-term gold timers.
If you were looking at a chart that gauged the average recommended gold market exposure level among short-term gold timers, you would see that the average has increased more than 53 percentage points over the last four trading sessions, a considerably significant jump in such a short amount of time.
The reason for this big jump was a rally of over $40 in the price of gold bullion, which was sufficient enough to convince long-suffering gold investors that good days were here again.
Their response is just the opposite of what normally would occur at more significant bottoms. According to contrarian analysis, those more important bottoms are instead accompanied by skepticism and disbelief
Not surprisingly gold this week has pulled back – including additional $10 per ounce on Tuesday.
An objection to this downbeat contrarian conclusion stems from some gold traders who debate that sentiment plays less of a factor during crucial economic or geopolitical upheavals.
As of today, they believe there are more than the usual number of potential candidates for such upheavals – everything from a comeback of inflation to a major terrorist attack, a currency issue in China or a major bear market on Wall Street.
One of many skepticisms about gold’s hedge against a crisis comes from an investigative study carried out by the National Bureau of Economic Research titled “The Golden Dilemma,” by Claude Erb, a former commodities portfolio manager for Trust Company of the West, and Campbell Harvey, a finance professor at Duke University.
They evaluate gold’s historical patterns during periods of inflation, hyperinflation, currency devaluations, geopolitical chaos and so forth, and discovered that during those periods gold just as often fell as it increased.
Gold traders’ arguments to the contrary are therefore just more proof of their eagerness to turn bullish.