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Nov. 4, 2009, 12:01 a.m. EST

Hazy crystal ball

Commentary: The gold market may have too many believers

By Mark Hulbert, MarketWatch

ANNANDALE, Va. (MarketWatch) — Contrarian analysts are not sure what to make of gold’s latest surge to an all-time record high.

On the one hand, there is a relatively high level of bullishness right now among gold market timers. That suggest to a contrarian that gold will find it harder in coming sessions to rise as much or as fast as it did over the last couple of months, when there was a much stronger wall of worry for the gold market to climb.

On the other hand, gold bullishness is not at record high levels, despite bullion’s record high. So a contrarian might also argue that current gold-market bullishness, while high, is still not as high as we otherwise would expect it to be. From this alternate perspective, gold’s wall of worry may not be as weak as it appears.

I wish the picture painted by the sentiment data were clearer. But my wishes are irrelevant, and the data are what they are.

Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Tuesday night, the HGNSI stood at 53.8%.

Since the HGNSI’s record high level is 89.6%, the current reading certainly does not appear to be saying that bullishness is at too high of a level.

The difficulty with this line of reasoning, however, is that this 89.6% record was set many years ago. Over the last couple of years, in contrast, the HGNSI has generally gotten no higher than the 55% to 65% range during gold market rallies.

From this perspective, therefore, the HGNSI’s current reading of 53.8% is more problematic, since it is getting dangerously close to those levels that marked the high points of previous rallies.

This analysis doesn’t mean that gold can’t continue rising, I hasten to add.

It instead simply means that, if gold does continue to rise, it will be without the strong support that sentiment had provided gold’s rally up until recently.

The bottom line is the same as what I reported in the October issue of the Hulbert Financial Digest: The “easiest money in gold’s rally is now behind us.”