Bearish Sentiment in the Gold, Stock and Commodity Markets

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 and the Uranium Participation Corp. (URPTF.PK). GTU, as noted above, holds gold bullion and currently trades at a huge premium to its net asset value (NAV). The Uranium Participation Corp., 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 UPC 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.

Comments

[Cesato:]

I would make a correction to your article regarding Mr. Cramer as follows: "When Cramer is bullish you should be bearish and when Cramer is bearish you should be bullish". I'm waiting for Cramer to shift to a neutral/bearish bias in Gold so I can buy more Gold, I went bearish when Cramer took a bullish instance and I made wonderful money short term. As soon as he advices to be careful about buying Gold, I'll buy it all. This strategy has worked brilliantly for me over the last 2 years.

Mar 11 03:53 PM

[Rokjok777:]

Mail out 100,000 free investment newsletters, 50,000 saying the market will go up, 50,000 saying it will go down. After one month, mail out 50,000 more to the group that got the right advice, this time 25,000 saying the market wil go up, 25,000 saying it will go down. One month later, same thing, mail out 12,500 to the group that got the right advice. repeat. Once you're down to 3,125 people who think you're a genius, send them all a note saying your newsletter now costs $1000/year. Voila!

Mar 11 04:25 PM

[Sakata:]

"... the premium to net asset value of GTU, 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."

This is utter nonsense. NAV-premium for a fund is pretty close to price-to-book value for a stock. (OK, not exactly, but it is more like Granny Smith to Golden Delicious than it is to apples to oranges.) A quick check on Yahoo Finance of the current P/B of each sector shows most sectors with a value higher than 1.33. Even the financial sector has a P/B of 1.38 with most other sectors much higher. Now maybe those people are paying that premium because they happen to think that there is a good chance of a return on their investments, but maybe they are just uninformed investors who randomly chose the financial sector instead of precious metals.

To categorize a puchaser of GTU as uninformed is insulting. I notice you don't mention GLD, which has a much lower premium. Perhaps you don't know enough about gold to appreciate that the purchasers of GTU are VERY well informed. Informed enough to know that GLD is a bigger risk than GTU but gold itself has much better potential than all those sectors with a P/B of 1.33 all the way up to 14.28.

Perhaps you could also explain why your only other article on SA about gold was entitled "Gold Is the Only Long Term Bull Market", published only 6 weeks ago.

Mar 11 05:42 PM

[CTMike:]

Seems like neither of you have your fact right or I can't read. I just checked the GTU website and as of 5:00 PM 11, March, they are reporting a 22% premium. I've seen other references to a 33% premium but don't no the origins. If I'm reading GTU's web site wrong, let me know. Why would anybody pay that kind of a premium unless they are blindly buying based on somebody's recommendation or "misinformation"?


On Mar 11 05:42 PM Sakata wrote:

> "... the premium to net asset value of GTU, 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."
>
>
> This is utter nonsense. NAV-premium for a fund is pretty close to
> price-to-book value for a stock. (OK, not exactly, but it is more
> like Granny Smith to Golden Delicious than it is to apples to oranges.)
> A quick check on Yahoo Finance of the current P/B of each sector
> shows most sectors with a value higher than 1.33. Even the financial
> sector has a P/B of 1.38 with most other sectors much higher. Now
> maybe those people are paying that premium because they happen to
> think that there is a good chance of a return on their investments,
> but maybe they are just uninformed investors who randomly chose the
> financial sector instead of precious metals.
>
> To categorize a puchaser of GTU as uninformed is insulting. I notice
> you don't mention GLD, which has a much lower premium. Perhaps you
> don't know enough about gold to appreciate that the purchasers of
> GTU are VERY well informed. Informed enough to know that GLD is a
> bigger risk than GTU but gold itself has much better potential than
> all those sectors with a P/B of 1.33 all the way up to 14.28.
>
> Perhaps you could also explain why your only other article on SA
> about gold was entitled "Gold Is the Only Long Term Bull Market",
> published only 6 weeks ago.

Mar 11 09:54 PM

[mr freddo:]

Hey Cesato, congratulations on your strategy. I was flat on my back for a month and started watching Cramer. I tracked his picks. Most would surge upward on his recommendation and then many would tank. I believe that the author is correct when he says that when Cramer knows it, the herd knows it.

Mar 11 09:58 PM

[Cesato:]

Mr. Freddo, I'm glad you succeded with some picks from Cramer but take a look of Rokjok777's comment above, it pretty much explains what I think about Cramer but in fairness with Cramer's followers, whether he gets lucky or not, the idea is that all of us can make money over time. Noted.

Mar 11 10:35 PM

[KenyaInvestor:]

I think you'll continue to see strong support for gold at $875/OZ because that's when Cramer says buy. At some point, Cramer may ditch his "buy slow" philosophy and tell everyone to get in.

The obvious reason for the premium of GTU over GLD is that GTU actually owns physical gold. GLD owns paper claims to physical gold. Personally, I prefer gold American Eagles, but to each his own. But the Eagles come at a cheaper premium than GTU.

Word on the street is that the supply of gold coins is drying up.

Mar 12 12:51 AM

[5142152-337:]

I was going to attack the author's premise that investors were uninformed--buying at 1250 per ounce--but wise posters already took him to task. Well done.

I would only add this: the buyers may not have been buying using USD, which would certainly adjust the buying price, no?

Mar 12 08:50 AM

[Schneidehouse:]

That was funny!


On Mar 11 04:25 PM Rokjok777 wrote:

> Mail out 100,000 free investment newsletters, 50,000 saying the market
> will go up, 50,000 saying it will go down. After one month, mail
> out 50,000 more to the group that got the right advice, this time
> 25,000 saying the market wil go up, 25,000 saying it will go down.
> One month later, same thing, mail out 12,500 to the group that got
> the right advice. repeat. Once you're down to 3,125 people who think
> you're a genius, send them all a note saying your newsletter now
> costs $1000/year. Voila!

Mar 12 09:03 AM

[Delojozafado:]

!! Go MULTI !! Buy (DGP), (AGQ), some (ASA), some (CEF), some (AEM), some PAAS, or Silver Wheaton or Hecla, Get a thousand silver Eagles and hold them physically, You can bury them in your back yard with a couple bags of concrete over the top. Buy the gold coins and keep them in a safe place, a US safe deposit box or maybe get some Maple leafs and rent a box in Montreal or other large Canadian city. Last of all do not neglect to keep buying those TBT shares on weakness below $45.

3 or 4 50 pound bags of rice and some canned fish which generally has a shelf life three years beyond the "best by" date should prove worthwhile.

A guy in China grumbles and the Ten year tumbles!!!!????

Mar 13 07:03 AM

[waldipup:]

I think the reason that sentiment has held up on this downturn is because the downturn is an expected reaction to a breakout which has happened on several levels , and in no way (as yet) indicates that a trend change back to down has occurred.

This would indicate a calm "holding" or "waiting to enter at support" scenario ,

Rather than frenetic fear and boot shaking.

This article should maybe have been held off until various supports have broken ,these events then lending creedence to its premises.

As well , while "highly sophisticated professionals and economists" explain to us that bonds and the dollar

are being "managed" ,

I forgot to listen to those complete morons and

instead see trillions avalanching into the red ,

And wonder how the forests still have any lumber left.

So I wont micro analyze too much , and will hold long unless supports give way on the (almost) only investment that has held up as all the "good ones" have tanked.

Mar 16 04:58 PM