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Excessive Bullishness Foreshadowed Gold's Meltdown

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September 12, 2013
Ron DeLegge, Editor

Can investors and traders use sentiment to spot turning points in financial markets?

Let's use media headlines from 2011 to chronicle the "Great Gold Rush" from bubble to crash.

ABC News: Gold Rush also A Boon for the Refinery Biz – Aug. 10
Bloomberg: Gold Exceeds $1,800 as Investors Seek to Hold the ‘Ultimate Collateral’ – Aug.10
Forbes: Jim Rogers Says Gold Going Higher – Aug.10
Forbes: Gold at $1,870 is Being Seen as a Haven – Aug. 22
TheStreet.com: Wait to Buy Gold at a Pull Back – Aug. 22
Beacon Equity Research: Gold Price Poised to go Parabolic – Aug. 22
MoneyControl.com: Gold in Portfolio is Mandatory – Aug. 22
Barron’s: Is $5,000/ounce the New Target in Gold’s Run? – Aug. 22
Chicago Sun-Times: The Gold Rush is On Again – Aug. 26
BusinessWeek: Gold Not in a Bubble as Central Banks Print Cash, Marc Faber – Sept.6
Reuters: Hard Hit Gold Bulls Not Yet Out For The Count – Sept. 26

It's worth mentioning, that gold prices topped at $1,917 in August 2011 around the same time the SPDR Gold Shares ETF (NYSEARCA:GLD) became the largest ETF with $77.9 billion in assets. (See chart below)

WATCH: How Gold Experts are Misleading the Public

At that time, just as today, the reasons for gold to rally and continue rallying were seemingly endless:

Gold is a protection against inflation
Gold is also a protection against deflation
Gold is a safe haven during stock market meltdowns
Gold also rallies when stocks rally
Central banks are buying gold, so should mom and pop
Gold is the only real collateral in a QE world

Despite all the bullish rationale for higher gold prices, there were even more compelling reasons to ignore the hype.



In our Weekly ETF Pick from Feb. 14, 2013 we wrote:

“Despite a modestly rising stock market, the Market Vectors Gold Miners (NYSEARCA: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 and 200 day moving average. Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) at these levels. A double digit slide for gold would likely translate into a 20%+ loss in mining stocks. This scenario offers some big upside potential for bears.”

We exited our Feb.14 DUST trade with a +29% gain and in that same report, we told our subscribers to buy JUN 40 GDX put options at $190. In early June, we sold the GDX put options for a +525% gain at $1,200 per contract.

Let's examine two more time stamped examples of how we used excessive gold bullishness to our advantage:

In our Weekly ETF Pick from Aug. 1, 2013 we wrote:

"Since hitting a temporary bottom on June 26, Gold Mining Stocks (NYSEARCA:GDX) have staged a fierce 21.78% rally. Is the worst over? To the contrary, this is just the sort of counter trend bounce you’d expect from a dead fish that has fallen off a 2,000 foot skyscraper. Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) around $74-75. DUST aims for triple opposite daily performance to mining stocks."

Per our 8/6/13 intraday email alert to subscribers, we sold the remaining half of DUST at $102 and we bagged a blended 23.5% one-week gain. It was a tremendous trade!

Almost one month later, rumors of a U.S. strike against Syria once again pushed short-term gold sentiment into bubbleland. And we pounced.

In our Weekly ETF Pick from Sept. 4, 2013 we wrote:

"Gold bullishness among polled analysts by Bloomberg is now at its highest level since March 8. This time around, expectations for soaring gold prices on a Syria attack is the consensus view. However, not only is the crowd’s opinion usually wrong, but the most important bullish underpinning for gold is in the midst of going away; namely scaled back Treasury bond purchases or “QE” by the Federal Reserve. Buy GLD OCT 2013 130 put options (GLD131019P00130000) around $230 per contract"

Per our 9/12/13 intraday alert, we sold our GLD OCT 130 put options for a 63% one-week gain and our tandem trade in the ProShares UltraShort Gold (NYSEARCA:GLL) is already ahead by almost 9% from our purchase price.

A Capiluation Moment 
The true sign of a market bottom in any asset - gold included - is capitulation selling, much like what the Bible describes in Ezekiel 7:19.

Clearly, sentiment extremes (both bullish and bearish) are opportune times to capitalize. And if we combine sentiment measures with other confirming signals, we increase the probabilities of being right and making money.  On the other hand, aimlessly buying precious metals at whatever price or on the dips or based upon expert opinions is a broken strategy.

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

Follow us on Twitter @ ETFguide

CommentsAdd Comment

Diana said on September 30, 2013
  I like your site. I know it requires a lot of eforft.Have you heard anything about FUTURES for the Oil VIX? If so, do you have an idea of the time frame of when they'll be offered?Have you heard anything about a "Treasury Note VIX" and possible futures on that "VIX"? If so, do you have an idea of the time frame?Thanks,DollarBill
 
 
Ron the Editor said on September 20, 2013
  TRADE UPDATE FOR Al D:

ETFguide's intraday trade alert to subscribers today was to exit 100% of the DUST and GDX positions originally entered on 9/19 (just after the -27% one-day plunge). Here's how it turned out: We bagged a +16.5% gain on DUST and +68% on the GDX puts. Hopefully, we earned our weekend coffee.
 
 
Ron the Editor said on September 19, 2013
  Hi Al D,

Dusted?

FYI, we did not have a position in DUST on the day of the FOMC meeting when it crashed 25%+. But we did add a new position in DUST on 9/19 and sold half for a quick 10% profit. We also raised our stop loss so that if DUST decides to retrace, we'll still squeeze a gain.

Also, our most recent physical gold trade (see our 9/4 Weekly Pick) did not involve DUST and was profitable, despite BernanQE, the Fed, the U.S. debt ceiling, Syria's war, fiat currencies, etc. We bagged gains in both GLL along with GLD put options.

Take care.
 
 
Al D said on September 19, 2013
  Looks like you DUST guys just got dusted by Bernanke.

I've made good money on AUY since its lows in 2008. I've been trading in and out of it since March. Despite the gold crash, I'm now showing a $1200 profit. I've been as high as $2000 profit and as low as a $20,000 loss since March. I'm going to be a bit more cautious due to the high degree of uncertainty in the Middle East, but should show more on the plus side by the end of the year with the sudden bullish outlook on gold (thanks, Bernanke and Obama) and the way I trade the stock.
 
 
BikeRacer said on September 14, 2013
  Here's the mathematical stats: DUST closed at $34.95 on September 13 and gold/silver mining stocks would need to fall another 5% for DUST to reach $50.
 
 
Ppope said on September 13, 2013
  Do you think DUST will hit $50?
 
 
grant8 said on September 13, 2013
  These are definitely dark days for goldbugs but I they are a tough group. I personally think gold will rebound and become a valuable asset. But it may not happen as fast as everyone likes or wants.
 
 
NAPAWINEGUY said on September 12, 2013
  You guys have been hammering the gold/miners trade all year long. Hat tip! I hear the goldbugs and others screaming about the 1,000 reasons the precious metals complex is depressed and manipulated. But I'm not listening. Keep up the fantastic work.
 
 
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