Sentiment indicators are contrarian, meaning that when the majority of investors are bullish on the a market, it is bearish for that market. Most investors are aware of several sentiment indicators that relate to the stock market, but they may not be aware that there is a sentiment indicator for gold. It is derived from the closed-end fund, Sprott Physical Gold Trust (PHYS).
Let’s quickly review how mutual funds work. An open-end fund processes contributions and redemptions while the market is open. After the market closes, it calculates the net asset value (NAV) per share. Closed-end funds normally do not process new contributions and redemptions. Rather, their assets are fixed and they trade on the stock market like stocks. Because of this, their price can be bid higher or lower throughout the market day, and they can sell at a premium or discount the their NAV.
On the daily chart below we can see sentiment panel, which shows that PHYS has been selling at a discount for at least a year. This means that investors are still reluctant to buy gold (bearish) even though gold has been making new, all-time highs. This is clearly bullish for gold.
On the weekly chart, we see that gold was selling at a small premium (green bars) a handful of times in the five years shown. Otherwise it sold at a discount, while price advanced +82% during the period shown.
On the monthly chart we can see that during the parabolic advance from 2005 to 2011, in 2010 the gold held by PHYS was selling at premium of about +14%, which is nuts. It continued selling at a premium for almost two years after the 2011 top, and it ultimately declined -46%.
The takeaway: Sentiment indicators are not precise timing tools, but in this case premium/discount analysis is an excellent method for assessing when investors in the gold market are too bullish or bearish.
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