February 1, 2014

Gold’s Next Big Move: Boom or Bust?

This is not last year’s market, so it's time to consider some maneuvering around precious-metals ETFs

Gold has had very long periods of boom and bust. Was last year’s 28% tumble the end of boom and beginning of bust? 

On the bearish front, Morgan Stanley (MS) reduced its 2014 gold forecast by 12% to $1,160 an ounce, and Goldman Sachs expects gold to fall to $1,050 over the next year. 

In contrast, gold perma-bulls see higher bullion prices this year, just as they wrongly predicted last year. Who’s right? 

Market prices always tell us who’s right and who’s wrong. And so far, gold is ahead around 4%, and gold mining stocks are up almost 15% year-to-date.  

However, ETFs tied to large-cap gold mining stocks (GDX) lost 79% from 2011 to 2013, while small-cap miners (GDXJ) crashed 111%.

The Direxion Shares Daily Gold Miners Bear 3x Shares (DUST), which aims for triple daily opposite performance to mining stocks, skyrocketed 179% last year and was a star performer.

After such a significant decline for both GDX and GDXJ, a significant bounce was almost inevitable.

Strategic Bets

Understanding market psychology and being able to profit from it is important, especially in a disorderly and mood-driven market like precious metals.

Before the surge in gold miner ETFs began in late December, overly bearish sentiment signaled a clear profit opportunity in this beaten down sector. Were you ready?

“This year [2013] will be the third consecutive year of losses for gold mining stocks. But once year-end tax loss selling is over, we’re anticipating a bounce in beaten down gold miners in January.

“It remains to be seen whether this bounce will become a bigger trend change for GDX from down to up, but it’s nevertheless a short-term profit opportunity. We’re buying the Market Vectors Gold Miners ETF (GDX) at $21 and our tandem options trade is to buy the GDX JAN 2013 20 call options (GDX140124C00020000) at around $140,” said ETFguide’s Weekly ETF Picks from Dec. 26.

Since our 12/26 gold miners buy alert, we booked a blended two-week gain of 27% on our tandem GDX options trade, and we’re still long GDX shares.

As readers familiar with ETFguide’s research know, last year we were consistently bearish on gold and other precious metals along with mining stocks. In fact, our largest ETF gainer last year was our 2/14/13 time-stamped alert to buy GDX JUN 2013, 40 put options at $190 per contract.

As we expected, GDX crashed. In our 5/15/13 alert, we exited the trade with a 525% gain, selling our remaining position at $1,200 per contract.

This time around, the smart gold trade has been to do the exact opposite of the crowd. When they’re selling, you should be buying.  

Although gold bullishness has certainly picked up, it isn’t at extreme levels. And that’s good. It means the 2014 rally in gold and gold equities may have some legs, even if it has no brains.

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Ron DeLegge is Editor of the ETF Profit Strategy Newsletter which uses technical and fundamental analysis along with market history and common sense to keep advisors on the right side of the market.  In 2013, 70% of ETFguide’s weekly ETF picks were winners.

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