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Is it Too Late to Short Gold Mining Stocks?

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Ron DeLegge, Editor
August 6, 2013

The Great Gold Bust of 2013 is a major investment theme we’ve been shouting about even before it turned into a full-fledged market crash. It’s been shock and awe for gold bugs, but not us.

The SPDR Gold Shares (NYSEARCA:GLD), which is linked to the price of gold bullion, is down -1.40% today, -23% year-to-date, and -32% from 2011 peaks. Gold focused ETFs that aim for inverse or short exposure are (NYSEARCA:GLL) hot performers, but one particular bear trade has been even better; shorting gold mining stocks.

Since the start of the year, gold mining stocks (NYSEARCA:GDX) have been crushed -46%.

And while analysts and gold experts were telling their clients to buy gold and gold mining stocks, we’ve repeatedly said to do the exact opposite.

In our time stamped Weekly ETF Pick from Feb.14, 2013 we wrote to subscribers:

“Despite a modestly rising stock market, the Market Vectors Gold Miners (GDX) has lagged both the broader U.S. stock market along with the SPDR Gold Shares (GLD) by a very significant margin. At present, GDX trades around $41.50 and is well below both its 50 ($44.41) and 200 ($46.06) day moving average. Buy the Direxion Daily Gold Miners Bear 3x Shares (DUST) at these levels.”

We bagged a +29% gain on our DUST trade and in that same report, we told our subscribers to buy JUN 40 GDX put options at $190. On our GDX puts we hit a grand slam with a +525% gain, and we exited that position in early June at $1,200 per contract.

Fast forward to now.

Gold miners have enjoyed a +14% run since June 26, but as we wrote in our Aug.1 report:

“It’s just the sort of counter trend bounce you’d expect from a dead fish that has fallen off a 2,000 foot skyscraper.”



Meanwhile, gold miners are nuclear bombing shareholders with multi-billion dollar losses.

A few days ago, Barrick Gold Corp. (NYSE:ABX), the world's largest gold miner, reported the second largest quarterly loss ever ($8.56 billion U.S.) for a publicly traded Canadian company. (Nortel Networks' $19.4 billion Q2 loss in 2001 still holds the record) The company also slashed its dividend by 75%.

“Cheap” valuations have seduced value investors into buying gold miners. And they’ve been quickly converted into victims of what we call the “value trap.”

WATCH: How Gold Experts are Misleading the Public

According to most recent 13F filings, hedge fund titans like George Soros, David Einhorn, and John Paulson are still long and wrong about gold mining stocks. And shamefully, guru based trading platforms and guru focused funds (NYSEARCA:GURU) have massacred their gullible followers by closely mimicking these ill-timed hedge fund bets. 

At the end of July, hedge funds and speculators raised their net-long position in 18 commodities, including precious metals, to a six-week high. Clearly, market sentiment was overly bullish on metals.

But instead of misinterpreting market sentiment data and depressed valuations as a bottom, like gold experts have done, we used it as a contrarian signal and high profit setup.

In our latest Weekly ETF Picks published on Aug. 1, we wrote:

“Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) between $74-75. DUST aims for triple opposite daily performance to mining stocks. 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.”

How did it turn out? We recorded a time stamped one-week 35% gain on our DUST trade. Furthermore, we’ve already bagged a 110% gain on our tandem GDX put options trade offered up in that same report.

Sir John Templeton was right when he said you can’t “produce superior investment performance if you buy the same assets at the same time others are buying.”

The next big and shocking move in the gold market is yet to come. And if you think gold experts look clownish right now, just wait.

The ETF Profit Strategy Newsletter uses a combination of technical analysis, market sentiment, and common sense to be on the right side of the market. Since the beginning of the year, 78% of our ETF picks have turned a profit. (through 6/30/13)

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CommentsAdd Comment

PHeller said on August 08, 2013
  Jay:
Ditto on the financial benefits of covered call writing. Not a perfect strategy, but still the best kept secret and income kick around. I love it when they close out of the money. Isn't it nice to scalp Wall Street for a change?
 
 
Jay said on August 08, 2013
  Grant, thank you for your kind words. You certainly do more than your share contributing to our Board and I hope all is well with you. Believe it or not retirement really can happen! I hung up my cleats this past May at age 55.

It does not mean I stop working. It just means my new boss is "The Man in the Mirror" as the late great King of Pop sang.

Ron taught me the income producing engine of covered call writing. I do that each month to replace twice my spending. Because of him I have a reasonable chance of never going broke :)!

Just one more dividend an ETFG subscription can pay. - jay



 
 
Sparkey said on August 08, 2013
  Gold miners now universally abhorred and hated by virtually everyone. And if any major miners go bankrupt, they'll be hated just a little more.

Cowen & Co. says that miners can withstand another 30% drop in gold prices for a year or more and still stay solvent. Given the magnitude of the EPS losses being doled out, this seems like a far-stretched assumption. If gold just stays flat, certain miners are in deep trouble.

Like all market cycles (real estate comes to mind), the companies and the individuals running them over-borrow, over-leverage, and over-invest...and eventually the reckoning day arrives.
 
 
grant8 said on August 08, 2013
  Hello Jay, you're now retired? Congratulations. Hopefully it's allowed you more time to enjoy life and relax. We're trying to hold down the fort. Any views or experiences we can share on this board, help each other. Take care.
 
 
Jay said on August 08, 2013
  BakerGirl, I agree with you about the value of an ETFG subscription: best deal you will find! I am one of the old buzzards around here and have subscribed with Ron a long time. I have joked with him off line about how I can not get his entry prices on trades because by the time The Oracle (him) has spoken it has already gone up :)! I used to be a fixture on this Board and will start commenting more now that I am retired. It is a wonderful place to share investing ideas and observations with kindred spirits of sharp mind and warm heart.

I appreciate the enthusiasm you, grant8 and Jersey Guy always show keeping the conversations going! - jay
 
 
CHANNERT said on August 07, 2013
  When gold went to $1700/oz people said it would never see $1600/oz. And when it hit $1500/oz people said it would never see $1400/oz. Now we're below $1300/oz. The market's psychology and how abrubtedly it changes is just fascinating. I'm not a psycho-analyst, BTW.

I still own a small stash of gold coins and 250 IAU shares. Still ahead, barely.
 
 
BakerGirl said on August 06, 2013
  You guys have been hitting home-runs all year long on your gold ETF trades. I'm not sure how you do it, but my portfolio is swelling up. Thanks again, very satisfied sub.
 
 
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