Gold's run is almost over - Mark Hulbert, MarketWatch

Bullion’s extraordinary run is fast running out of steam. Don’t be surprised if gold pulls back in coming sessions.

At a minimum, such a pullback would be a health-restoring event for the bull. However, such a pullback could also be the start of something more serious. We’ll know soon after it begins.

For now, though, the important thing for short-term traders to know is that excitement has grown markedly over the last couple of sessions, and now stands at close to the fever pitch that prevailed in late April. Soon after that previous crescendo of bullish enthusiasm, of course, gold encountered a stunning air pocket and fell more than $100 per ounce.

Consider the average recommended gold market exposure among a subset of short-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 67%, which is within shouting distance of the 73.7% level the HGNSI rose to in late April, which was a several-year high. 

The wall of worry that the gold market has been climbing in recent weeks is close to disintegrating, in other words.

This represents a big change from just a few days ago, when that wall of worry remained quite strong — surprisingly so, in fact, given that gold had already run up by quite a bit and was close to its late April peak (which was registered at around $1,560 an ounce). This is what allowed contrarians to forecast that gold would be able to significantly break above its previous all-time closing high. ( Read my Jul 13. column in Barron’s “Gold can head even higher.” ) 

The deteriorating sentiment picture doesn’t mean gold’s run is over, I hasten to add. The bull market’s longer-term future depends in no small part on how sentiment reacts to coming market weakness.

It would be a positive sign, from a contrarian point of view, if the gold traders were to quickly run for the exits in the face of that weakness. That would suggest that there remains an underlying climate of skittishness about gold, which would allow the wall of worry to be quickly rebuilt. 

In contrast, it would be a negative sign if the gold traders cling to their new-found bullishness in the face of market weakness. Contrarians believe stubbornly held bullishness to be a particularly bad sign, suggesting that more downside action is necessary before a sustainable rally can once again begin in earnest.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.