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Is the Great Gold Crash Over?

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October 2, 2013
Chad Karnes, Chief Market Strategist

If there has been one major theme for 2013 it is the bear market in precious metals.  Year to date, gold has fallen over 23% and silver is down a whopping 30%. At a time of monumental government instability, precious metals have not lived up to their "safe haven" status.

And all the “major” gold players got it wrong and continue to get it wrong. (See John Paulson, Peter Schiff, and James Turk.) 

As they were all calling for higher prices, they refused to listen to what the markets were actually saying. In other words, their rose colored glasses combined with their conflicted biases have resulted in a cesspool of toxic advice. (Read our “Is the Worst for Gold and Silver Really Over?” piece published 9/5.)

When it comes to the gold (NYSEARCA:GLD) and silver (NYSEARCA: SLV) markets these blind guides were looking at the wrong things, namely fundamentals.  Instead, they should have been following market sentiment, market history, and the charts - all of which combined for some extremely good trade setups.

What Really Mattered

In mid-June when silver (NYSEARCA:AGQ) and gold (NYSEARCA:NUGT) were in the midst of their waterfall declines, bearishness toward the metals (NYSEARCA:DBP) reached an extreme. 

This was also supported by a Commitment of Traders report that showed extremely bearish lopsided bets by the typically wrong “speculators”.  That data suggested that the majority of traders were selling or had already sold out of their precious metals positions leaving the path of least resistance to the upside.

WATCH: What the VIX is Saying about the Stock Market

When combining such sentiment extremes with the charts, we saw a lot of great opportunities to go both long and short the metals.

Here is a summary of how we captured the major turns of the precious metals utilizing a combination of sentiment and technical analysis in our twice weekly Technical Forecast including our most recent two week 10% profit on 9/15:

--June 30 (SLV @ $19 GLD @ $119) – Take profits on short positions.  “Gold and silver may have kicked off their relief rally Friday.  Gold and silver shorts should be on high alert and managing stops to lock in profits should be priority #1”

-- July 13 (SLV $19 @ GLD @ $124) – Long - “Big gap on SLV up at $20.50 that will likely be filled at some point”

--September 1 (SLV @ $23 GLD @ $136, ZSL @ $68, GLL @ $81) – Short - “At this point it is very tempting to say gold has topped and has resumed its downtrend on extremely bullish sentiment.  Very aggressive traders look into GLL (NYSEARCA:GLL) or ZSL (NYSEARCA:ZSL)”.
 
--September 15 (SLV @ $21, GLD @ $128, ZSL @ $75, GLL @ $90) – Take Profits - “Gold bears (shorters) should get a better price this week to initiate or add to precious metals shorts.  Aggressive traders should look at taking some profits off the table”

--September 18 (SLV @ $22, GLD @ $132) – Short - “Traders that were looking to short and waiting for a better entry certainly got that today, and it needs to be stressed that today did nothing to the longer term outlook, which is to stay short as long as price stays below trendline resistance.
 
The above mentioned trades are shown in the chart below along with the commentary and technicals we provided to subscribers. Each step of the way, we were able to capitalize on the direction of metals.

 


What Still Really Matters

A logical trading philosophy behind gold and silver should include the euphoria and/or negativity surrounding the precious metals as much as it surrounds the long term fundamental outlook.

Even though the fundamentals, based on some professional opinions, may have not changed or may have even gotten better, reality says otherwise for owners of gold (NYSEARCA:GDXJ) and silver (NYSEARCA:USLV). They have seen prices drop 25% to 40% since their 2011 peak. 

Timing is important when it comes to volatile markets such as the precious metals, and a large part of that timing is based on the public’s and traders’ general sentiment toward these assets (NYSEARCA:XME) that don’t offer any cash flows and are probably the most speculative of all the major asset class. 

It is no coincidence that Pawn Stars was one of the highest rated television shows in 2011 just as another program Gold Rush – Alaska was being kicked off and gold and silver were topping in price.  As I discussed in our April Newsletter, pop culture warning signals such as these often coincide with peaks in their respective markets.

The ETF Profit Strategy Newsletter follows the major asset classes utilizing sentiment, technical, and fundamental analysis.  Gold and silver have offered some great sentiment setups over the past few years.  What will they offer us next?

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CommentsAdd Comment

technician said on October 03, 2013
  Good point CC. The other thing is the manipulation between paper gold and physical gold prices. This manipulation still hasn't helped physical bullion to rally above or even near its 2011 top. Where's the pentup demand?

The story of market manipulation - whether it's in gold, stocks, or another market is always a convenient haven for bad traders who can't make money. It's also a wonderful story for gold pawns to sell more physical bullion to unsuspecting consumers that don't know better.
 
 
B.Brennan said on October 02, 2013
  Hi Chad,
As a subscriber, I can speak firsthand as to how right ETFGUIDE has been about the precious metals market. Congrats to you and Ron on the many excellent gold/silver trades you've given us. The charts are unemotional and free of personal biases and that's why I pay attention.
 
 
ClamChowder said on October 02, 2013
  Jim Rogers is one of the few perma-bull commodities traders that recognizes the gold/silver market is not the same market as it was from 2000 to 2012. They broken advice of buy bullion at any price mantra is getting really old. I would trust Rogers over Schiff and Turk any day.
 
 
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