Excessive Bullishness Foreshadowed Gold's Meltdown

Can investors and traders use sentiment to spot turning points in financial markets? Let's use media headlines from 2011 to chronicle the "Great Gold Rush" from bubble to crash.

ABC News: Gold Rush also A Boon for the Refinery Biz - August 10 Bloomberg: Gold Exceeds $1,800 as Investors Seek to Hold the 'Ultimate Collateral' - August 10 Forbes: Jim Rogers Says Gold Going Higher - August 10 Forbes: Gold at $1,870 is Being Seen as a Haven - August 22 TheStreet.com: Wait to Buy Gold at a Pull Back - August 22 Beacon Equity Research: Gold Price Poised to go Parabolic - August 22 MoneyControl.com: Gold in Portfolio is Mandatory - August 22 Barron's: Is $5,000/ounce the New Target in Gold's Run? - August 22 Chicago Times: The Gold Rush is On Again - August 26 BusinessWeek: Gold Not in a Bubble as Central Banks Print Cash, Marc Faber - September 6 Reuters: Hard Hit Gold Bulls Not Yet Out For The Count - September 26

It's worth mentioning, that gold prices topped at $1,917 in August 2011 around the same time the SPDR Gold Shares ETF (NYSE:GLD) became the largest ETF with $77.9 billion in assets. (See chart below)WATCH: How Gold Experts are Misleading the Public

At that time, just as today, the reasons for gold to rally and continue rallying were seemingly endless:

Gold is a protection against inflation Gold is also a protection against deflation Gold is a safe haven during stock market meltdowns Gold also rallies when stocks rally Central banks are buying gold, so should mom and pop Gold is the only real collateral in a QE world

Despite all the bullish rationale for higher gold prices, there were even more compelling reasons to ignore the hype.

In our Weekly ETF Pick from Feb. 14, 2013 we wrote:

"Despite a modestly rising stock market, the Market Vectors Gold Miners (NYSE: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 (NYSE: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."

We exited our Feb.14 DUST trade with a +29% gain and in that same report, we told our subscribers to buy JUN 40 GDX put options at $190. In early June, we sold the GDX put options for a +525% gain at $1,200 per contract.

Let's examine two more time stamped examples of how we used excessive gold bullishness to our advantage:

In our Weekly ETF Pick from Aug. 1, 2013 we wrote:

"Since hitting a temporary bottom on June 26, Gold Mining Stocks (NYSE:GDX) have staged a fierce 21.78% rally. Is the worst over? To the contrary, this is just the sort of counter trend bounce you'd expect from a dead fish that has fallen off a 2,000 foot skyscraper. Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSE:DUST) around $74-75. DUST aims for triple opposite daily performance to mining stocks."

Per our 8/6/13 intraday email alert to subscribers, we sold the remaining half of DUST at $102 and we bagged a blended 23.5% one-week gain. It was a tremendous trade!

Almost one month later, rumors of a U.S. strike against Syria once again pushed short-term gold sentiment into bubbleland. And we pounced.

In our Weekly ETF Pick from Sept. 4, 2013 we wrote:

"Gold bullishness among polled analysts by Bloomberg is now at its highest level since March 8. This time around, expectations for soaring gold prices on a Syria attack is the consensus view. However, not only is the crowd's opinion usually wrong, but the most important bullish underpinning for gold is in the midst of going away; namely scaled back Treasury bond purchases or "QE" by the Federal Reserve. Buy GLD OCT 2013 130 put options (GLD131019P00130000) around $230 per contract"

Per our 9/12/13 intraday alert, we sold our GLD OCT 130 put options for a 63% one-week gain and our tandem trade in the ProShares UltraShort Gold (NYSE:GLL) is already ahead by almost 9% from our purchase price.

A Capitulation Moment The true sign of a market bottom in any asset - gold included - is capitulation selling, much like what the Bible describes in Ezekiel 7:19. Clearly, sentiment extremes (both bullish and bearish) are opportune times to capitalize. And if we combine sentiment measures with other confirming signals, we increase the probabilities of being right and making money. On the other hand, aimlessly buying precious metals at whatever price or on the dips or based upon expert opinions is a broken strategy.

The ETF Profit Strategy Newsletter uses a combination of market sentiment, fundamental/technical analysis and common sense to be on the right side of the market. Since the beginning of the year, 78% of our time stamped ETF picks have turned a profit. (through 6/30/13)