Is Gold Headed to $1,000 Per Ounce?
Deflationary action in not just gold, but all commodities, spells danger for other asset classes like stocks, currencies, and real estate.
Precious metals are getting crushed (again). This time it's allegedly because the Federal Reserve hinted that curtailing its monthly purchases of $85 billion in U.S. Treasuries and mortgage securities could happen within months. Reality, however, rooted upon real life price action, says otherwise.
The bear market in both gold and silver actually began two-years ago – long before the QE-taper was even an embryo in the Federal Reserve's mind. Put another way, the correlation between the Fed's QE spending pattern and precious metals prices has been completely disconnected for more than two years. And the theory that relentless QE is bullish for gold simply hasn't been true.
This is a very important point because it means the gold market isn't reacting based upon the Fed's behavior – as gold experts and the media would like you to believe.
After peaking in late summer 2011, gold has since fallen 33% while silver has collapsed 54%. In other words, the genesis of the current bear market in precious metals began during the height of QE – when goldbugs least expected it. This was also a time period that was supposed to be most bullish for gold.
What about gold fundamentals?
Aggregate gold demand is down 37% year-over-year in all categories, according to the World Gold Council's Q3 2013 research. (See table.) Investment demand for gold is down 65% and global central bank purchases are down 33%. And anyone who says that gold demand is going up has fairyland view of the world.
Profiting From a Gold Shock
Contrary to what the very wrong gold experts have said all along, we said that the real money in gold and silver would be on the short side.
In our Weekly ETF Pick from Feb.14 we wrote:
Despite a modestly 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 (NYSEARCA:GLD) 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 55% and DUST has climbed 99%. But that's just the tip of the iceberg.
In that same report, we told our subscribers to buy JUN 40 GDX put options at $190. In early June, we sold those same GDX put options for a 525% gain at $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.
Gold has already had 17 major false breakouts (see chart above) over the past two years and another profit opportunity awaits investors who are correctly positioned.
Furthermore, the deflationary action in not just gold but all commodities spells danger for other asset classes like stocks, currencies, and real estate.Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com.
To read more from ETFguide, see:
Is the US Housing Market Far Worse Than Reported?
The Fed Out-Gobbles Foreigners for US Debt
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