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Yoni Jacobs, CFA, CMT, is an investment strategist & financial advisor.

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Gold Bubble: Profiting From Gold's Impending Collapse
  • Charts Point to a Precious Metals Bubble 7 comments
    Jan 18, 2011 12:16 PM | about stocks: GLD, GDX, GDXJ, ABX, EGO, GG, NEM, AU, DZZ, SLV, AGQ, SLW, PALL, PAL, PPLT, PTM, FCX, REEIQ
    With Gold's massive run, investors have flocked to silver, copper, palladium, rare earth elements, and other precious metals for the "next big thing." What many fail to realize, however, is that if we are currently in a gold bubble, many of the precious metals will also collapse as the gold bubble deflates.

    There are numerous reasons both to justify the high gold prices and to warn of an impending bubble collapse (see "Gold Bubble: Final Warning?"). When an investment theme, such as gold and precious metals, involves so many conflicting fundamental arguments - as our case can be argued either way - it may help to use some visuals to gauge where we're coming from, where we are are, and where we may be going. Charts display both the price changes over time as well as the investor psychology that accompanies the shifting supply and demand levels of the market. By looking at the prices which gold and the precious metals have reached, and by pointing out important psychological support and resistance levels that are currently in investors' minds, we can better predict their future direction. And based on the charts, we may be setting up for a considerable fall.

    Let’s take a look at the Charts:

    As you can see above, Gold has been on an almost parabolic rise since 2000. It has climbed from near $250 to over $1400 (nearly a 500% gain). For one of the oldest measures of wealth and forms of currency to spike up so rapidly and at such a steep angle, either gold is 5 times more important today than it was 10 years ago, or we may be in store for a serious correction as we snap back to reality.
    Gold (GLD) has been in a very well-defined upward-sloping channel since the beginning of 2009. Every time the price hit the top or bottom of the channel, it bounced off in the opposite direction. Since the channel has worked so well for two years already, it is a very reliable gauge for future price action. And since we’ve neared the top of the channel in the past few months, now may be the proper time to sell before the price makes its way back down toward the bottom trendline. Not only are we expecting the price to drop to the lower trendline, but after such a long and considerable rise in gold prices, the channel may begin to break down. In other words, though the channel has worked magnificently in the past, does not mean it will work in the future; if gold prices start falling, they may quickly fall right through the bottom trendline. And if that happens, we will be entering a much deeper correction.
    The gold miners ETF (GDX) has also been in a very well-defined uptrend for the past two years. As opposed to the GLD ETF, however, the miners are showing increased weakness. While Gold (GLD) itself is still near the upper trendline within the channel, the GDX is about to meet the lower trendline. Not only is the GDX about to meet – and maybe even break down through – the lower trendline, it is showing considerable weakness by failing to hit the upper trendline in November and December 2010 and with increasingly slowing momentum as evident by the MACD crossover and negative RSI and Stochastics divergences. In other words, while the prices of the gold miners were making new highs, the momentum and relative strength were falling behind. As momentum continues to weaken and the price challenges the lower trendline, keep your eye out for building momentum on the downside – this could be the beginning of a rapid collapse.
    Let’s take a look at the big mining companies for any further clues:

    Barrick Gold (NYSE:ABX)

    Making up over 16 percent of the Gold Miners ETF (GDX), ABX has tremendous influence on the direction of the GDX and on the gold play in general. And though it wasn’t obvious in the charts of GLD or GDX, the chart of ABX is showing an almost-deadly pattern – the Head and Shoulders. The Head and Shoulders is a reversal pattern that shows up at the end of big price moves; and, if completed, the head and shoulders pattern signals a major turning point. In the case of ABX, not only do we have a perfect example of a head and shoulders pattern, but the heavy selling volume that has accompanied the breakdown is almost guaranteeing a swift and severe upcoming drop. Unless ABX holds the $45 level, the Gold bubble may be nearing collapse.
    Newmont Mining (NYSE:NEM)

    The third largest holding in the GDX, Newmont Mining (NEM) makes up 11 percent of the ETF. Like most of the other gold plays, NEM has also been in an up-channel and may also be in the midst of a collapse. Unlike the GLD, GDX, or other gold plays, however, NEM hasn’t made a new high since September 2010. While Gold (GLD) and others have made new highs in December, NEM has failed to follow. It hit the peak and the top trendline in September, and has since fallen. Like ABX, it too may have formed a Head and Shoulders, and may be headed for a fall as well.
    Goldcorp (NYSE:GG)

    The second largest holding in the GDX (11.47%), and perhaps the most-rapidly falling gold stock, Goldcorp (GG) is a severe warning signal of an impending gold collapse. Goldcorp formed a double-top in November and December 2010 and has since fallen over 15 percent! It’s been falling fast and on high volume, and is right at the lower trendline. If it breaks through, expect a much bigger correction.

    Like gold, silver has also seen a meteoric rise in price over the past ten years, rising from under $5 in 2003 to over $30 in December 2010. Yet while gold’s rise has been fairly steady, silver has almost doubled in price since August in an almost-vertical price move. Not only is such a rapid rise in price extremely dangerous, but the uptrend that has been in place since late August 2010 has been broken:

    Silver Wheaton (NYSE:SLW)

    Many investors’ favorite silver play – Silver Wheaton (SLW) – has more than tripled in the past year! But with a peak in December 2010, SLW may have also formed a Head and Shoulders pattern. It has strong support at $30; but if it fails to hold these levels, expect a massive correction.

    Platinum has skyrocketed since late 1998 from under $400 to over $2100 in 2008 and to $1800 now. It is worth noting, however, that while huge gains were made, a dramatic and devastating drop in prices is not out of the picture – after peaking at over $2100 in early 2008, prices plummeted to $800 by the end of the same year! This is absolutely possible again.
    Let’s see how the Platinum ETFs are performing:
    Platinum (NYSEARCA:PTM)

    After doubling since the October 2008 low, PTM is struggling to break through and hold above the $21-22 level. Watch for the direction in which it breaks out.
    Physical Platinum (NYSEARCA:PPLT)

    Only a year-old ETF, the PPLT has ranged between $145 and $180. With a rising resistance line, however, it’s important to see if it can break through, or if it will break down. With two very bearish candle patterns in the last two trading days – an “Evening Cloud” and a “Bearish Harami” – this could also be setting up for a fall.

    After rising 1000% from 1992 to early 2001, Palladium dropped over 80 percent from 2001 to early 2003, and has yet to set a new all-time high. Palladium prices have, however, more than quadrupled (from $200 to $800) since late 2008.
    North American Palladium (NYSEMKT:PAL)

    After forming a very strong base at $3 from May to August 2010, PAL is up nearly 150 percent in under five months! With a very bearish reversal candle (“Shooting Star”) on January 13, 2011, we’ll see if PAL can make new highs, or if it begins to fall with the rest of the metals.
    Palladium ETF (NYSEARCA:PALL)

    After nearly doubling since July 2010, the Palladium ETF (PALL) is also showing potential signs of weakness. It has formed a potential ending-diagonal, in which a breakdown below $75 will trigger a much bigger drop.

    Copper has nearly quadrupled in the past two years, and has broken above its previous 2008 highs.
    Investors’ favorite way to play copper has been through Freeport-McMoran (NYSE:FCX).
    Freeport-McMoran (FCX)

    After setting an all-time high of $122 in May 2008, FCX dropped to $15 by late December. It has since risen by 700%, but has reached the May 2008 highs of $122 – a VERY strong resistance level. Unless FCX can break through the $122 level and hold, it will see a considerable correction as well.
    As I mentioned above, investors have been clamoring over and rushing into any investment or company that has any relation to gold and precious metals. Looking for outperformance, investors have moved from gold to silver to copper, platinum, palladium, and now Rare Earth metals and elements. With companies like Rare Earth Elements (NYSEMKT:REE) and Molycorp (MCP) up over 500 percent since July, and with the CEOs of the companies even calling the price moves risky and potentially overdone, these investments could plummet in value if gold and the precious metals space continues to slip.
    Rare Earth Elements (REE)

    Molycorp (MCP)

    After the massive runs in most of the precious metals market, many of the metals - such as gold, silver, palladium, platinum, and rare earth elements - are showing considerable weakness. Many of the gold miners have shown reversal patterns that may be signaling the beginning of a top, while other precious metals plays are nearing strong upper resistance levels. After such huge runs, and right at resistance levels, a safe investor would be very smart in at least locking in profits or buying some protection through options. With great reasons to believe that a gold bubble is in place and about to collapse, however, it may even be a great time to start betting against it.

    Disclosure: I am short GDX, ABX, FCX, REE, AGQ.
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Comments (7)
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  • Agbug
    , contributor
    Comments (1341) | Send Message
    Your charts should give any PM bull pause, but I've come to believe that the fact that many bulls would like to see you stoned for such blasphemy indicates to me that for many of them the PM sector is a proxy for their outlook on deficits and the state of the U. S. economy in general. I use religious references due to the fact that for many it is like a religion or politics.
    They will go down with the PM ship before acknowledging that PM prices could disconnect from our dismal state of fiscal and economic malfeasance.
    Thank you for your time and efforts.
    The 20th of January's morning charts are sure busting through the bottom of the channel. Time will tell.
    20 Jan 2011, 09:06 AM Reply Like
  • Louis Paquette
    , contributor
    Comments (49) | Send Message
    I would have expected a firestorm of protest over this article. The lack of reaction is odd.
    23 Jan 2011, 03:53 AM Reply Like
  • Agbug
    , contributor
    Comments (1341) | Send Message
    Since it was posted to your blog, instead of as an article, it appears it had view readers. You might try submitting it as an article. I enjoy the "just another PM hit piece" and "one of Blythe's henchmen" comments for their entertainment value.
    23 Jan 2011, 11:28 AM Reply Like
  • dadidadudable
    , contributor
    Comments (13) | Send Message
    people don't like hearing bad news. heck i'm in no hurry to short gold or silver just yet - that's called herding. i'm scared just as everybody else. but one point thought - do you honestly think america is on its way to "recovery"?? really? what makes you have even a remote idea of that? We have all that debt, we can't pay back, foreign countries will soon stop lending us money, feds will be forced to face our own debts and will start printing money like crazy (they already have), we are not exporting anything of real value, we are just consuming and putting it onto our credit cards... nothing has changed! it's just a continuation of what's happened before the collapse, only now we are printing more money - which should depreciate the dollar nicely. that's not a very rosy picture... but think about it logically, do you believe it's going to be different? government will do something like cutting social programs to pay the debts and raise interest rates?? no way! they'll just print and print money. and what happens to precious metals when dollar goes down? if I were you, i'd see that pullback you are predicting to be temporary and much smaller then a bubble burst.
    19 Apr 2011, 07:35 PM Reply Like
  • jrbillig
    , contributor
    Comments (6) | Send Message
    How accurate are your charts??? I look at GG, it has gone up to 53, what does that do for your analysis? You chart had price much lower.
    20 Apr 2011, 07:24 AM Reply Like
  • Louis Paquette
    , contributor
    Comments (49) | Send Message
    Okay Chart Prophet - maybe your call for a top was a wee bit early in mid January - but the bubble is now unquestionably burst. So WHAT do you see going forward now that the bubble has burst?? Have we seen the highs? Is the precious metals bull over for good? Or - do you expect new highs - and if you had to guess - when? Later this year or will it take longer?


    Would appreciate your opinions on this!
    6 May 2011, 12:48 PM Reply Like
  • Karlranch
    , contributor
    Comment (1) | Send Message
    It is apparent that there is a bubble mentality in the air around PM. When the Taxi Driver starts talking to you about investing in Gold or Silver you know there is a bubble right...
    There is a buzz and a frenzy akin to many other bubbles out there.
    How long how far etc. Who knows. The charts can point towards clues. Thanks for the article.
    19 May 2011, 02:17 PM Reply Like
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