Precious Metal Sentiment Adjusts Downward – Finally

We can finally see the effect of the shellacking that precious metals received recently in various sentiment measures. Silver of course bore the brunt of the selling, falling 33% from its high of almost $50. The selling then spilled over into gold and other precious metal markets. And all commodities suddenly were flashing red after months and months of gains.

Gold Sentiment
According to Mark Hulbert, the keeper of the Hulbert Gold Newsletter Sentiment Index (HGNSI), gold newsletter editors are finally throwing in the towel and from a contrarian viewpoint, providing us with a reason to expect gold’s correction to have ended.

The average gold market timing newsletter is now recommending a long exposure of just 7% in comparison to 74% at the start of the month. I’d prefer to see that dip into the negative (meaning that they are actually recommending shorting gold and gold stocks). That’s what we saw in February 2011 when the HGNSI snuck down to -1.40%. That marked the swing low of course.

Another important indicator that has swung to the other side is the put call ratio for the SPDR Gold ETF (GLD). I mentioned this at the end of April when I suggested that gold was ready for a stumble (see Sentiment Overview for April 29th 2011):

Things have changed markedly since then. The 10 day moving average of the GLD put call ratio is now above 1. In an ideal scenario, we’d see this put call ratio go a bit higher, say, to 1.3 or 1.4 as with previous times before gold can find its legs again.

I was expecting gold to correct until it reached its 50 day moving average (at least) and we may yet get there. I think we are starting to see a growing list of arguments for the end of this correction. But we are just not there yet.

Silver Sentiment
In response to the dramatic selloff, silver sentiment which was at a record high plummeted along with price. SentimenTrader’s Public Opinion which amalgamates several individual sentiment surveys for silver shows the decline in comparison to previous cycles:


Source: SentimenTrader.com

While unquestionably swift, the decline has only reduced bullish sentiment to about the half-way point. That is enough for a short term bounce. But we are not seeing the kind of pessimism and despondency that would provide for a really strong foundation from which to launch a fresh bullish assault on the $50 level.

In my last commentary (Silver’s Last Stand) I wrote that, in the short term, the selling was overdone and we would see a feeble bounce in reaction. The next day a three day streak started that carried silver back up 12%.

And silver then fell decisively. While the general silver sentiment picture has now moved away from the extremely lopsided bullish view of a few weeks ago, there are several other metrics which are revealing a stubborn bullish tendency on the part of silver investors.

One of them is the relative premium/discount in various silver closed end funds. I’ve spoken about this previously when I pointed out the irrational exuberance of silver traders to be willing to pay almost 25% more than the actual value of the holdings, just to be long the commodity (Sprott on Silver). The premium of the Sprott Physical Silver Trust (PSLV) fell from 23% to 15% as of today’s close.

That reduction is certainly healthy from a contrarian point of view. But it isn’t yet enough to provide for anything more than just a “dead cat bounce”. Another silver closed end fund, the Silver Bullion Trust (SBT) shows a similar stubbornness on the part of retail silver traders:

This particular CEF is showing an even more bullish bias as retail investors cling to the belief that silver is so valuable, they are willing to pay a higher premium for it now that it has fallen compared to a few weeks ago when it was trading for a third more!

Three days after silver started to selloff, this CEF fell into a discount of 10.6%. Now, with silver even lower, it closed at a premium of 12%.

In the short term, the nimble can put bets on the long side in the precious metals space. I’d personally wait for a fatter pitch.

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