How to Trade the Gold Bear Market

How to Trade the Gold Bear Market

Before diving into today’s Money Morning, I wanted to let you know about some exciting changes ahead in 2017.

Starting on Tuesday, 3 January — our first new edition following the holiday break — I will be writing for our sister publication, The Daily Reckoning. Along with co-editor Vern Gowdie, I’ll continue to call it like I see it, bringing you all of the latest resources news and global investment insights you’ve come to expect.

That means you will no longer see me leading off here at Money Morning. Don’t worry though. We’ve got a great editor lined up to fill my shoes over here.

To follow me at The Daily Reckoning, you can simply click here. I hope to see you over at The Daily Reckoning in the New Year.

Now, onto the latest for gold.

Gold has been a terrible investment since the US election. It’s plunged over 11%.

A lot of experts are starting to see the light — gold isn’t some kind of ‘magical’ saviour. Daily FX expects more losses. They wrote on 16 December,

It would appear that the bullish thesis that drove gold prices up by 31% in the first half of this year is dying if not already dead-altogether.’

It doesn’t sound good…

The gold promotors — who have overpromised and under-delivered for years — have a tough job ahead.

Gold’s given back most of its yearly gains. At Thursday’s low of US$1,124 per ounce, gold was 5.6% — or US$64 — away from wiping them out. If gold finishes 2016 in the red, it would be the fourth-straight year down — the first time since 1988.

We can’t be certain, but gold could start nosediving soon. If you want to prosper, I recommend shorting gold and/or buying a certain type of gold stock.

I’ll explain…

Rumours and sentiment

The US Federal Reserve raised interest rates last week. The market was 94.9% confident it would happen, according to the CME FedWatch Tool. That’s the main reason why gold got smashed following the US election.

It’s a typical market reaction…

Remember, financial markets move on rumours, not actual news. That’s why gold nosedived into the rate announcement.

The Fed now wants to raise interest rates three times next year. That’s the new rumour on the block.

The story sounds familiar…

The Fed wanted to raise rates four times last December. That turned out well.

Should we believe them this time?

I honestly wouldn’t waste your time thinking about it. It doesn’t matter.

If you want to be a successful trader, just trade the trade — don’t overthink it. The three rate hike rumour is pushing gold lower for now, with punters piling into US dollars. The smart money is on the short side now.

Remember, gold is considered a ‘safe haven’ that people turn to in times of turmoil. With interest rates and stocks moving higher, investor sentiment appears favourable. There’s no reason to ‘buy’ insurance with gold. Without a major unexpected crisis, gold could keep plunging lower. Don’t expect a big turnaround anytime soon.

Analysing the technicals

Take a look at the five-year weekly chart for gold:


Source: Tradingview.com; Resource Speculator
Click to enlarge

The blue lines show that gold is in a major bear market. For this reason, I find it unbelievable that anyone can say gold is in a bull market — it’s clearly not. That is an outrageous lie.

The left green line is the break line, and drawn from either side of the major high at US$1,377 per ounce in July. The break line gives the projection for the bear trend in motion. The bear projection is quite steep. It shows that a major capitulation to the downside is possible into year end.

The right green line is a parallel line of the break line — any rally or short squeeze should re-test that line. Remember, that’s only possible if we get an unforeseen crisis in confidence. In that case, gold would be bought as ‘insurance’. That’s unlikely for now.

Ari Wald, head of technical analysis at Oppenheimer, has a slightly different opinion. He told CNBC ‘Power Lunch’ on Thursday:

The factors that have pressured it have indeed been the stronger dollar, and I think gold is selling off as a safe-haven asset as well, with the market embracing more risk, and I think that can continue.

Wald ultimately discussed the 1999 gold price spike. It jumped from roughly US$250 to about US$340 per ounce in a few weeks. Take a look for yourself:


Source: Tradingview.com
Click to enlarge

Ari Wald continued (my emphasis added):

After that spike, gold ultimately settled back into its base and it really required another two years of basing until it really started to break higher again. We think we’re in a similar basing period, where it’s probably, at best, dead money here, even if it is coming into some sort of support. That prior low at $1,045 I think is the important level here. Look elsewhere for investment opportunities.

Ward believes the recent price spike is the start of the bull market and gold is finding support. I obviously don’t agree with that argument. It’s hopeful at best. Gold is yet to make a final low — it’s nowhere near basing.

On another note, despite a capitulation to the downside, you can still make massive profits in gold sector. In that respect, Ari Wald is dead wrong. His investment foresight seems extremely narrow-focused.

Sure, as they have proven resources and known breakeven numbers, the producers and developers track the gold price. For that reason, I’ve consistently told Resource Speculator readers to stay clear of these players. If gold nose-dives, the producers and developers will probably get crunched and lose you a fortune.

So where can you profit?

‘Penny gold’ stocks offer the most rewards in this market — they are already priced at failure and have little to do with the gold price. If a ‘penny gold’ stock strikes the mother lode, or upgrades a major resource, the stock price should skyrocket — even if the gold price collapses.

Ari Wald is correct noting that gold is weak. However, if you completely ignore the gold sector, you could miss some amazing opportunities.

Regards,

Jason Stevenson
Resources Analyst, Money Morning

PS: For the past couple of months, I’ve been hunting for the best ‘penny gold’ stocks on the ASX. If you’re a serious trader or investor, I’ve found about five to six companies worth your time. These ‘penny gold’ stocks boast exciting stories, with lots of drilling in the months ahead. One great announcement could make readers a fortune, regardless of what happens to the gold price. These stocks are going under the radar…for now. To find out more, click here.

And if you missed my note up top, just a reminder that starting in 2017, I will be making the move to our sister publication, The Daily Reckoning. If you’ve enjoyed my work here at Money Morning, I think you’ll really like what you see over at The Daily Reckoning. For a free subscription to The Daily Reckoning, simply click here. We’ll take care of the rest.

Jason Stevenson
Jason shares his extensive knowledge of Australia’s mining sector as Money Morning’s dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory. If you’d like to know more about Jason’s financial world view and investing philosophy then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.
Jason Stevenson is Money Morning’s resource analyst. He believes that the best way to make money is, and always has been, to back Australia’s best explorers, miners and refiners.
Before joining the team at Money Morning, Jason worked at boutique firms which advised fund managers and high net wealth clients where to invest. Now he brings that expertise to Money Morning, where he provides readers with his take on the Aussie resource sector. Whether it’s iron ore, oil and gas, gold or lithium, you’re guaranteed in-depth analysis of Australia’s biggest and most important sector. Jason is also the analyst for the leading resource investment advisory Resource Speculator. This is where he shares the best mining prospects and natural resource plays he finds on the ASX. Official websites and financial e-letters Jason writes for:

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