How Can You Profit From Gold's Fast and Furious Decline?

By ETFguide.com  APR 15, 2013 4:20 PM

Gold bugs knew there was going to be a massive collapse. They just didn't know that it would be gold prices that led the way.

 


Gold bugs knew there was going to be a massive collapse. They just didn’t know that it would be gold prices that lead the way. 

The SPDR Gold Shares (NYSEARCA:GLD) fell -7.86% in intraday trading today, adding to its yearly loss of 11.15%. Other precious metals like silver (NYSEARCA:SLV) are following suit too. Meanwhile, investors (a polite word for panic driven maniacs) yanked $9.2 billion from gold ETPs during the first quarter, according to BlackRock (NYSE:BLK). 

The sudden collapse in precious metals has surprised many, but not us. 

As we pointed out in a previous article, gold’s 12 years of consecutive yearly gains was masked by the fact that gold has been in correction mode since 2011. (Our chart shows a 27.7% decline from SPDR Gold Shares's 2011 peak to today's level.) But the biggest trade of the year hasn’t been trading against gold itself. More on that in a minute.  

Is John Paulson the Most Misinformed Billionaire on the Planet?

“Paulson Loses More Than $300 Million as Gold Declines” reported Bloomberg on April 12. And despite those handsome losses, Paulson refuses to change his gold strategy, which implies more losses ahead. According to reports, Paulson has around 85% of his $9.5 billion in hedge fund money committed to gold linked investments. Yikes.

In an emailed statement, partner at Paulson & Co. wrote, “The recent decline in gold prices has not changed our long-term thesis. We started investing in gold at $900 in April 2009 and while it’s down from its peak to $1500, it’s up considerably from our cost.”  Remember that $900 figure for later.

Other Gold Experts

Over the past few years, our generation has amassed some of the best gold sound bites in history. Has any of this advice helped people to be on the right side of the market? Here’s just a tiny sample of the toxic advice:

“Peter Schiff-Dollar Vulnerable to a Massive Collapse, Buy Gold and Silver” – USAWatchDog.org / Sept. 2012

“James Turk $8,000 per oz. gold by 2013” – Gold Money News / Dec. 2012

“Gold with be $3,000 bid, no offer.” – Harvey Organ, gold analyst / Apr. 2012

Despite all of the colorful theories about what will or should happen next in the gold market, none of these expert opinions has been right.

Source: ETFguide.com

Gold and the Classic Bull Trap  

Although gold has the seemingly perfect macroeconomic backdrop for a massive rally, Paulson and other gold experts have been snake bitten by gold’s bull trap.

By way of reminder, a bull trap is an inaccurate signal that tricks investors into buying an asset they think is done going down. The bullish investor buys the asset under the mistaken assumption the worst is over. The final result is they get stuck with an underperforming investment that continues to decline.

The buy-and-hold gold trade isn’t working today and hasn’t worked since August 2011 when SPDR Gold Shares peaked at $184.59. Similarly, the buy-on-the dips gold strategy hasn’t worked either. 

What about the increasing bearishness of market sentiment with gold?

While overly bearish sentiment towards gold could indicate a major turning point or reversal, it still doesn’t trump raw price action. It never has and never will. 

A Perfect “Setup” 

On Feb. 14, we wrote about a high probability setup in the precious metals category:

Despite a 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 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 (NYSEARCA:DUST) at current levels.

Since our February alert, Direxion Daily Gold Miners Bear 3x Shares has gained over 100% in value. That’s not a typo. Furthermore, our Market Vectors Gold Miners put options alert in that same report are still open and have already generated a +475% gain.

What about now?

The velocity of gold selling hasn’t yet reached Ezekiel’s selling climax. He predicted in Chapter 7 verse 19, “Into the streets they will throw their silver, and an abhorrent thing their own gold will become.”

Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com.

To read more from ETFguide, see:

Direxion Adds Leveraged EM ETFs

Six Sector ETFs That Are Cheap To Hedge Now

Follow just One Company in the Tech Sector to Monitor its Health (Hint: it’s not Apple)
No positions in stocks mentioned.