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Why It Pays to Ignore Gold Experts

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Follow price action before opinion.

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The Great Gold Crash of 2013 is one of this year's biggest investment themes the gold experts never saw coming. And most of them, after being utterly blindsided, are still in complete denial.

Look no further than Peter Schiff. Here's what he said on June 11 in a interview with Futures Now: "Gold can certainly make a move up to $1700 or $1800. When the world figures out the position we're in, it's gold that's going to the moon."

Lest we remind our dear readers, this is the same Mr. Schiff who on February 13 said in a MarketWatch report he was sticking to his $5,000 per oz. gold forecast. And before that, on December 6, 2012, Schiff told Yahoo! Daily Ticker that "gold was still in an uptrend." Ha!

To be fair, Schiff is not the only gold expert who's been long and wrong about gold. Mr. Schiff is joined by a venerable list of other "smart money"* guys who remain bullish on various gold-linked assets. This includes David Einhorn, Dennis Gartman, James Turk, John Paulson, James Grant, and Marc Faber.

For the rest of the world (not the one with its ostrich head buried in the sand -- the other one), it's important to understand a few gold facts:

1. Global gold investment demand is down 51% over the past year. (Source: World Gold Council.)

2. Gold has already met the generally accepted definition of a bear market, with it 20% decline from peak to trough.

3. Gold and other precious metals are in the midst of a severe technical downtrend.

4. Gold is underperforming every major asset class. (See relative performance table below.)

5. Gold manipulation or not, being short or completely out of gold, has been the right place to be.



In ETF land, the SPDR Gold Shares (NYSEARCA:GLD) has declined around 23% in value and is down over 32% since August 2011. And gold mining stocks (NYSEARCA:GDX) are down a breathtaking 52% over the past two years. The sign of a true bottom, as with all markets, are panic-stricken sellers, not brainwashed buyers who are delighted to buy more.

Learning From Their Mistakes

In the meantime, we can't help but wonder: Why do experts like Schiff and Co. continue to be so wrong about the direction of gold prices? As we see it, there are a few reasons behind their epic failure.

First, gold experts have heavily vested interest in being bullish on gold (NYSEARCA:IAU) 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. Just as Harry Houdini fooled his audience with eye tricks, gold experts extrapolate impressive data and deflect attention from gold's real price action with scare tactics and dogmatic arguments about why gold will soar.



Second, gold experts have zero trading discipline. This is mainly because they don't use protective stop losses to guard against catastrophic declines. John Paulson alone is sitting on roughly $1.5 billion in losses from busted gold bets. For the experts that tell you to buy physical bullion, you can't protect a physical gold position with a stop loss -- and besides that, hedging against lower prices isn't how goldbugs are bred to think. Instead, goldbugs continue to be married to the gold trade, until death do them part or they get slaughtered or whichever comes first.

Finally, gold experts suffer from a behavioral disorder referred to as "affinity bias" disorder (ABD). Instead of carefully examining the soundness of an investment, ABD causes the individual to buy investments they are enamored by, but that may be disadvantageous. ABD can trick a person into buying things that reflect their social or personal biases, rather than a clear-headed and subjective analysis of the real opportunity.

Profiting From the Gold Shock

Contrary to what the very wrong gold experts have said all along, since early 2013, our firm has alerted readers that the real money in gold, silver, and miners would be on the short side.

Besides troublesome charts, we observed incredible market distortions between the relative performance of gold versus other major asset classes. These dislocations were (and are) especially pronounced in gold mining stocks (NYSEARCA:GDXJ).

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 mid-February, DUST has gained 199%. And in that same report, we told our readers to buy JUN 40 GDX put options at $190. In early June, we booked a +525% gain in those GDX puts at $1,200 per contract. (Our latest timestamped metals trade is already up over 100% and is still an open position.)

Our examination of the precious metals market points a very high profit opportunity for investors and traders who are on the right side of the market, and who are correctly positioned in the right investments.

In summary, the moral of the story is that even convincing arguments about why gold prices should rise can be wrong. Let real-life price action be your guide -- not dogmatic investment opinions.

*A decoy phrase for "dumb money."

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

To read more from ETFguide, see:

YYY vs. PCEF

Think Twice Before Concluding ETNs Are Safe

A Common Sense View for Investing in Stocks
No positions in stocks mentioned.
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