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Could Gold Lose 40-50 Percent in Value?

Ron DeLegge

Goldbugs are scared to death and rightly so.

The "currency of last resort" that was supposed to be a bastion of safety has been falling in value right alongside global stocks (NYSEArca:AWCI) and the euro (NYSEArca:FXE - News).

Even commodities permabull Jim Rogers admitted to the Business Insider that gold could fall 40-50% if India (NYSEArca:INDY - News) ceased gold imports or if Europeans (NYSEArca:IEV - News) began liquidating their holdings. What's going on with gold?

Gold's Rocky Road

The early warning signs behind gold's fall beneath key trading levels has been months in the making. The ETF Profit Strategy Newsletter via its weekly picks warned its readers on 4-4-12 about gold's inconsistent performance: 

"Could 2012 turn out to be the first time in 11 long years that gold has a loss? We know it's a sacrilegious thing to say, especially to demi-gods like James Grant or Jim Rogers, but the way precious metals are acting lately it makes you wonder." (That research note was posted for our readers when gold was still in positive territory.)

Over the past three months, gold (NYSEArca:IAU - News) has lost almost 10% in value and now has a negative year-to-date return. Silver (NYSEArca:SLV - News) has lost around 15% since the beginning of the year.

The ETFS Physical Precious Metals Basket Shares (NYSEArca: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 over 12% over the past three months.

The Past is not (necessarily) the Future

Over the past decade or so, gold performed well despite the 9/11 attack, the bursting of the dotcom and housing bubbles, and the 2008-09 financial crisis. But past performance, as investors keep forgetting, is not prologue for the future.

It's been a long time since gold has had a major correction and those corrections have tended to be infrequent. From 1999 to 2011, gold experienced three declines greater than 20%, but snapped back each time. But this time around might be different.  

Huge budget deficits, bankrupt governments, and political instability aren't necessarily a slam dunk for gold investors, as 2012 is already proving.

Interestingly, the Dollar Index (EURUSD=X) - also known as the Grande Fiat of Fiats - rose for its 12th consecutive day, which is its longest winning streak since 1973.

Troubled Waters

There are two worrisome factors for gold right now, let's talk about the first: Gold's immediate performance versus other assets has not been defensive.

The ETF Profit Strategy Newsletter via its Weekly ETF Picks identified this trend on 4-18-12:  "Gold has hardly behaved as the "perfect hedge" that goldbugs call it. Not only is gold underperforming stocks year-to-date, but instead of increasing in value on trading days when stocks are down, it's tended to drift lower."

There are many examples of these correlations, but we highlighted just one: "During the 4-4-12 market selloff, the Nasdaq-100 (NasdaqGM:QQQ - News) and S&P 500 (NYSEArca:SPY - News) moved lower by 1.46% and 1.02% respectively. Instead of being a haven of safety, instead of zagging when stocks are zigging - the SPDR Gold Shares (NYSEArca:GLD - News) had the audacity to fall 1.68% while the iShares Silver Trust (NYSEArca:SLV - News) moxied up a 4.19% loss."


Here's another ominous sign for gold: It has now sliced through key levels outlined in our Weekly ETF Picks without any sort of major fight. As a result, we're already focused on new support levels to see how gold reacts.

The Right Strategy and the Wrong One

It's easy to be critical of investors that buy stocks (NYSEArca:DIA - News) and bonds (NYSEArca:AGG - News), because these assets aren't tangible, as the goldbug will gladly explain. But interestingly, many goldbugs are infected with the same self-destructive behavior that plagues the rest; they have no exit strategy. No doubt, the vast majority of goldbugs will be riding their gold straight to the bottom, screaming that every new low is a buying opportunity. What kind of strategy is that? 

The ETF Profit Strategy Newsletter uses the right gold strategy by clearly identifying support/resistance indicators along with strict trading discipline. No major selloff or bear market happens without taking out key support levels.

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