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Gold Sentiment Hits Bearish Extremes

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Central Gold Trust (GTU) is a closed-end mutual fund, which means that it trades like a stock on the NYSE. The fund owns only gold -- the metal, not stocks. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a "premium" or "discount" to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding gold.

Currently and for over a year, GTU has been selling at a substantial discount, so we could say that sentiment is sufficiently bearish for a rally to begin. We need and want to see in preparation for a gold rally  is the discount rate move lower and then buyers start paying a premium (green bars).

With most sentiment indicators, when the market is extremely bearish, that's when we see a rally. In the case of GTU and Gold, we can see that bearish sentiment can hang on for months. Note also in 2009 when the premiums got ridiculously high (over 25%), it was not the harbinger of a correction in the price of gold, it actually was an initiation to higher prices. 

A closer look at this chart and we can identify numerous areas of overhead resistance that gold will need to break through on a rally. On the other side, there is one significant area of support drawn along the 2013 lows. The weekly PMO just had a negative crossover below the zero line which is extremely bearish. 

We also track the premium/discount for the Central Fund of Canada, however, they hold silver, some cash and other net assets in their portfolio. It does follow quite closely to GTU's premium/discounts. The symbol is !CEFPREM and can easily be added to the bottom of your chart using the same settings I used in the above chart for GTU. 

Happy Charting!
Erin

 

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Erin Swenlin
About the author: is a co-founder of the DecisionPoint.com website along with her father, Carl Swenlin. She launched the DecisionPoint daily blog in 2009 alongside Carl and now serves as a consulting technical analyst and blog contributor at StockCharts.com. Erin is an active Member of the CMT Association. She holds a Master's degree in Information Resource Management from the Air Force Institute of Technology as well as a Bachelor's degree in Mathematics from the University of Southern California. Learn More
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