October 6, 2013

Still a Sucker for Gold?

There's talk about a gold rally, but some investors are doing better with bearish plays

Here’s a trend that’s repeated itself numerous times this year: Whenever gold prices rise, gold experts come out of the woodwork, telling their brainwashed followers to buy more bullion because gold prices are heading to the moon.

Over the past two years, that poisonous advice has been dead wrong.  

Since 2011, there have been nine notable bull traps in gold. Furthermore, all the rallies in gold prices and gold ETFs (GLD) this year have been brief, fooling just enough people into believing that prices are still going up.

In fact, gold’s one-day rally of 4.1% on the Federal Reserve’s Sept. 18 statement that QE would continue, was just another classic bull trap.

A “bull trap” is defined as an inaccurate measure that shows a decreasing trend in the price of an asset or investment has reversed itself and is now heading upwards, when in fact the asset will resume its decline. Technicians also refer to a bull trap as a “false breakout.”  

Just days ahead of the most recent bull trap in gold, we alerted our readers of the high profit opportunity. In our Sept. 15 Technical Forecast, we wrote: “Gold bears (shorters) should get a better entry price this week to initiate or add to precious metals shorts.”

That golden opportunity (pun intended) to boost short exposure to precious metals came like a gift from the heavens on the Sept. 18 one-day rally. And while gold bugs like Peter Schiff and James Turk were celebrating their one-day victory, we recognized that another bull trap had been set.

In our time-stamped ETF Weekly Pick to subscribers on Sept. 18, we explained: “Gold miners are a leveraged play on physical metals and if the next leg down in metals prices takes hold, as we suspect, miners should lead the way down. Buy the Direxion Daily Gold Miners Bear 3x Shares (DUST) around $24.60 with a price limit up to $25.25. DUST aims for triple opposite daily performance to mining stocks. A tandem options trade is to buy the GDX Oct 2013 25 put options around $40.”

How did our gold trade turn out?

Via intraday alerts to our readers on 9/19 and 9/20 we sold our DUST position for a two-day +16.5% blended profit.

DUST aims for triple opposite daily performance to mining stocks. Our tandem trade in the GDX Oct 2013 25 put options were sold for a two-day gain of +68%. 

Despite higher demand in the physical bar and coin category versus lower investment demand, the total aggregate demand for gold bullion has fallen 23% over the past year, according to the World Gold Council.

The only place where fundamental demand for gold is up is among Chinese and Indian consumers. But rather than being a bullish signal, as goldbugs have been tricked into thinking, consumer sentiment — regardless of the continent — is a telltale contrarian signal. 

The technical damage done to gold and silver prices in April and June was significant and it will take time to heal. And blindly buying precious metals on the dips as a “long-term” investment has been rendered thoroughly ineffective for two straight years and counting.

For now, we continue to profit from the bull trap in gold, until the judgment day of selling capitulation tells us it’s time to go long. (See Ezekiel 7:19.)

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The ETF Advisor Pro uses a combination of market sentiment, fundamental/technical analysis, history, and common sense to be on the right side of the market. Since the beginning of the year, 74% of our time stamped ETF picks have turned a profit. (through 9/30/13). Follow us on Twitter @ ETFguide.

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