Is the 'Currency of Last Resort' in Trouble?

ETFguide

Should goldbugs be scared about falling gold prices?

The "currency of last resort" that was supposed to be a bastion of safety has spiraled right alongside the euro (FXE - News) and emerging market stocks (BIK - News). Gold is posting YTD losses of -7.6% and has reached a crucial tipping point that could take it into official bear market territory.

Forget Feelings, Prices are What Matters

After increasing in value for 12 consecutive years, overconfidence among gold investors and traders has reached extremes. Is it any wonder the gold crowd trades on "feelings" and "hunches" instead of obeying prices? 

According to some experts, gold (GLD - News) was supposed to soar to $2,000 per oz. because of Europe's banking crisis and America's debt debacle. Unfortunately, hindsight bias has been baked into their gold forecasts because they erringly see gold's recent history as a predictor of its future. Meanwhile, they ignore price along with important technical indicators.   

This sort of flawed thinking is reflected by depressed levels in gold volatility (^GVZ), which like its counterpart the CBOE S&P 500 VIX (^VIX), still shows a genuine lack of real fear about falling prices.

"Prices and trends are really the simplest indicators you can find," said Gerald Loeb. "Profits can only be made safely when the opportunity is available and not just because they happen to be desired or needed." This is a similar philosophy to how the ETF Profit Strategy Newsletter operates.

Early in the year, we alerted readers about discrepancies in the gold market - especially between gold mining stocks and physical metals. We also told readers about which side of the market was the right place to be.

View photo

.

On Feb. 14, via our Weekly ETF Pick update we wrote about a high probability setup in the precious metals category:

"Despite a rising stock market, the Market Vectors Gold Miners (GDX - News) has lagged both the broader U.S. stock market along with the SPDR Gold Shares (GLD) by a very significant margin. The current downtrend for mining stocks is still in place. Furthermore, 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. Buy the Direxion Daily Gold Miners Bear 3x Shares (DUST - News) at current levels."

Our DUST trade resulted in a one-week gain of 29%. In the same update, we also told readers to buy GDX put options with specific strike price and expirations. Our GDX put options are still open and are up over +190%.

The ETFS Physical Precious Metals Basket Shares (GLTR - News), which is a broader measure of the precious metals group and includes gold, silver, platinum, along with palladium in one package, is down 7.38% over the past  three months.

What price levels do gold and silver need to hold before a complete breakdown occurs? What levels would signal that a price rebound is underway?

The April 2013 issue of ETF Profit Strategy Newsletter and Technical Forecast examines the precious metals market, including gold and silver. Also included is our 2013 ranking of top commission free ETF brokers along with a short, mid, and long-term outlook for stocks, bonds, and gold.

Follow us on Twitter @ ETFguide



More From ETFguide.com
View Comments