By Mark Hulbert
Gold and gold miners perform best right after investors give up. This 'extreme pessimism' is the contrarian tailwind the market has been waiting for.
Gold no longer glitters for market-timers - a positive sign.
Gold and gold-mining stocks are likely to gain over the next several weeks, according to a contrarian analysis of sentiment from those following the gold market.
You should pay attention to contrarian theory because it helps to explain why gold (GC00) has performed so poorly since the Iran war began two months ago. Despite gold's reputation as a strong hedge against geopolitical crises and uncertainty, during March and April, it suffered its biggest two-month drop ever.
You might wonder whether a stronger U.S. dollar, not sentiment, is the culprit. A stronger dollar would cause gold's dollar-denominated price to fall. But that isn't the case here, since the U.S. dollar index's DXY current level is close to where the index stood before the Iran war.
To appreciate sentiment's role in gold's surprising weakness, consider how exuberant the average gold timer was over the four months leading up to the outbreak of hostilities in the Middle East. In the chart above, the red line reflects the average gold timer's recommended gold allocation, which is what the Hulbert Gold Newsletter Sentiment Index (HGNSI) measures. Notice how the HGNSI spent considerable time over those four months in the shaded zone at the top - which indicates the top 10% of its historical distribution (and most exuberant).
Gold's huge loss in the wake of that exuberance constitutes just one data point, of course, but it's consistent with the historical record. This is illustrated in the chart below, which reflects the performance of gold mining shares over the past two decades. Those shares don't perform as well, on average, in the wake of extreme optimism as they would in extreme pessimism.
Fortunately for gold traders, the HGNSI has worked off its bullish excess and is now low enough to be in the bottom 10% of its historical distribution - the zone of extreme pessimism, in other words. Assuming the future is like the past, the sentiment winds are now blowing gold in the direction of higher prices.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: The markets are in the early stages of pricing in stagflation. Here's what happens next.
Also read: Why this bullish stock-market timer is about to flip to bearish
-Mark Hulbert
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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Gold and gold-mining stocks are expected to rise in the coming weeks due to extreme pessimism among investors, according to contrarian analysis. Despite recent poor performance linked to geopolitical tensions, sentiment indicators show that gold timers are now in the bottom 10% of historical optimism. This shift suggests a potential rally ahead, as historical trends indicate that gold performs better following periods of extreme pessimism rather than optimism. Mark Hulbert emphasizes the importance of sentiment in predicting gold's future performance.

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This gold-timing indicator just hit a bottom - and history says a strong rally is next