Published July 22, 2013
A tremendous rally for precious metals has occurred over the past five days.
The SPDR Gold Shares (GLD), which is linked to the price of gold bullion, has surged 6.23% while the Market Vectors Gold Miners ETF (GDX) has surged 17% and the iShares Silver Trust (SLV) has added 7.3%.
Have precious metals (GLTR) finally bottomed?
"Speculators increased their net-long position by 56% to 55,535 futures and options by July 16, the highest since June 4, U.S. Commodity Futures Trading Commission data show. Short contracts fell the most since November after reaching a record the previous week. Net-bullish wagers across 18 U.S.-traded commodities jumped 28%, the biggest gain since March."
Put another way, most of the gain in net long positions is attributable to a strong pullback in short holdings, which dropped last week from 80,147 to 61,002. Over-bearishness towards gold reflected in short positions are now getting creamed in a classic "short squeeze." And gold prices are jumping as poorly timed shorts exit their bets by purchasing back their busted gambles.
What about the ultimate leading indicator, gold prices themselves?
Although the latest rally in precious metals and mining stocks (GDXJ) has been impressive, prices are still in a significant downtrend.
GLD has dropped more than 20% year-to-date, SLV is down 32.69% and GDX has submerged by 40.85%. Whenever an asset or stock falls from peak to trough by 20% or more, it's met the technical definition of "bear market." And by that yardstick, metals and mining stocks are still in bear territory with substantial technical damage that will take time to repair.
Unlike gold experts, who have the misguided and uninformed view that buying gold at any price (even the wrong one) will result in big gains, the ETF Profit Strategy Newsletter has kept its readers on the right side of 2013's biggest investment theme; the Great Gold Crash.
In our time stamped Weekly ETF Pick from Feb.14, when analysts were predicting higher prices, we wrote:
"Despite a modestly rising stock market, the Market Vectors Gold Miners (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 (DUST) at these levels and the JUN 40 GDX put options at $190. 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."
We sold DUST with handsome gains and in early June we booked a +525% gain in our JUN 40 GDX put options at $1,200 per contract.
We also had parallel short positions in both SLV and GDX put options with longer expirations. Here's a quick recap of how those time stamped trades turned out:
On 5/9 via our Weekly ETF Pick, we alerted our subscribers to buy SLV AUG 2013 20 put options (SLV130817P00020000) for around $35. We sold half our position for a 94% one-week gain. On 7/11, we sold the remaining half of this position on for a 328% gain at prices near $150-170.
On 5/15 via our Weekly ETF Pick we alerted subscribers to buy GDX SEP 2013 25 put options (GDX130921P00025000) at $135 per contract. Per our 6/24 email alert, we sold half that position at around $284 per contract. And on 7/11 we sold our remaining half of this position for an 85% gain at prices near $250-270.
Bearish sentiment toward gold and silver has picked up, but is still a far cry from capitulation. A continuation of GLD's counter trend rally toward $135-$140 could shake out some of these late comer bears. Will it present another good entry point for new short positions?
The ETF Profit Strategy Newsletter uses a combination of technical analysis, market sentiment, and common sense to be on the right side of the market. Our mega-investment theme report along with our weekly ETF picks and technical forecast identify market extremes along with the best way to profit.
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