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A Bottom For Gold And Gold Stocks?

 May 07, 2012 09:06 AM

(By Cam Hui) Mark Hulbert wrote last week that his measures of gold timer sentiment was very washed out, which indicated the possibility of a bottom for gold and gold stocks soon:
Consider the average recommended gold market exposure among a subset of the shortest-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI).

When I wrote about gold sentiment two months ago, this average stood at 16.7%. Today, in contrast, it is at minus 14.8%, which means that the average gold timer is now allocating about a seventh of his gold-oriented portfolio to shorting the market.
Hulbert wrote that he hadn't seen these kinds of sentiment readings since March 2009:
In fact, except for a couple of days in late March when the HGNSI dropped marginally lower to minus 15.7%, its current level is the lowest it's been since March 2009, more than three years ago.

And that's really quite amazing, given that gold at that time was trading only slightly above $900 an ounce.
Does this mean that gold and gold stocks are set to bottom? Not yet, according to my long-term measures of greed and fear. Consider, for example, the silver-to-gold ratio. Silver has long been regarded as a high-beta play on gold. The chart below of this ratio shows that while sentiment has descended from levels indicating excessive bullishness, they are not at levels consistent with a long-term bottom yet.

Here in Canada, we also have a good measure of speculation levels in resource and junior resource stocks. The chart below shows the ratio of the TSX Venture Index, which is comprised mainly of junior resource companies, against the more senior and established TSX Composite. This relative return ratio also tells the story of falling speculative fever, but readings are not at levels consistent with capitulation bottoms.

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