Here’s a market trend you can almost bank on: Whenever gold prices jump, gold experts come out of the woodwork 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 upward 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.
On Sept. 15, 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, gold bugs 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.
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 Market Vectors Gold Miners ETF (NYSEARCA:GDX) Oct 2013 25 put options 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 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 gold bugs 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 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.
Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com
To read more from ETFguide, see:
Rough Road Ahead for Financial Stocks?
Will a Government Shutdown Stall Stocks?
US Treasury Exceeds Debt Limit by $39 Billion with Accounting Trick
No positions in stocks mentioned.