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Goldbugs Bitten Again by Precious Metals Rout


September 25, 2013
Ron DeLegge, Editor

Here’s a market trend you can almost bank on: Whenever gold prices jump, gold experts come out of the woodworks telling their fervent followers to buy more bullion because gold prices are heading to the moon! It's a pattern that's repeated itself multiple times over the past two years. It's also toxic advice that's been dead wrong.

In fact, the rallies in gold prices have been brief, but just long enough, to fool the gullible masses into believing that prices are still going up.

Since 2011, there have been nine notable bull traps in gold. (See chart below) And gold’s one-day rally of 4.1% on the Federal Reserve’s Sept. 18 statement that QE would continue, turned out to be 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 that continues to play out.

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 on the Sept. 18 one-day rally. Meanwhile, goldbugs like Peter Schiff and James Turk were celebrating their one-day victory, predicting higher prices. But we recognized that another bull trap had been set.

In our time stamped ETF Weekly Pick to subscribers on Sept. 18 we wrote:

“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 (NYSEARCA: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 (GDX131019P00025000) around $40.”

How did our gold trade turn out? 

Via intraday alerts to our readers on Sept. 19 and Sept. 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 (GDX131019P00025000) were sold for a two-day gain of +68%. 

Despite higher demand in the physical bar and coin category vs. lower investment demand, the total aggregate demand for gold bullion has still fallen 23% over the past year. The only place where fundamental demand for gold is up is among Chinese and Indian consumers. However, instead of being a bullish signal, as goldbugs have been misled to think, consumer sentiment – regardless of the continent where it occurs - is a telltale contrarian signal. 

The technical damage done to gold and silver (NYSEARCA:SLV) prices in April and June was significant. And the damage will take time to repair. In the meantime, we continue to profit from the bull trap in gold.

The ETF Profit Strategy Newsletter uses a combination of fundamental/technical analysis, sentiment, market history, 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 and a 525% gain was our biggest winner. (through 6/30/13)

Follow us on Twitter @ ETFguide

CommentsAdd Comment

grant8 said on September 26, 2013
  Ron Surz: The threat of default is just another case of boy who cried wolf. It's not going to happen and it would be political suicide for all parties. There doesn't seem to be a lot of fear anywhere in the stock market and if the day arrives when fear comes back, I'm not so sure gold will repeat its 2008 feat.
Ron Surz said on September 26, 2013
  Here's an anomaly to think about. We're in another budget crisis, which could cause the government to renege on our debt. The fear trade is buying gold and U.S. Treasuries.

Why buy Treasuries if you're afraid of government defaults? Shouldn't you short Treasuries?
FontaineS said on September 25, 2013
  I think gold will excel once we have a major global currency go belly-up. At that point, everyone will wake up to the reality of fiat currencies. Until then, don't trade or bet against the trend.
CabernetSav said on September 25, 2013
  Good article and 100% true, particularly on the madness of the masses and goldbugs for not recognizing the big picture trend of falling prices. For now, I'm content to wait for gold/silver prices to bottom out once panic selling kicks in with a few trades mixed in here and there. I think we had an abbreviated taste of what's yet to come in April but we'll see.

P.S. I'm a satisfied customer and great calls in both the tech.forecasts & picks. Before I was a skeptic, but no more.
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