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Gold Prices: Two Ways To Play An Imminent 30% Drop

by Karim Rahemtulla, Investment Director, Smart Profits Report

Gold prices are set to drop by 30% in the coming months.

I know… this flies in the face of conventional thinking. And maybe you think I’m crazy for even suggesting it. After all, we have a plethora of reasons why gold prices deserve to be two or three times higher than they are today…

  • Massive currency inflation
  • A financial catastrophe
  • Political upheaval
  • Wars
  • Global warming

Add this to the fear of currency debasement, personal security concerns (see the record number of gun sales since the new Presidency), and lack of faith in anything coming from Wall Street, and you have the perfect storm for gold prices sitting at $2,000 an ounce, not $600.

But prices are no higher than they were prior to the crisis.

And here’s the plan for dealing with a drop in gold prices…

Gold Prices Headed Higher Over Long-Term

Don’t get me wrong… I think there’s little doubt that gold prices are headed higher over the long-term. But right now, I’m more concerned with the metal declining precisely because we haven’t gone higher.

News that China is hoarding gold is not helping. Usually when resistance to the upside is so strong, the path of least resistance is to the downside.

Consider that over the short-term, markets are driven by anything but rational factors. They are, in fact driven by fear and greed.

For proof, just look at what has happened in the stock market. In a period of eight months, we’ve seen it tank by more than 50%, only to bounce back by 40%. This is not abnormal during a period of intense volatility and crisis… it’s actually normal.

And the market for gold is not immune to the same type of swings. So what would you do if gold dropped to $600 this year? Would you sell or buy more?

As Gold Stocks Go… So Do Gold Bullion Prices

If you want to gauge where gold bullion prices are headed, look no further than gold stocks. They’ve predicted the moves with uncanny accuracy.

For example, when gold stocks weakened by more than 50%, the price of gold soon followed, dropping from a high of over $1,000 per ounce in March to the mid $600s by October.

The price has since recovered, but gold stocks are still more than 40% below their highs, while gold retraced to within $50 of the 2008 highs. This tells me that the rally in gold is neither impressive, nor lasting.

Gold Demand Is High… But The Price Isn’t

The odd thing is, demand for gold is at a high. Investors are buying bullion and coins… the Chinese are hoarding it and we’re just a few months away from peak demand season in Asia (especially India)… and taxi drivers are talking about it.

Notwithstanding the market’s shenanigans, gold has basically not done a darn thing. This tells me that we’re likely to move in the direction that most investors don’t expect - down. And that would actually be a good thing for patient investors.

And what about inflation?

Inflation is not coming back this year… maybe not even next year.

But not only will inflation return, the U.S. dollar and the euro are destined to drop in value. When it happens - and it’s not happening now - the price of gold will reach those lofty four-digit levels - and probably won’t turn back.

So, this is not a call to sell gold right now. Far from it.

Gold Prices May Drop In The Coming Months…

Instead, it’s a warning that gold prices may drop in the coming months - and that you should take that opportunity to actually buy the metal and the stocks because it’s one opportunity that you do not want to miss.

And as for the fall… it will happen because the same people buying gold today are the ones who always buy assets at their highs, only to be suckered out of their positions when volatility creeps in.

I suggest you play the imminent drop in gold prices two ways:

  • Sell call options against your gold shares and rake in the huge premiums being offered for out-of-the-money options.
  • If you’re heavy into gold shares, you may want to consider trading out of them and buying LEAP options to reduce the money you have on the table.

And if you own bullion or coins, do nothing, since you probably didn’t buy it for trading purposes anyway, but more for long-term protection.

Gold is not dead, but it’s not ready for its run just yet. There will be another chance to buy it on the cheap soon… so just make sure you’re ready for it.

Karim Rahemtulla

Disclosure: No positions