Never mind that gold is posting year-to-date losses and never mind that gold mining stocks are already in a bear market. Is this the start of bad things to come for gold investors?
Gold volatility (^GVZ) spiked over 18.03% in trading on Feb.20 and the bumpy ride in gold is getting even bumpier. Early in the year, we hinted that rain clouds over the precious metals market were forming. (See my article "8 Reasons Gold May Disappoint" written on Jan.8)
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Although gold (NYSEARCA:GLD) registered its 12th consecutive yearly gain in 2012 , it's actually been in correction mode since September 2011.
On the supply/demand side, the investment demand for gold has been declining. (See chart below) The 17% drop in demand for bars and coins was offset by a 51% gain in ETFs, but still resulted in a 10% demand reduction, according to the World Gold Council. India, the largest consumer of gold, experienced a 12% decline last year in gold demand to 864.2 tonnes.
One positive growth area was central bank purchases. In Q4 2013, global gold investments by bankers topped 145 tonnes, second only to the peak achieved toward the tail end of the credit crisis in Q2 2009.
Other precious metals like silver (NYSEARCA:SLV), palladium (NYSEARCA:PALL), and platinum (NYSEARCA:PPLT) have sold off too. We've done a lot of relative performance analysis on this particular trend and when areas within the metals sector that previous led start to lag, it's a clear warning sign.This is extremely problematic for one key industry sector: Mining stocks.
Decelerating metal prices when the cost of mining is increasing is a bad combination.
On Feb. 14, in our Weekly ETF Pick update to subscribers we wrote:
"Despite a modestly rising stock market, the Market Vectors Gold Miners (NYSEARCA:GDX) has lagged both the broader U.S. stock market along with the SPDR Gold Shares (GLD) by a very significant margin. The current downtrend for mining stocks is still in place. Furthermore, 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. Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) at current levels."
Our DUST trade has spiked +29.6% since we recommended it on 2/14. Furthermore, our GDX put options alert has already generated a +95% gain.
The ETF Profit Strategy Newsletter uses technicals, fundamentals, and common sense to pinpoint high probability ETF trades. The research includes detailed analysis of ETFs in major asset classes like emerging market stocks, commodities, and Treasuries.