Goldbugs are scared to death and rightly so.
The "currency of last resort" that was supposed to be a bastion
of safety has been falling in value right alongside global stocks
(NYSEArca: AWCI) and the euro (NYSEArca: FXE).
Even commodities permabull Jim Rogers admitted to the Business
Insider that gold could fall 40-50% if India (NYSEArca: INDY)
ceased gold imports or if Europeans (NYSEArca: IEV) began
liquidating their holdings. What's going on with gold?
Gold's Rocky Road
The early warning signs behind gold's fall beneath key trading
levels has been months in the making. The ETF Profit Strategy
Newsletter via its weekly picks warned its readers on 4-4-12 about
gold's inconsistent performance:
"Could 2012 turn out to be the first time in 11 long years that
gold has a loss? We know it's a sacrilegious thing to say,
especially to demi-gods like James Grant or Jim Rogers, but the way
precious metals are acting lately it makes you wonder." (That
research note was posted for our readers when gold was still in
positive territory.)
Over the past three months, gold (NYSEArca: IAU) has lost almost
10% in value and now has a negative year-to-date return. Silver
(NYSEArca: SLV) has lost around 15% since the beginning of the
year.
The ETFS Physical Precious Metals Basket Shares (NYSEArca:
GLTR), which is a broader measure of the precious metals group and
includes gold, silver, platinum, along with palladium in one
package, is down over 12% over the past three months.
The Past is not (necessarily) the Future
Over the past decade or so, gold performed well despite the 9/11
attack, the bursting of the dotcom and housing bubbles, and the
2008-09 financial crisis. But past performance, as investors keep
forgetting, is not prologue for the future.
It's been a long time since gold has had a major correction and
those corrections have tended to be infrequent. From 1999 to 2011,
gold experienced three declines greater than 20%, but snapped back
each time. But this time around might be different.
Huge budget deficits, bankrupt governments, and political
instability aren't necessarily a slam dunk for gold investors, as
2012 is already proving.
Interestingly, the Dollar Index (EURUSD=X) - also known as the
Grande Fiat of Fiats - rose for its 12th consecutive day, which is
its longest winning streak since 1973.
Troubled Waters
There are two worrisome factors for gold right now, let's talk
about the first: Gold's immediate performance versus other assets
has not been defensive.
The ETF Profit Strategy Newsletter via its
Weekly ETF Picks
identified this trend on 4-18-12: "Gold has hardly behaved as
the "perfect hedge" that goldbugs call it. Not only is gold
underperforming stocks year-to-date, but instead of increasing in
value on trading days when stocks are down, it's tended to drift
lower."
There are many examples of these correlations, but we
highlighted just one: "During the 4-4-12 market selloff, the
Nasdaq-100 (NasdaqGM: QQQ) and S&P 500 (NYSEArca: SPY) moved
lower by 1.46% and 1.02% respectively. Instead of being a haven of
safety, instead of zagging when stocks are zigging - the SPDR Gold
Shares (NYSEArca: GLD) had the audacity to fall 1.68% while the
iShares Silver Trust (NYSEArca: SLV) moxied up a 4.19% loss."
Here's another ominous sign for gold: It has now sliced through key
levels outlined in our Weekly ETF Picks without any sort of major
fight. As a result, we're already focused on new support levels to
see how gold reacts.
The Right Strategy and the Wrong One
It's easy to be critical of investors that buy stocks (NYSEArca:
DIA) and bonds (NYSEArca: AGG), because these assets aren't
tangible, as the goldbug will gladly explain. But interestingly,
many goldbugs areinfected with the same self-destructive behavior
that plagues the rest; they have no exit strategy. No doubt, the
vast majority of goldbugs will be riding their gold straight to the
bottom, screaming that every new low is a buying opportunity. What
kind of strategy is that?
The
ETF
Profit Strategy Newsletter
uses the right gold strategy by clearly identifying
support/resistance indicators along with strict trading discipline.
No major selloff or bear market happens without taking out key
support levels.