Idea Of The Week: Is A Knockout Punch Ahead For Gold?

Having an entrenched view is a good recipe for failure. And perhaps there’s no better Wall Street case study than Peter Schiff, a precious metals permabull. Never mind his incorrect calls about a U.S. dollar collapse, let’s briefly examine the sorry advice of gold permabulls over the past few years.

On Feb. 13, 2013, Schiff stubbornly reiterated his bullish view of gold, saying that gold was headed to $5,000 an ounce.

Below is a chart that shows how gold related ETFs have performed since Schiff’s $5,000 per ounce call. The SPDR Gold Trust (GLD) has crashed 30.73% while the gold miner ETF (GDX) has collapsed almost 60%.

Furthermore, just as Schiff was spewing his rosy gold forecast, we told our Weekly ETF readers:

“The Market Vectors Gold Miners (GDX) has lagged both the broader U.S. stock market along with the SPDR Gold Shares (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 (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.”

In that same report, we told our subscribers to buy JUN 40 GDX put options at $190. In early June 2013, we sold those same GDX put options for a 525% gain at $1,200 per contract. We also sold DUST for a double digit gain.

We followed that up with another gold alert on Aug. 1, 2013 by buying the Direxion Daily Gold Miners Bear 3x Shares (DUST) between $74-75. And per our 8/6/13 intraday email alert we sold the remaining half of DUST at $102 for a blended 23.5% one-week gain.

Golden bears and bulls

Did we allow one good bearish trade to keep us entrenched in a singularly negative view of precious metals? Not at all! In fact, just as we saw negative sentiment toward gold climaxing, we used it as a short-term opportunity to buy when others were panic selling. You’ve heard about doing the opposite of the crowd, right?

Via our ETF Weekly Pick issued on Dec. 26, 2013 – when the world was hung over from the holiday and those who weren’t were furiously unloading gold – we wrote to our readers:

“Once year-end tax loss selling is over, we’re anticipating a bounce in beaten down gold miners in January. It remains to be seen whether this bounce will become a bigger trend change for GDX from down to up, but it’s nevertheless a short-term profit opportunity for aggressive contrarians. Our tandem options trade is to buy the GDX JAN 2013 20 call options) at around $140. The call options expire on Jan.24, 2014.”

How did our short-term GDX bullish trade turn out? We bagged a 26.5% two-week gain on our GDX trade.

Just as rollercoaster sentiment wave toward gold and gold miners was again souring, via our Weekly Pick issued on June 5, 2014 we wrote to readers:

“Although the Market Vectors Gold Miners ETF (GDX) has performed about twice as bad as gold itself over the past three months (see chart below), we’re buying GDX shares at around $22.25 up to a limit of $22.75. Our tandem options trade is to buy the GDX JUL 2014 22 call at around $100 per contract.”

On 6/24/14 we sold the FINAL half of our GDX JUL 2014 22 call options at $365 per contract while on 6/17 we sold our FIRST half at $212. Our one-month blended profit for this trade was 188%. Our unleveraged GDX trade also resulted in a gain.

Forget about what happened in the past, what about now?

Since the start of 2015, gold has lost all of its year-to-date gains and is underperforming not just U.S. stocks and bonds, but European stocks too. The bigger picture is that gold has been mired in a four-year bear market and is down almost 35% from its 2011 peak at $1,980 per ounce.

Moreover, gold’s 2015 underperformance while Chinese stocks crash and Greece burns, isn’t a good sign for an asset class that is allegedly a safe haven during times of crisis.

What’s next for precious metals?

Our body of work shows that not being entrenched in a singularly rigid view has allowed us to capitalize on both bullish and bearish trades.

Bottom line: If gold’s knockout punch is coming, listening to the sorry advice of gold permabulls won’t help you. Not unless you want to be on the receiving end of an ugly TKO.

The ETF Profit Strategy Newsletter provides detailed analysis on major market trends, and which long/short ETFs offer high profit potential. Investments are carefully selected from a universe of more than 2,000 ETFs and each issue contains our proprietary global equity map, our mega-investment theme report, and a complete rundown of yield and performance data for major ETFs. Subscribers also get access to our Weekly ETF Picks and Technical Forecast.

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Ron DeLegge is the founder of ETFguide.