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CHAPEL HILL, N.C. (MarketWatch) — Gold’s $30-plus drop Monday — the biggest daily decline of the year — serves as a powerful reminder that the market for the yellow metal remains vulnerable to shifts in investor mood.

And that does not bode well for gold’s near-term prospects. That’s because there’s more bullishness than bearishness today among the gold traders I monitor, which, in turn, means it’s more likely that shifts in mood will cause gold to fall than to rise.

Consider the average recommended gold-market exposure among a subset of short-term gold-timing newsletters tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). The average currently stands at 23.3%.

To put that into context, consider that as recently as early June, the HGNSI stood at minus 30%. In other words, in a little more than a month’s time, the average gold timer has increased his recommended gold-exposure level by 53.3 percentage points.

That’s a remarkably quick retreat from bearishness.

According to contrarian analysis, major market bottoms are more likely to be greeted by stubbornly held bearishness — just the opposite of what we’ve seen recently. In other words, the initial rally off the final low will most likely be greeted by disbelief. Only well into the new bull market will market timers be eager to jump back on the bullish bandwagon.

In fact, a close analysis of gold sentiment over the past 12 months suggests we’re getting further away from extreme pessimism, not closer.

Notice from the accompanying chart that there have been three major periods of bearishness over the past year among monitored gold timers. As you can see, the trend in sentiment across these three periods is of higher sentiment levels, now lower.

If gold’s recent low represented a major bottom, then contrarian analysis suggests we would be seeing just the reverse pattern, with each successive sentiment low lower than the previous one.

To the extent that contrarian analysis is right, gold traders should be prepared for more days like Monday, when August gold futures fell 2.2% to $1,306.70 an ounce. Unless you have nerves of steel and are ready and willing to hold on to gold despite extraordinary volatility, you might want to wait until sentiment conditions are more favorable.

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