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business newsGold to Implode: Don't Become a Squashed Gold Bug
By
Ron Coby
Jul 28, 2010 7:55 am
Gold could become a victim of its own success if the stock market enters another capitulation stage, like I suspect it will later this summer or fall.
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Gold has a huge head-and-shoulder top and gold stocks put in giant double tops on the gold bug index long ago. Don't become a squashed gold bug as the Amex Gold BUGS Index made a giant double top at 501, and gold stocks are a great leading indicator for the future price of gold. On May 12 the HUI Index closed at 502 and on June 28 it closed at 501. This is a lower high on the right side of this double top, or what many call an "M pattern." The Gold Bug Index is now under the 200-day moving average so the M pattern is now completed. The chart below shows the daily Gold SPDR (GLD) and it doesn't look pretty.
Click to enlarge
I'm a longtime gold bug. I even wrote a whole chapter on gold in my book, Discover the Upside of Down. My first stock recommendation on TV was New Gold (NGD) at $1.50 per share. I also recommended Goldcorp (GG) and Great Basin Gold (GBG) as well. New Gold hit the $6 target I mentioned on TV before it finally crashed.
Gold has been in a long and powerful bull market trend but it's on a sell on our trend and timing indicators. We view any coming crash in gold as a correction in a mega bull market and a buying opportunity. However, you never can know if that will be the case. After a long bull market, gold could reverse into a brand new downtrend. Our trend indicator is telling us that gold has reversed its uptrend and may in fact be entering a new bear market. Only time will tell.
Gold is a very crowded trade right now as everyone seems to be bullish on gold. Every day there are commercials with something bullish to say about gold. Some of those commercials show hotlines with multiple people waiting for you to call and buy gold. The commercial that I hear over and over again says, "Gold has been up for 10 straight years so you should go out and buy gold." Because gold prices are sky high right now and have been up for 10 straight years, is now really a great time to buy? Remember that the stock market had a straight and steady rise from the 1982 lows until it crashed in 1987. That's what can happen to gold too after a 10-year run.
As of Tuesday's close, Goldcorp was down 4.2% over the past five sessions, Barrick (ABX) down 5.4% over the same period, Kinross (KGC) off 0.97%, Newmont Mining (NEM) lower by 6.2%, and AngloGold Ashanti (AU) down 3.7%.
The very sharp folks at Elliot Wave Theorist (EWT) have said that recent investor and trader surveys showed bulls as high as 98%. Those are sentiment numbers you see at a major top and are clear signs of euphoria. This move below 1180 on gold is very concerning but a close below 1160 would be very bearish for gold. Any close under 1000 and a crash will likely be the end result for gold and especially gold stocks.I want to prepare you for what's developing on our timing and trend indicators on gold and gold stocks. Gold could become a victim of its own success if the stock market enters another capitulation stage, like I suspect it will later this summer or fall. At a mass liquidation stage, the big winners get sold down the hardest and gold has been the big winner for the last 10 years.
For those who simply want to hedge their gold and gold stock exposure, the ProShares UltraShort Gold ETF (GLL) is one way to do so. My partner Denny and I put out a timely buy on GLL a couple weeks ago in the Minyanville Grail ETF & Equity program, so we had subscribers get short gold. Everyone who took that suggestion is already up about 10% on GLL.
In summary, the gold bulls need to quickly push gold back higher or there will be some serious blood in the streets. Don't be a squashed gold bug because when gold reverses, it crashes. We most certainly will be buyers after any crash in gold and especially in gold stocks. We also put out a short on silver Tuesday morning for subscribers as well. Birds of a feather tend to flock together. Right now these two birds are getting shot down and could have a long way to fall.
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No positions in stocks mentioned.
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