How ugly has the gold market gotten? So ugly that even goldbugs are completely dazed and confused.
Here’s just a brief summary of their hilarious views over the past few months:
Gold’s Uptrend Is Still Intact: Peter Schiff
– Yahoo Daily Ticker (December 6, 2012)
Gold at $5,000 and Beyond: Peter Schiff Sticks to His Call
– MarketWatch (February 13, 2013)
James Turk Ups His $8,000 an Ounce Peak Gold Price Forecast to $11,000
– Arabian Money (January 6, 2013)
Gold Bets: John Paulson Loses $1 Billion
– Hedge Co. (May 6, 2013)
Should it really surprise us that the gold experts have been so wrong about the direction of bullion prices?
The fact is they ignore every important technical and fundamental data point that contradicts their bullish views.
Plus they have a heavily vested interest in being bullish on gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) because it's good for their businesses. Schiff and Turk both have large marketing enterprises that sell physical bullion to the public. Paulson rakes in hefty fees for making quarterly appearances about why he’s still bullish on gold.
Meanwhile, as their customers continue losing money, gold experts are laughing all the way to the bank. (And the customers that suffer from Stockholm Syndrome don't just enjoy losing money, but they like defending their captors.)
The uncomfortable truth is that gold prices have been in a bear market since 2011 and gold investment demand is down 51% over the past year. (see table)
Anyone that’s bought and held physical gold and silver bullion over the past two years probably knows that much. But it gets worse.
Gold Markups Add to Pain
The typical markup that bullion dealers charge customers is between 5% to 8% over spot prices and others (we won’t mention any names) skim even higher percentages!
If there’s anything that could ever make a ghastly pawn dealer look good, it might be grotesque the food chain markup in the physical bullion marketplace.
Here’s how it works:
The US Mint marks up the price of coins it produces (usually around 3%) to cover the value of the metal along with minting, shipping, and other costs. Authorized purchasers who buy from the Mint add their own markup. And if they sell to dealers who sell to the public, another markup gets added. Guess who’s at the bottom of the food chain? That’s right: physical bullion buyers.
And if bullion buyers are unfortunate enough to purchase fractional coins, they get hammered a little more. That’s because the markups for fractional coins, like a half-ounce or quarter-ounce, routinely reach above 10% to 20% of spot prices.
Here's what it means:
In a rising gold and silver market (NYSEARCA:GLTR), rising prices can cover the steep transaction costs for buying and selling physical bullion. Conversely, in a sharply declining metals market – as we have right now – it’s impossible for lower prices to cover the ridiculously high transaction costs of taking physical delivery. And if we include the cost of storage and insurance, the pain worsens and that’s why owning physical metals are turning out to be a bad investment. Will it match the cold spell from 1980 to 2007?
Profiting From a Gold Shock
Contrary to what the very wrong gold experts have said all along, our firm has said that the real money in gold and silver would be on the short side.
On February 14, we wrote:
Despite a modestly rising stock market, the Market Vectors Gold Miners (NYSEARCA:GDX) has lagged both the broader US stock market along with the SPDR Gold Shares by a very significant margin. At present, GDX trades around $41.50 and is well below both its 50 and 200 day moving average. Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) at these levels. 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.
Since then, GDX has slid 33% and our February 14 DUST trade resulted in a +29% gain. But that’s just the tip of the iceberg.
In that same report, we recommended buying JUN 40 GDX put options at $190. Today, those same GDX puts are up +525% to $1,200 per contract.
Our GDX trade was a grand slam, but forget about what already happened. What’s coming next in the gold market will shock the world.
The cute idea that frenzied buying of physical bullion by Chinese and Indian consumers is a bullish event is laughable. Consumer sentiment is always a contrarian indicator, as the gold experts, once again failed to mention. The sign of any market bottom – gold included – isn’t panic buying, but panic selling.
Our examination of the precious metals market points a very high profit opportunity for investors and traders who are 1) on the right side of the market, and 2) who are correctly positioned in the right investments. The gold shock could turn out to be one of the biggest investment themes the experts never saw coming.
P.S. If you hated this article, then you'll love the one I wrote in January titled: 8 Reasons Gold May Disappoint in 2013.
Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com
To read more from ETFguide, see:
How Can You Profit From Gold's Fast and Furious Decline?
Have Gold and Silver Capitulated?
Household Debt Down, Margin Debt Up