by Ron deLegge
In October 2004, the New York Yankees did the unthinkable. They blew a 3-0 lead and lost the World Series against their archrivals the Boston Red Sox. Is a similar epic collapse happening in the precious metals market?
After racking up a 144% gain from late 2008 to mid-2011, gold prices have choked their lead against other investments and crashed over 35%. No doubt, bullion enthusiasts are still in denial, but the luster of gold's gains - fueled by the Federal Reserve's trillion dollar QE (quantitative easing) - have definitely faded. The chart below shows how the SPDR Gold Shares (NYSEARCA:GLD) has erased 35.4% of its performance over the past 28 months. In reality, the fixation on gold's 12-year streak of consecutive yearly gains from 2000 to 2012 has been largely masked by a bear market that began two years ago.
How has gold performed against other major investments from when the Fed's QE began in late 2008 until now?
If we compare gold's relative performance gain of 60% versus competing asset classes, we get a clearer picture of the actual performance lag. Over the same five-year period (2008-2013), the S&P 500 (NYSEARCA:IVV) gained almost 105%, emerging market stocks (NYSEARCA:VWO) gained 78% and U.S. REITs (NYSEARCA:VWO) gained more than 92% and that's not even including dividends! From that perspective, gold has been a dog.
Profiting from a Gold Crash
Contrary to what the very wrong gold experts have said all along, the ETF Profit Strategy Newsletter alerted its subscribers that the real money in gold and silver would be on the short side, especially with gold/silver mining stocks. In our Weekly ETF Pick from Feb.14 we wrote:
"The Market Vectors Gold Miners (NYSEARCA: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 (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 47% and DUST has climbed 102%. 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. Gold has already had 18 major false breakouts over the past two-years and is acting just like the 2004 Yanks.
Gold has also been a sucker's paradise because people keep buying it at the wrong time and the wrong price, thinking they can make a future profit by being ignorant of the prices they paid. "The golden rule of investing: no asset (or strategy) is so good that you should invest irrespective of the price paid," said James Montier of GMO.
The deflationary action in not just gold but all commodities (NYSEARCA:GCC) spells danger for other asset classes like stocks, currencies, and real estate. That means another big profit opportunity for investors who are correctly positioned.
Disclosure: No positions