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Good Morning,
Showing no signs that it has found a near-term bottom, gold continued to lose ground in overnight trading and erased its year-to-date gains, plunging to $801.90 per ounce and turning into bear territory. The metal was the subject of long liquidation by funds and did not fully meet the anticipated bargain hunting demand from India. Although buying interest has picked up nicely in advance of wedding season, some local buyers are now betting that they might be able to pick up even cheaper gold if they wait some more.
Gold futures fell by their daily limit in Tokyo and Shanghai, while platinum fell limit on the TOCOM as well. The recent volatility in these markets appears to indicate a shift in the long-term trends of the dollar, the euro, and the precious metals. The US dollar was trading at 1.487 against the euro this morning, and at 76.30 on the index. The US currency solidified its gains as the UK pound came under pressure this morning. Oil prices fell more than $1.25 to $113.20 after Russia announced an end to its Georgian operation, and despite (unconfirmed) reports of a bombing of the Baku-Suspa pipeline.
Gold prices started Tuesday's New York session still on the back foot, but looking a little better than overnight, down only $2.60 per ounce at $820.50 while participants ponder the metal's next steps, but remain apprehensive that the upper $700's might still be the first value zone for which it is headed. Bullion would need to return to above $875 to change the current situation in any meaningful way. Little in the way of data is on the economic calendar today, but a speech by Fed Chairman Bernanke is likely to draw the crowd's attention this morning. Silver fell another 7 cents to open at $14.57 while platinum added to its losses in Japan by starting the day $36 lower, at $1477 per ounce. Palladium dropped $10 to $309 and appeared to be aiming for a test of support at $300 per ounce.
A few things have changed since the last time Mark Hulbert sounded the gold-timing newsletters for sentiment. Quite a few. In retrospect, his July 29 warning signal about the timers' stubbornly bullish stance was one of the better calls of the year. Cries of 'nonsense' went up after the alarm was sounded. The silence among the perma-bulls today, is deafening. But not all of them are on board. Let's see what Mr. Hulbert finds at this juncture out it newsletter-land:
"The big market mover on Monday was gold, dropping by more than 4% during the day alone.
Gold bullion is now posting a loss for the year to date. Read full story
Contrarians were not surprised by the recent weakness, as it has been apparent to them for several weeks now that gold timers were too optimistic, providing a textbook illustration of the notion that bear markets like to decline a slope of hope.See July 29 column
Unfortunately for the gold bulls, it's not clear that enough gold timers have thrown in the towel to convince contrarians that a bottom is at hand. Consider where the Hulbert Gold Newsletter Sentiment Index (HGNSI) stands. It reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HGNSI stood at 5.4%, meaning that the average gold timing newsletter is recommending that clients invest 5.4% of their gold portfolios in gold and gold-related investments.
The good news, from a contrarian point of view: This 5.4% is a lot lower than the 64.3% level to which the HGNSI soared in early and mid July. The bad news is that it is not even lower. For example, the HGNSI dropped to minus 10.7% in the correction that ended in early May, or 16.1 percentage points lower than where it stands today. Even so, gold then bottomed out at above the $850/ounce level, some $25 per ounce higher than where it stands today. That difference betrays now much more inclined the average gold timer is today to see the glass has half full rather than half empty.
Another comparison that leads to the same conclusion: During gold-market weakness in early April, the HGNSI dropped to as low as minus 17.9%, or more than 23 percentage points lower than where it stands today. Even so, bullion at that time was trading above $900 per ounce, or some $80 per ounce higher than where it closed Monday.
All of this suggests to contrarians that more gold weakness is in store.
What would lead contrarians to conclude that a bottom was finally at hand? Coming up with a single answer is difficult, since different contrarians have different thresholds that would trigger a buy signal. But, at a minimum, the HGNSI will probably need to drop into negative territory. That's because virtually every intermediate bottom in the gold market in recent years was accompanied by HGNSI levels below zero.
It's impossible to predict when that might happen. It might be, for example, that a couple more days of weakness will lead to capitulation on the part of the typical gold timing newsletter editor. But it also could be that a dead-cat bounce in the gold market leads to renewed hope on the part of the average gold timer, thereby postponing that bottom.
In any case, we're not there yet. 
Look for attempts at a bounce following the seven sessions of intense pain we've endured. Critical supports at $800, $14, $1400, and $300 will be on trader-watch. Volatility will not be lacking - that's a given. Yesterday's initial recovery tripped and fell into a meltdown. Finally, pray for a good Indian harvest. Like the price of tea in China, an abundant crop on the subcontinent has a lot to do with the overall fate of the yellow metal.
Happy Trading.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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