Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 8th March 2009.
Gold Market Sentiment
When the gold price rose to $1000 in late February there was naturally a lot of enthusiasm about this market's prospects, which, combined with the almost uninterrupted $200 rise over the preceding five weeks, paved the way for a downward correction. The gold price then fell for eight trading days in a row, with the eighth down day being last Wednesday. The stage was thus set for a rebound, but as noted in last week's Interim Update the fact that the 8-day decline had barely put a dent in bullish sentiment suggested that the overall correction from the February high had not yet run its course.
Interestingly, while the 8-day decline generated very little concern amongst gold bulls, Thursday's rebound from support near $900 was greeted with unrestrained exuberance. For example and as illustrated by the following chart, the premium to net asset value of the Central Gold Trust (GTU), a closed-end fund that invests in gold bullion, surged from an already-high 20% on Wednesday to a new all-time high of 33% in response to Thursday's technical rebound. Buyers of GTU near the close of trading on Thursday were, in effect, paying about $1250/ounce for gold while the spot gold price was in the $930s. No well-informed investor would do this.
Chart provided courtesy of DecisionPoint.com
If the pullback that culminated last Wednesday had been accompanied by significant concern and the subsequent rebound had been accompanied by scepticism then the gold market would be well positioned to resume its intermediate-term upward trend. However, this is clearly not the situation.
Stock Market Sentiment
Extreme short-term optimism in the gold market is occurring alongside extreme short-term pessimism in the stock market. For example, the following chart of the weekly AAII Sentiment Survey indicates that 70% of survey respondents were bearish as of last week, versus only 19% that describe themselves as bullish. This happens to be the highest bearish percentage in the survey's history.
We won't argue that the incredibly high bearish percentage isn't justified by both the price action and the fundamentals. We also won't claim that total capitulation has occurred. However, if the current long-term equity bear evolves in similar fashion to previous examples then total capitulation lies at least a year, and potentially as many as 5 years, into the future. In the mean time there is a sentiment platform in place capable of supporting a strong counter-trend rebound.
Chart provided courtesy of DecisionPoint.com
Industrial Commodities
With the exception of those who remain in a blissful state of denial, observers of the economy and the financial markets realise that the global boom has ended and that a new boom is not going to begin anytime soon. Many people are therefore extrapolating today's bearish industrial-commodity supply/demand trends (falling demand relative to supply) well into the future. In other words, there is a great deal of pessimism built into the current prices of most industrial commodities.
A good example of the current stark difference between gold sentiment and industrial-commodity sentiment is the relative performances of the Central Gold Trust (GTU) and the Uranium Participation Corp. (TSX: U). GTU, as noted above, holds gold bullion and currently trades at a huge premium to its net asset value (NAV). U, on the other hand, holds an industrial commodity (uranium) and is currently priced at a substantial DISCOUNT to its NAV (by our calculations, Friday's closing price of C$5.95 for U represented a discount of about 16% to the market value of its uranium).
Cramer
Jim Cramer, a very high-profile and outspoken commentator on the financial markets, has recently had a lot to say about gold, almost all of it positive. At the same time he has apparently been saying bearish things about natural gas.
Cramer is a good indicator of public sentiment, meaning that when he is very bullish it generally means that most people are bullish and when he is very bearish it generally means that most people are bearish. Cramer's current outlook therefore confirms that there is considerable optimism built into gold's current price and considerable pessimism built into the current prices of natural gas and other industrial commodities.
By the way, we understand that Cramer has been advising people to scale into gold on weakness, which is actually very good advice. Our point is that his current strong focus on gold adds weight to the view that sentiment represents a barrier to significant additional SHORT-TERM gains in the gold price.
Conclusion
Sentiment suggests that there will soon be a temporary shift away from the premier counter-cyclical investment (gold) to cyclical investments such as general equities and industrial commodities. Silver is part monetary (counter-cyclical) and part industrial (cyclical), so if/when this shift takes place it will probably build on its recent strength relative to gold.
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