Dips Are Bought, Pennants Indicate Trend Continuation
We recently came across the information that the DSI (daily sentiment index), a short term futures traders sentiment survey, clocked in at about 80% bulls. This is as high as at the interim peak in gold in late August 2013, so we want to caution that in the very short term, gold looks a bit stretched from a sentiment perspective. However, it must be pointed out that it is only this very short term indicator that shows a high level of bullishness. Similar enthusiasm is simply not reflected in any other sentiment data we watch. One point that needs to be made about the DSI is that it can sometimes remain stretched for long periods of time, and is moreover quite volatile, so that often a brief correction is all it takes to bring it back to a more balanced reading. Meanwhile, gold continues to look technically convincing and the same is true of gold stocks:
Gold, public opinion – sentimentrader's amalgam of the most important sentiment surveys. Contrary to the DSI, we see no sign of froth here as of yet. In fact, sentiment is at best lukewarm – click to enlarge.
Gold Stocks – Same Story, Only More So
Gold stocks have likewise built a pennant on the daily chart. A few things are worth noting: the 50-day moving average is now rising at the steepest clip since the rally of autumn 2012, while the 200-day ma is trying to flatten out for the first time since turning down in late 2011. Prices are now above both moving averages, and we suspect will manage to remain above at least one or perhaps even both of them in the near to medium term in the event of a pullback. Note also that RSI remains stubbornly above the 50 mark so far this year, which is a positive sign as well. Here is the daily chart of the HUI illustrating this:
The 'more so' reference above has to do with sentiment on gold stocks as reflected in the Rydex precious metals fund. This fund is an excellent proxy of sentiment on the sector, and it has so far barely shown any signs of life in terms of inflows, never mind signs of froth. On the contrary, it reflects enduring and widespread skepticism about the recent rally. This is of course inherently bullish:
Rydex precious metals assets and the percentage the fund represents of all Rydex assets. Both remain at levels that reflect a great deal of skepticism about the recent rally – click to enlarge.
We should add an anecdotal observation here as well: many 'old hands' who are well known experts on the sector are also skeptical about its near term prospects. This is quite a change from the far more hopeful tone that still prevailed at similar index levels last year. Mind, this is not something we can really put numbers to – no statistical analysis of 'expert sentiment' is at our fingertips. We can only come to a qualitative judgment based on what we are reading and hearing, so you will have to take our word for it and keep in mind that we don't have the time to read everything (just as an example, Rick Rule, Sprott's junior mining expert, recently called the gold market 'frothy', a characterization we think is not applicable at this juncture. We are not picking on Mr. Rule by the way, who really does deserve the designation 'expert'. We merely note that he and other experts are quite cautious at the moment – and that is actually not a bad sign this early in a rally that has started from a very depressed level).
Addendum: Gold-Silver Ratio
Along the lines of what we discussed in recent updates on commodities, we want to point to the gold-silver ratio, which serves as an indicator of waxing and/or waning economic confidence. As Bob Hoye likes to say, it acts like a proxy for credit spreads, even though it isn't one. In fact, it can at times give us early warning signals that the credit markets only confirm later. The idea is that silver tends to outperform gold when economic confidence is rising due to its significant industrial demand component, and vice versa when economic confidence is waning. Currently, gold is outperforming silver and the ratio chart suggests that this could continue for a while yet. If so, then it would indicate that more pronounced economic weakness must be expected in the not-too-distant future.
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