Gold and Silver Bearish Sentiment Is At Extreme Levels

May 10, 2013

By:  John Townsend at The TSI Trader.

The usefulness of sentiment’s stealth crystal ball is about to be revealed to the litany of unsuspecting precious metal bears and skeptics who have convinced themselves that gold’s bull market is either over or, at the minimum, in need of lengthy ongoing retesting, restructuring and consolidation.

This article will bring us up to date as to the degree of current bearish sentiment regarding both gold and silver using no fewer than 5 sentiment indicators (with 9 illustrative charts), as well as provide the reader with an opportunity to observe the price outcome of previous bearish extremes using these sentiment indicators.

But first, let’s briefly consider the concept of investor sentiment.

Sentiment extremes, simply put, tell us that there are too many traders at one end of the boat and therefore the boat is about to tip over. Sentiment can strongly suggest that the trade, as some say, has become “crowded”. When someone finally yells “fire” in the “crowded” room there are so many of the market’s participants motivated to get out the same door and in the same direction that most get trampled – unable to reverse their trade fast enough.

Another way of characterizing a sentiment extreme is to say that the trade simply runs out of buyers or sellers, as the case may be. The extreme price momentum in one direction “exhausts” itself of all available ammunition to continue the trend and is sometimes signaled when someone yells “fire” in the “crowded” room, but often comes to a conclusion unrecognized by most traders as price reverses direction in an unassuming manner.

You may have heard comments when a particular market bottoms and then begins to trade higher and then continues to trade even higher yet, despite “bad” news, the assertion that the bullish price movement seems to make no sense – that it cannot possibly be sustained. At this time it appears to nearly everyone the common sense question to ask is how “bad” news that used to cause a market to go into free fall now seems to have absolutely no negative effect? And to observe that as this market continues higher, it always leaves behind those traders stuck in pessimism to declare that the market is “climbing a wall of worry”. That is, the “bad” news continues in the media, yet this particular market’s price reversal continues upwards.

We will begin with the put / call volume ratio of the options trade of the Silver Trust ETF (SLV) and the SPDR Gold Trust (GLD). Charts courtesy of Schaeffer’s Investment Research.

Click on image to enlarge.

The red line in the charts are the ETF’s price movement over the recent 2 years (GLD above, SLV below). The blue line is the put / call volume ratio. This considers the trading day’s volume of puts traded and is divided by the volume of calls traded. Generally, the higher the put / call ratio, the more bearish traders are about the ETF’s likely price movement, while the lower the put / call ratio, the more traders believe the ETF is bullish and going to rally higher.

Click on image to enlarge.

Undoubtedly you have noticed that both charts reveal that the put / call ratio is at the highs of the past two years; meanwhile price is at the lows of the past two years. I will leave it to you to observe the repetitively flip flop relationship between this sentiment indicator and price movement. For me, anyway, this indicator leaves little doubt as to the upcoming direction of GLD and SLV.

Next up is the Hulbert Gold Sentiment Index. This chart courtesy of Mark Hulbert’s Newsletters.

Click on image to enlarge.

This first Hulbert Gold Sentiment Index chart shows us that gold sentiment at present is even more depressed than at gold’s infamous 2008 low.

So there you have it. Sentiment on GLD and SLV options is crazy extreme, Hulbert’s Gold Sentiment Index reveals sentiment is not only more bearish than the 2008 bottom – it’s more bearish than anytime in the past 17 years (at least).

Read complete article here.

Comments

By Dale on May 11th, 2013 at 1:35 am

The thing to watch here is the physical vs paper silver market disconnect and the upcoming possible default risk on paper silver. At the moment, it would be plain stupid for anyone with a choice about it to deliver physical silver at the on-paper spot price. Market value is at least 15% higher. So only contracted silver with firm ownership credentials is likely come onto the market. Any firm that can get away with simply giving out cash at the spot price instead of metal is nearly certain to do so.

As the availability of physical silver declines and the price goes up, the risk of not being able to take physical delivery of contracted silver also goes up, thus driving the paper price of silver futures and ETFs DOWN, as well as the stock price of all mines contracted to sell their silver at spot price.

This very quickly becomes a death spiral, once the market starts looking past the headline paper price and sees the growing disconnect.

Result: SILVER skyrockets, while SLV and other paper silver tanks
Same thing then hits gold 1-2 weeks later.

By Jay on May 11th, 2013 at 6:25 pm

Indeed, you are correct. I am selling GLD and SLV with my two hands because they will be defaulted due to lack of deliverable gold. And I am buying physical gold and silver with premium of $50-100 and $4-6 respectively after selling GLD and SLV. Hence, If many people do as I do, GLD and SLV will tank(bearish) and physical gold will sky rocket(extremely bullish), which I believe I am correct. I have no doubt that very soon physical gold and silver premium will surpass $200-330 and $8-15. no wonder why GLD and SLV sentiments are so bearish. Best luck if you have these ETFs, which I will never own any more in my life time.

By Victor on May 15th, 2013 at 5:31 am

I guess sentiments are bearish and one must not make a decision based on the bearish sentiments which are fluctuating erratically.

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