How To Print Money In The Psychotic Gold Market

Includes: GDX, GLD, JNUG, NUGT
by: ETFguide

By Ronald Delegge

The gold market is the epitome of human psychosis.* On one hand, there’s the anti-gold camp that have utter disdain for precious metals 24 hours a day, eight days a week. On the other hand, there are the survivalist types, general goldbugs, and anti-Fed clan who live, breath, and eat gold at any price.

Together, both groups are a wonderful psychotic mix in the ever confused and manipulated (per the conspiracists) gold market. It’s the perfect recipe for the opportunistic gold trader.

Finding sentiment extremes (bullish or bearish) and technicals is one way to print money in the psychotic gold market. From mid-April to June 2, precious metals and related assets weren’t very good performers. Silver lost 4.5%, gold fell 4.6%, and large-cap miners were down 7.2%.

And without too much surprise, the banging of pots and pans to sell, to short, or to avoid everything gold filled up the airwaves. Here’s just a tiny sample of the negative headlines:

  • “Why I Still Hate Gold” – James K. Glassman, Kiplinger, 6/4/14
  • “Pisani: Gold Can’t Get Traction” – NBC News, 6/4/14
  • “Kiss Gold Market Good-Bye” – Bloomberg, 6/4/14
  • “Gold Vulnerable to Manipulative Selloff in June” – Max Keiser, 5/30/14
  • “Gold Miners Fail to Launch” – Forbes, 5/14/14
  • “Barrick Gold Downgraded to Strong Sell” – Zacks Equity Research, 4/14/14
  • “Goldman Stands by $1,050 Gold Target on Outlook for Recovery” – Bloomberg, 4/14/14

Besides being dead wrong, all of these headlines are a testament to the kind of sentiment extremes that consistently pervade the gold marketplace. It oozes from bearish to bullish and back in no time. In early June, it was just the kind of overly bearish sentiment that has given legs to the latest thunderous move in precious metals and mining stocks.

Click to enlarge

While all of these other sources pooh-poohing on precious metals and miners, we told readers via our timestamped Weekly ETF Picks on 6/4/14:

When sentiment extremes are this bearish, more often than not it signals a reversal turning point and a buying opportunity. Although the Market Vectors Gold Miners ETF (NYSEARCA:GDX) has performed about twice as bad as gold itself over the past three months (see chart below), we’re buying GDX shares at $22.50. Our tandem options trade is to buy the GDX JUL call options (price and expiration reserved for subscribers) at around $100 per contract. We like the odds of a short-term gold bounce, especially if the equity market experiences its long overdue correction. And if GDX follows its historical pattern, it should outperform gold to the upside.

How has it turned out? Our unleveraged GDX trade has already gained around 15% since our 6/4 alert and our tandem GDX call options trade is up more than 250%. Trades in directional 3x gold mining ETFs are also up big. (See chart)

* Psychosis refers to an abnormal condition of the mind, and is a generic psychiatric term for a mental state often described as involving a “loss of contact with reality.” People suffering from psychosis are described as psychotic.

Disclosure: No positions

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