Good News For Contrarians

Mark Hulbert notes the lack of stubborn optimism among gold timers after yesterday's plummet, which he interprets as a good sign for the metal. The drop in bullishness means that gold has not engendered a bullish extreme of the kind that signals a major top.

Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). In the wake of Thursday's 3.2% decline in gold bullion's price, the HGNSI dropped 14.3 percentage points to 23.5%.

This not only is a big drop for just one day, which would, in and of itself, be a bullish omen, according to contrarian analysis. It's also bullish that the HGNSI level that prevailed going into Thursday's session was already surprisingly low, given how close gold bullion was to its all-time high reached earlier in June.

To put the current HGNSI level in context, consider that the HGNSI's all-time high is 89.6%. So by no stretch of the imagination can current sentiment levels be described as excessively high....

He also compares recent data to that of six months ago, in the middle of gold's correction. Sentiment back then was much higher than it is now. Instead of clinging to optimism, gold timers are clinging to a skeptical stance.

That skepticism means there's still a reservoir of bullishness that hasn't been tapped as of yet.