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.

That’s a relatively aggressive bet on lower gold prices.

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.

In other words, gold traders today are just as pessimistic about gold’s prospects as they were when gold was trading for more than $700 less. No wonder contrarians are impressed by the wall of worry that exists in the gold arena these days.

How long must traders wait for gold to begin to respond to these positive sentiment conditions? Assuming the market responds the way it typically has done in the past, the wait could be as much as several more weeks.

I say that because of econometric tests I have run on the HGNSI over the last three decades. Its greatest explanatory power in predicting the market’s subsequent direction existed at the three-month horizon.

Here we show the S&P 500 with its bullish percent index, a breadth indicator. The S&P 500 is nearing resistance at 1350 and has strong long-term resistance at 1400-1500. Currently, the bullish percent index is at 83% which suggests a top is near.

This chart, from the Short Side of Long, shows the S&P 500 and various sentiment indicators. Two of the three indicators are very close to bullish extremes.

Moving along, in the next chart we find that the gold stocks are retreating and could retest the December lows. From top to bottom we show GDX (large caps), ZJG (Canadian Junior ETF) and GDXJ (US Junior ETF). Note the positive divergence in the juniors which are no threat to break to new lows. We believe the same can be said of the large caps.

Relatively speaking, the gold stocks have reached an extreme in terms of their ownership versus the broad market. The chart below (source: sentimentrader.com) shows the assets in Rydex’ Precious Metals Fund. Relative to other sectors, assets are only 13% which compares with past bearish extremes.

The gold stocks will likely spend the next few months forming a base which follows the long-term bottom in December. Meanwhile, the broad equity market is unlikely to move much higher. The S&P is nearing short-term resistance at 1350 and would face significant long-term resistance if it reached 1400. Moreover, sentiment indicators show increasing risk in the equity market. At the same time, the gold stocks are on the other end of a spectrum. They are coming out of a bottom, are underowned and unloved after a disappointing 2011.

The impact of the overall market on gold equities can be tricky. If the broad market is in a bear market then gold equities will find it difficult to rise. If the broad market is surging, then investors will invest in conventional stocks and ignore precious metals. The biggest moves in mining stocks began prior to an equity market bottom (1931, 2001, 2008) or occurred with the market moving sideways (2005-2006, 1978-1980). Over the next year, the equity market is likely to move sideways from 1200-1450 while the gold stocks have a chance to rally back to resistance and launch a major breakout move. It isn’t obvious yet but markets are definitely and gradually nearing a turning point. If you’d be interested in professional guidance in uncovering the best mining stocks for 2012, then we invite you to learn more about our service.    

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

The current bottom in Gold bears similarities to what we saw in 2006. First we show the bottom in 2006. Note the previous bull flag (blue), the double bottom pattern and the final low occurring at the 300-day moving average. Going forward, Gold rallied for five months and recovered over 75% of the losses.

Note the similarities between the past and the present. Both corrections occurred in five months, both occurred in a simple A-B-C pattern where A and C were nearly a double bottom and both bottomed above the previous bull flag at the 300-day moving average. Thus, we would not be surprised to see Gold rebound in a gradual fashion into the spring. It will be a while before a new high but we do see Gold getting back to $1800 in the first half of this year.

While Silver corrected more than 40%, we believe it made a major bottom at $26, which hosts a major confluence of support. First, note the 600-day moving average, which provided important support in 2007, late 2009, 2010 and recently. Secondly, $26 was the bottom in both January and on the spike low at the end of September. Third, $25 was the key rebound peak after the crash in 1980 and has been a very important price point in the last bull market and this bull market. Finally, the 50% retracement of the current bull market is $26. Need I say more about the importance of the recent bottom occurring at $26?

Clearly, bubble callers have not consulted the latest commitment of traders reports for Gold and Silver. In fact, I doubt most of them even know anything about the COTs. The current structure of the COTs is very supportive to Gold and Silver bulls. (Source: SentimenTrader.com).

First we look at Gold. Note that commercial short positions and speculative long positions are at levels last seen in early 2009.

The COT structure for Silver is even more encouraging. Recently, the net commercial short position in Silver was at an eight year low. The speculative long position was at an eight year low and the small trader long position was at its lowest point during the entire bull market.

Public opinion, also courtesy of SentimenTrader.com, shows 58% bulls on Gold and 39% bulls on Silver. A few weeks ago these figures were at multi-year lows. Let me ask you. Months after a peak in a bubble, is the public cleaned out and pessimistic as the data shows for Gold and Silver? No. In fact, its the public that remains optimistic and continues to buy after the initial peak. That is hardly the case at present.

Simply put, there are only two conclusions a reasonable person can posit. Either the bull market in precious metals is over and a small reflex rally is coming or the bull market has made a major bottom. We believe the latter. The bull market is far from over for obvious reasons. Considering the evidence it seems highly likely that Gold and Silver have made major bottoms.

That being said, Gold and Silver have incurred technical damage and it would be excessive to expect more than a gradual recovery. We believe the current bottom in Gold is similar to the bottom in 2006. Gold recovered its losses steadily but it would be nine months until the market began an impulsive advance that resulted in new highs. Silver rallied back to its highs but in total it was nearly eleven months before it began an impulsive advance to new highs. Essentially, we expect these markets to be in consolidations for 2012. It just so happens that we are starting from the low point which based on the evidence, is likely to be a major low. Those with patience should accumulate physical now. Meanwhile, those who are looking for growth and capital appreciation should consider the mining stocks. If you’d like professional guidance in riding this bull market and uncovering the winning companies then consider our premium service.

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

According to a Bloomberg survey, the median estimate of eight of the ten most accurate forecasters (of the past two years) is $1,950/oz by the end of the first quarter 2012.

Source

We use a combination of sentiment analysis and technical analysis in market timing which often gets a bad name courtesy of mainstream retail nonsense. The dumb money tries to time the market while the smart money utilizes market timing to weigh risk and reward. It’s rather simple when you acquire the skills and helps you understand markets. Recently we had been quite bullish on precious metals but thought we were in a small corrective period. We were wrong as the sector has suffered from Europe’s version of 2008. The good news is, our market timing work leads us to believe that the worst is soon to be over and this is an opportunity on the long side for those who have a twelve month time horizon.

Below is the Commitment of Traders (COT) for Gold. The data is as of last Tuesday. The commercial short position has dropped nearly 50% in the last few months. The commercials (the smart money, the end users and producers) are positioned more bullish than any other time in the past two years. This is another way of saying the speculative long position is at a two year low. Meanwhile, open interest is 28% off its high and close to a two year low.

In Silver, we see that the commercials are are net short only 24K contracts. This is the lowest since December 2008. Open interest is 35% off its high and at its lowest point since the end of summer 2009.

In addition, the latest public opinion report from sentimentrader.com (as of last Tuesday) shows 58% bulls on Gold and 31% bulls on Silver. Any further drop in Gold would mark a three-year low while the public is its most bearish on Silver since September 2008.

Even one month ago the speculative money was not so involved in precious metals. The recent carnage in equities and in Europe precipitated the selloff in precious metals which has caused all the remaining speculators to exit the market. Sure, we could see the metals move a bit lower and have sentiment turn even more bearish. It’s not impossible. However, Gold and Silver are rallying today and will soon begin a bottoming process. Sentiment tells us a bottom is very likely. Now we need the price action to confirm. If you are interested in professional guidance in profiting from this bull market while managing your risk we invite you to consider our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

Last week we wrote about Silver so this week we decided to provide an update on Gold. In looking at the price action and sentiment indicators we find that Gold is once again ripe for what is becoming an annual seasonal breakout. Gold has broken to a new all-time high in three of the past four years and presently, we are anticipating another breakout.

Gold is entering the third month of a consolidation that has range from $1475 to $1560. This tight consolidation is looking like a bullish flag, which is a continuation pattern. It “continues” the previous trend, which of course was bullish. The flag projects to $1825. We have a near-term Fibonacci projection of $1742. Finally, there is a long-term strong Fibonacci target of roughly $1820.

The Commitment of Traders data (source: timingcharts.com) for Gold remains very encouraging. Commercial hedgers are short 202K contracts (as of last Tuesday). This is well below the October 2010 high of about 300K contracts short. Aside from one or two weeks, their current short position is at a two-year low. Furthermore, open interest is well below the recent high and in fact fairly close to a one-year low. The COT data indicates a very low amount of speculation in the Gold market. Certainly we will need to see that pickup in order for Gold to breakout.

Note the public opinion from sentimentrader.com. It is only 57% bulls. While not so low we have to view it in the context of a strong bull market. It is a two-year low.

Furthermore, as usual, none of the clowns…I mean Wall Street analysts have an ounce of bullishness regarding Gold. The following is from the Erste Group’s July Gold Report:

According to a survey by Barclays not a single one of the 100 institutional investors expects gold to close 2011 among the top performers. On the other hand, the precious metal received the second-highest number of votes – behind natural gas – as expected worst performer of 2011. The 22 gold analysts covered by Bloomberg do not come across as very enthusiastic either, as the following screenshot illustrates. The consensus expects a sharp decline in the gold price from 2012 onwards. The median price targets were USD 1,450 (2011), USD 1,400 (2012), USD 1,231 (2013), and USD 1,159 (2014).

There you have it. Price action is bullish and sentiment indicators are quite supportive of the bullish cause. We didn’t discuss how the mining shares actually bottomed prior to the latest bottom in the metals. Several months back the mining shares peaked before the metals. Now we see the reverse. Such action is typical of turning points. Perhaps it is too good to be true but until proven otherwise, we have to anticipate another seasonal breakout in Gold.

Not only is Gold set to breakout but this could finally be the breakout that accelerates this bull market into the beginnings of a bubble. Folks, we are 12 years into this bull market and based on a typical bull market, the returns over the next few years will accelerate relative to the previous few years. If you’d like to learn about our premium service then visit here for more information.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

This week, the loquacious jackass will permit some lovely pictures to tell the story. Three graphs adequately tell of a grand opportunity to latch onto the powerful Gold Train with a super-charged Silver Scout. Who were the smart buyers back in September of 2007? The false phony deceptive mainstream message then was that the subprime mortgage problem was contained. That was the first major stumbling block by the hapless witless clueless USFed Chairman Bernanke. He has made not a single correct economic or financial system analytic call. Who were the smart buyers back in October of 2008? The false phony deceptive mainstream message then was that a TARP solution was being put in place to save the US banking system. The solution turned out to be basic largesse to the big US banks, enabling purchase of preferred shares, enabling outsized executive bonuses, and enabling secretive bailouts of banks across the globe. Without the Financial Accounting Standards Board allowance for insolvent banks to continue to dictate the value of their own balance sheets, otherwise known as systemic accounting fraud, the big US banks would have been liquidated. The entire Too Big To Fail principle is actually a battle cry to avoid solutions, to protect the banking elite that was mostly responsible for multiple $trillion bond fraud and mortgage fraud. Without any reservation, it can be said that TBTF means No Solution, no remedy, no recovery, and no attempt at anything remotely resembling a road to economic recovery. In my view, TBTF is the epitaph on the USEconomy and the nameplate on the USTreasury Bond default. So who were the dummies who ignored the opportunity to buy gold and especially silver in September 2007 and October 2008? The majority of them listened and trusted the mainstream news, the Wall Street misdirection, and all their fallacious messages.

THE COMMITMENT OF TRADERS SIGNAL

A big hat tip to internet contributor RG, whose message was relayed by the Midas Report. Consider verbatim his message, in which he gleefully proclaims to be calling all Rocketeers of the Happy Silver Ship. The goodfellow RG wrote, “The latest Commitment of Traders Report for silver is now screaming out at full volume BUY BUY BUY. In fact, the Commercial Short-Long Ratio that I have already bored you with at great length in recent correspondence is now down at a multi-year super extreme of 1.79. Below is an up-to-date chart of the COT picture. In summary there have only been four other weeks in this whole bull cycle where the ratio has dropped below 1.80, four weeks. The first two weeks of these was the 28th August 2007 and the following week of the 4th September 2007. The second tranche was the 21st October 2008 and the following week 28th October 2008. If you study below both the chart of silver over that period and also the HUI gold mining index, you can see how these extreme lows below 1.80 in the ratio coincided on both occasions very markedly with a bottom in both the silver price and the mining index. On each occasion this proved to be a multi-year opportunity to take positions in both the metal and the precious metal mining stocks. Each time the price of silver rose by some 60% to 90% within a six month period! And the HUI index rose some 90% to 160%. Folks, there is no such thing as a risk-free trade. There is no such thing as a free lunch. And there is no such thing as a one-way bet. However, there are certain times in an investment cycle when an outstanding opportunity presents itself and advantage should be taken. The evidence above shows very clearly the historic correlation between an extreme low below 1.80 on the Commercial Short-Long Ratio and a multi-month bottoming in the price of both silver and the precious metal mining stocks. I have been trading the precious metal sector since 2003 and I would consider this to be one of perhaps four of the most suitable buying opportunities within the last eight years!” The man RG makes a compelling argument, without providing the background factors that push the gold & silver prices upward. He simply points out the COT signal and the resulting performance after two significant lows were registered in precious metals prices. Very convincing inded. Thanks to RG also for the fine chart.

Note the green arrow in September 2007, a strong signal when silver was at a $12/oz price. Note the green arrow in October 2008, a strong signal when silver was just above the $9/oz price. The same type of signal is identified with yet another strong signal here & now in July 2011 with silver price at $35-36/oz. It is ready for the next big upleg. This time gold might lead, but as usual silver will follow and run fast and hard making yet more breathtaking gains. The great springtime consolidation is over. The power merchants have spent their ammunition with no lasting reversals, only pause with consolidation. They must manage unending financial crisis without motive toward remedy or solution. The climb has begun. Eager investors have waited and will wait no longer. The Chinese have already begun to re-enter the gold & silver markets armed and loaded with a $3 trillion war chest. Hong Kong exchanges await the precious metals trade. Lawsuits against the tainted SLV and GLD funds are in progress. A little more backfilling might be required. The fundamentals are incredibly powerful and bullish for both precious metals. The global monetary and sovereign debt situation is in ruins, crumbling more with each passing month. If corrupt henchmen are not in charge, then clowns and charlatans are at the USGovt, its finance ministries, the USFed itself, the many regulatory bodies, and so much more.

PAST SIGNAL PERFORMANCE

Consider the silver price move from the two points in the past. The move up by 50% in six months to March 2008 was interrupted by the Wall Street meltdown, followed by the insolvent collapse of the US banking system. Those who bought all the way down from $20 to the bargain price of $9.5 were amply rewarded. The key was to avoid leverage, paper contracts, and the mainstream nonsense spouted daily with errant focus and deceptive view. The sudden banking system insolvency in 2008 was followed by grand orchestrated attacks on the entire anti-USDollar trade. Hardly a hedge fund was not attacked by their own creditors and brokers on Wall Street, incredibly desperate to stay afloat. They found relief in white pixie dust. The US banks collapsed but did not suffer failure. Instead, with FASB aid, coupled with TARP confiscated funds, they continue to limp along as Grand Zombies. The silver price gain since October 2008 has been on the order of 4-fold, almost 300%. This is a stunning gain. The same will be said when silver surpasses the $100 price level. The ruin of major currencies in falsely posed money forms, the parade of USGovt debt, the hapless unfixable condition of the USEconomy, the submerged US households, and the US banks suffering from shadow home inventory coupled with investor lawsuit marred by defiant default in legal challenge, these over-arching factors assure much greater ruin of money. They assure a march to $100 silver. Many naysayers will be silent a year from now.

Ditto for the gold price moves, but the size of the gains are much less. The shape of the chart is very similar though. The springtime correction was not as great, but the gold gain was only half the silver gain. The crumbling global monetary system is the primary push factor for gold, not price inflation. The quality and substance of money is under scrutiny and question. In the next year or more, the price inflation factor will be put more in the forefront. Investors and households will be forced to seek out true inflation hedges, if not hedges against personal ruin.

FACTORS IN VIEW & ON HORIZON

The future holds many crucial factors to be extremely important. The Greek Govt debt bandaid will prove again to be pathetic and useless, buying a little time, while it aids the big European banks in toxic asset redemption. The bag holder is the Euro Central Bank, going down the tubes with its outsized Southern European sovereign debt and deep losses. The debt contagion will spread to Portugal next, then Spain and Italy. Those two large nations, spared the shame and focus up until now, will deliver two lethal deadly blows in the near future. When these two large columns fall on the European bank offices, the Germans will finally announce their exit plan. The Euro Central Bank just hiked interest rates by 25 basis points to 1.5% in defiance of the USFed. My Jackass forecast made in early 2009 was that the USFed would be dead last in hiking rates, and that call seems correct. The big US banks have troubles in court. They actually believe a mere $8.5 billion can permit them to walk away from well over $1 trillion in bond fraud. They want bond fraud and mortgage contract fraud forgiveness with limits on restitution and penalties. Their executives in New York City and London still enjoy $200 lunches. Not a single settlement deal will stick, not when investors and individuals are winning every single court challenge against the banks. The municipal bond and auction bond fraud deals will follow. The budget battle within the chambers of the USGovt has exposed the polarization, corruption, ineptitude, lack of leadership, and inability to avoid the catastrophe. It is simply too broken to fix. Taxes cannot be raised due to economic fragility. Entitlements cannot be cut due to public outcry and dependence. War cannot end since too profitable to the syndicate. Deficits will pile up regardless of any accords. Whatever progress is made will serve as tiny down payment for a bigger problem just a few months ahead. The next news item to anticipate is flirtation with USTreasury auction failures, against a backdrop of absconded USGovt worker pension funds. It is no wonder Treasury Secy Geithner wants to leave town. The next QE initiative will come in response to an auction failure, as buyers have vanished and primary bond dealers are under extreme distress. The lousy auctions last week were the telling indicator, largely ignored by the blind in the madding crowds. The US states are falling like flies in the summer heat, trapped inside window frames. Their extraordinary measures to avoid default have become almost a tragic comedy. Talk has come of splitting California into two states, of silicon and latin stripes. Illinois and New Jersey are basket cases. Wisconsin is a war zone.

The USEconomy sputters down the hill over the cliff with lost brake systems and no functioning engine. The industrial base has been forfeited in its core. Legitimate income was replaced by debt which defaulted. Then lastly consider the assault on global crude oil supply, the silly futile release from strategic petroleum reserves, following the Gulf of Mexico shutdown. The elite want $150 crude oil. The oil release effect has been forgotten already in just two weeks. With all the positive factors toward gold & silver, by the middle of next year in 2012, one must wonder what motivated people not to invest in precious metals after seeing the strong COT signal once more. The smart ones among us have learned long ago to ignore the Wall Street sell side artisans, to ignore the USGovt wrecking ball managers, to ignore the equity stock analysts whose paper game has turned into a leveraged valuation bonfire. Money faces ruin, as Gold & Silver offer preservation and growth during the greatest transfer of wealth in over a century. Recall the barons who exploited the Great Depression, whose names are part of the elite landscape of banking and politics and philanthropy.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com. For personal questions about subscriptions, contact him at  JimWillieCB@aol.com

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Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Consider the average recommended gold exposure among a subset of the shortest-term gold timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at just 20.3%, which means that the average gold timer is currently allocating nearly 80% of his or her gold portfolio to cash.

To put the HGNSI’s current level into context, consider that it is just 13 percentage points higher than the 7% level at which this average stood at gold’s mid-May low. Normally in the face of a $65 increase in gold’s price, we’d expect to see the HGNSI jump by more than this, which is why contrarians conclude that bullishness in the gold market remains healthily subdued.

In fact, even though gold closed Monday within 10 dollars of its previous all-time high, the HGNSI currently stands 53 percentage points below where it stood when gold hit that earlier high.

This all suggests to contrarians that gold has good odds of soon trading at a new all-time high. How far bullion is able to push into new-high territory will depend in no small part by how quickly the gold traders then choose to jump on the bullish bandwagon.

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