Risk/Reward for Gold and Silver is Getting More Attractive, But …

On May 5, I received the following e-mail:

“Hi Simon, With all this volatility, why don’t you want to initiate any trades? For example a low risk trade as shorting XLU and QQQ? Gold, Silver, Platinum, Natural Gas, Oil look to me as a great long candidates. I don’t understand why you are staying on sidelines at the best time you can trade.”

Here is my reply:

“True, purely based on technicals, there are trades out there, but we lack confirmation of our other indicators to confirm such a trade. I have learned that no trade is better than a bad trade, and that a bad trade is more likely when data is conflicting. We didn’t short QQQ, because of the open chart gap. Feel free to go long gold or silver, and we’ll revisit how that trade is going in a few weeks (please see recent PRRs for more details on why we are not buying silver and gold at these prices). Seasonality for XLU is pretty strong the next several weeks, so shorting it is not ideal.

I’m itching to recommend a trade … once the risk profile improves. Hope this helps a bit. Best, Simon”

I haven’t yet sent an e-mail to revisit the gold and silver trade (I don’t like to rub things in, so I won’t), but lets take a moment to revisit gold and silver.

The April 20 Profit Radar Report looked at technicals, gold sentiment and gold seasonality and concluded the following:

Gold Update

Out of the three driving forces we monitor for gold (technicals, sentiment, seasonality), technicals look the most bullish. Sentiment says risk is elevated. Immediate up side potential is limited based on seasonality.

Important chart support is around 1,200 and 1,160 – 1,130. We are looking to buy gold at a price tag of 1,200 or below. We will reassess our buy limit once (and if) we get closer to 1,200.”

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

The same analysis along with long-term gold and silver charts and sentiment data were also published here on May 5: Gold and Silver Bulls Risk Painful Whipsaw

On Monday, gold fell as low as 1,202, which makes buying much more attractive than it was near 1,300. It now becomes an exercise of patience and fine-tuning to peg the right buy limit.

We may see another up/down sequence before a more ideal low (see chart for potential support levels). The biggest knock against buying right now remains gold sentiment.

Silver

The April 13 Profit Radar Report stated that: “A move above 16.40 could result in a move towards 17.8.”

Silver peaked at 18.075, and the April 24 Profit Radar Report warned that: “Seasonality and sentiment suggest danger ahead. We eventually would like to own silver, but the risk/reward ratio doesn’t become attractive until price drops towards 16 and below.”

Silver fell as low as 15.84 and retraced 50% of the prior gains. There are some oversold readings and silver may bounce, but more bullish sentiment will likely have to be worked off before a more lasting low is reached (see chart for potential support levels).

The corresponding ETF charts for gold and silver – SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV) – paint the same picture.

Continued gold and silver analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Smart Money is Buying Silver

Silver ETF prices are near the lowest level since 2010, and there’s been one of the quickest changes in opinion ever.

Back in May, commercial hedgers (considered the ‘smart money) held the biggest short position since 2010.

Prices slipped 10% since, so hedgers weren’t wrong per say, but the decline was shallower than on similar previous occasions.

Now, only six weeks later, commercial hedgers are much more bullish.

As the silver chart shows, silver is at or near long-term support. The same is true for the iShares Silver ETF (NYSEArca: SLV).

Based on sentiment and long-term support, the odds of a silver rally have increased.

But sentiment extremes in itself are not a reason to buy. At least seasonality and technical analysis have to confirm a buy signal. Perhaps sentiment will even become more extreme (silver COT data released tomorrow).

A more detailed silver analysis, including short-term technicals and silver seasonality, is available via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Commercial Traders Abandon Silver at Record Pace

Commercial traders have dropped their silver exposure to the lowest level in years, according to the latest commitment of traders report.

Many commercial traders use futures to hedge existing exposure to silver. The reason many commercial traders have existing exposure is simply because they are ‘in the business’ of mining or buying/selling silver (unfortunately banks also fall into this category).

Many commercial traders could be considered insiders, and thus the ‘smart money.’

Smart investors often follow the smart money.

The chart below shows what the smart is money doing.

It was originally published in the May 25 Profit Radar Report, and plots the price of silver against the net short position of commercial traders (hedgers are generally short to hedge their existing long position).

The smart money is holding a record 62,485 contracts, the highest in years.

The dashed red lines show what effect similar short exposure had on silver prices in the past. It wasn’t good.

The last time silver was able to shrug off the same degree of short bets was early 2011, when the silver bull market was alive and well.

If silver can rally despite this extreme, it may be an indication that the bear market is over.

 

However, seasonality suggests lower prices (full silver seasonaliy chart is available to Profit Radar Report subscribers).

Sentiment and seasonality are two major driving forces. Technicals is the third. The short-term chart actually looks constructive, and would allow for higher prices.

However, if trade breaks down, sentiment and seasonality suggest (much?) further down side.

Continued analysis of the three major driving forces (technicals, sentiment & seasonality) for silver and other asset classes is available via the Profit Radar Report.

The iShares Silver Trust (NYSEArca: SLV) is the easiest way to gain silver exposure. The ProShares UltraShort Silver ETF (NYSEArca: ZSL) is one way to bet on lower silver prices.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Once Largest ETF in the World Drops Out of Top 10

At one point in history, the SPDR Gold Shares (NYSEArca: GLD) was the world’s largest ETF.

Courtesy of a massive gold bull market and the accompanying hysteria, GLD’s assets mushroomed to $77.5 billion. That was in August 2011.

Back than, the S&P 500 traded around 1,100. Gold traded near 1,900. How the roles have reversed (Gold at 1,100, S&P at 2,050).

The SPDR S&P 500 ETF (NYSEArca: SPY) is now $205 billion strong, while GLD amounts to ‘only’ $27 billion, the 12th largest ETF in the world.

This data may be of some use to contrarians on gold bugs.

In fact, back in December 2013 I used official data from iShares and State Street on the SPDR Gold Shares, iShares Gold Trust (NYSEArca: IAU) and iShares Silver Trust (NYSEArca: SLV) for very insightful sentiment analysis.

The data (tons of gold/silver held, and trading volume) helped me come to the conclusion that gold and silver were still miles away from a major low (view original  SLV analysis or GLD analysis).

Unfortunately iShares does not offer that data anymore (I send an e-mail every month to bug them, but it hasn’t helped).

Other sentiment data and technical analysis triggered a buy signal (sent to subscribers of the Profit Radar Report) for gold in November 2014 at 1,140 (111 for GLD).

We’ve been holding on ever since, but gold needs to surpass strong overhead resistance to give the preferred bullish scenario some teeth.

The fact that GLD has fallen out of favor with investors is a check mark on the bullish side of the ledger.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

10 Hottest ETFs For December

Hot or not? How can you buy ‘hot’ ETFs without ending up with a hot potato? Obviously there’s no foolproof way to eliminate losers before they spoil your portfolio, but here is a list of the 10 hottest ETF screened according to ‘hot potato risk.’

How can you buy a hot ETF without ending up with a hot potato?

Although there’s no foolproof protection (don’t shoot the messenger) against “today it’s hot, tomorrow it’s not” portfolio decisions, there are things that can be done to separate the wheat from the chaff.

Here’s a look at some of the hottest Exchange Traded Products (ETPs; include ETFs and ETNs) around. The list at the bottom of this article shows which ETPs have the potential to remain (or turn) hot throughout December.

VelocityShares Daily Inverse VIX Short-term ETN (XIV)

This is the best performing non-leveraged ETP over the past three years, up 546.23%. XIV is the inverse counterpart of the popular iPath S&P 500 VIX Futures ETN (NYSEArca: VXX).

Unlike VXX, XIV actually benefits from contango at times of low volatility. Over time this benefit of contango averages about 0.25% per day (click here for an explanation of contango).

VIX seasonality is pointing lower for another few weeks, but things may get a bit rocky for the VIX and XIV thereafter. XIV is a quick mover, but buying XIV at times of significant VIX spikes tends to deliver nice returns.

iShares Russell 2000 ETF (IWM)

IWM is by no means a top performer going into December, however, starting in mid-December, small cap stocks often outperform large cap stocks.

A low-risk strategy to profit from this potential small cap outperformance is this pair trade. Buy IWM and short the S&P 500 ETF (SPY).

VelocityShares 3x Inverse Crude Oil ETN (DWTI)

DWTI is the hottest ETP over the past four weeks, up 31.53%. Crude oil prices just sliced to the lowest level since May 2010.

Although trade is stretched to the down side, and – like a rubber band – oil may rally at any given time, the crude oil chart does not yet display the classic signs of a major low.

It appears that new lows are still ahead, but milking DWTI at this stage may be a bit greedy. Hey, but there’s nothing wrong with enjoying the trip to the pump for a change.

ProShares UltraShort Silver (ZSL) – iShares Silver Trust (SLV)

The 2x leveraged short silver ETF (ZSL) is up 32.20% over the past three months, but ZSL has ‘hot potato risk’ written all over it.

Silver futures painted a massive green reversal candle on Monday. Now may be the time to trade in ZSL for the iShares Silver Trust (NYSEArca: SLV).

iShares Nasdaq Biotechnology ETF (IBB)

Biotechnology is the best performing sector year to date, up 31.42%. Investing in biotech is always a bit of a gamble, but the trend for IBB is up as long as support at 300 and 275-280 holds.

Coffee ETFs

A look at coffee prices may explain why your Starbucks venti, half caff, one-pump, skinny, soy latte with extra whipped cream costs more than 5 bugs.

It also explains why two coffee ETPs made it into this year’s list of top 5 hottest non-leveraged ETFs:

  • iPath DJ-UBS Coffee ETN (NYSEArca: JO) +61.34%
  • iPath Pure Beta Coffee ETN (CAFE) +56.84%

Will JO and CAFE continue to caffeinate portfolios or is there risk of a sugar crash? A combination of chart analysis and cycles suggests this low-risk strategy: Buy JO and/or CAFE on a 10% pullback.

‘Big Picture’ ETFs

Drum roll please! Here are the top three ETFs of the past 5 years:

  • ProShares Ultra Consumer Services ETF (NYSEArca: UCC) +493.70%
  • Direxion Daily MidCap Bull 3x ETF (NYSEArca: MIDU) +458.23%
  • ProShares UltraPro S&P 500 ETF (NYSEArca: UPRO) +455.29%

Nine of the top 10 best performing ETFs are leveraged U.S. equity ETFs.

This raises the mother of all ‘hot or not’ questions: Are U.S. stocks a hot potato? Is this massive bull market (almost) over?

Ask ten different analysts and you’ll probably get ten different answers. When analyzing stocks, I find it best to leave my ego at home and simply look at the facts.

Obviously different analysts look at different facts (many of which are just biases). I like to look at the indicator that correctly foretold the 1987, 2000 and 2007 tops. The same indicator continued to point higher from 2009 until today (click here for more details on this indicator I call ‘secret sauce‘).

In a nutshell, the stock market is showing signs of aging, but a major S&P 500 or Dow Jones top appears still months away. There’s still time to hold some potatoes before they get too hot. However, most investors should consider using non-leveraged vehicles like the S&P 500 SPDR (NYSEArca: SPY) and Dow Jones Diamond (NYSEArca: DIA).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

This Line is More Important for Gold Than the 200-day SMA

Back in December you couldn’t get investors to touch gold even with a 10-foot pole. From low to high, gold has rallied 13% since and analysts are starting to up their full-year targets. This could be a costly mistake.

About 50 days ago analysts gave gold a snowball’s chance in hades to move higher.

The December 2013 headlines below show that investors were as bearish about gold as they were bullish about the S&P 500 (NYSEArca: SPY).

Bloomberg: Gold’s drop to lowest since 2010 seen extending next year by Goldman Sachs
Forbes: Gold may be on verge of a waterfall-style decline
Wall Street Journal: Gold is testing last ditch support before it falls further into the abyss
Bloomberg: Gold trades below 1,200 as growth outlook curbs haven demand
Wall Street Journal: Gold’s glimmer gone, mutual funds feel the pinch

Those bearish headlines and other sentiment gauges contributed to this contrarian assessment by the December 29 Profit Radar Report: “Gold sentiment is very bearish (bullish for gold) and prices may bounce here.”

Up until February 11, gold’s rally attempts were feeble, with gains of less than 4% since the December 31 closing low at 1,204.

Gold broke free of its short-term technical shackles on February 12, when the Profit Radar Report noted: “Gold has broken above red trend line resistance (dashed red line), but has been held back so far by silver’s inability to move above 20.64. Odds favor higher gold prices as long as 1,254 holds.”

Silver confirmed gold’s move on February 14 (when it surpassed its prior highat 20.64), which helped gold jump above its 200-day SMA.

However, as the weekly long-term gold chart shows, there’s significant trend line resistance right around 1,335, which has kept a lid on gold’s rally.

The short-term daily gold chart illustrates additional short-term support/resistance levels. It also shows that RSI confirmed the recent rally high, which suggests new highs in the future.

However, any new highs could be short-lived. A thorough analysis of gold money flows – in particular Gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU) – strongly suggests that new lows for gold and silver are still ahead.

The article below reveals the reliable pattern that tends to accompany major gold bottoms. The Missing Tell-Tale Sign of a Lasting Gold Market Low

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Are Gold and Silver Revving Up for Another Leg Down?

Believe it or not, gold is one of the best performing asset classes of 2014, but today’s drop is the biggest this year. Here’s the simplest explanation of today’s drop and why eventual new lows are likely.

Gold hasn’t gone anywhere fast in a few weeks, but is down 20 points today.

According to the financial media, there are various reasons why gold is down:

“Gold falls 2% as dollar climbs on Fed” – Reuters
“Gold lower on stronger U.S. dollar, rebound in stock market” – Forbes
“Gold edges lower as Chinese support fades ahead of holiday” – CNBC
“Gold prices fall on stimulus, demand outlook” Economic Times

Wow, there are many reasons, but no unanimous consent. According to Forbes, gold is down because the S&P 500 and dollar are up. CNBC blames ‘Chinese support,’ whatever that means.

Simple but Effective

The following piece of gold trivia shows that every investor could easily see why gold is down today.

All the information needed is contained in the gold chart below. Can you see why gold is down today?

If you can’t see it, look at the second chart. What a difference just one line makes.

The silver chart paints the same picture, even more compelling.

The Profit Radar Report has been watching the gold and silver trend line for weeks. Initially they acted as a magnet and drew prices higher. Lately, they have acted as resistance and rejected price.

Although I prefer to analyze the purest representation of an asset, it’s noteworthy that the chart for corresponding gold and silver ETFs, the SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV), look similar.

Long-Term Outlook

What about the longer-term outlook for gold and silver?

The December 29 Profit Radar Report featured this longer-term forecast:

Gold prices have steadily declined since November, but we haven’t seen a capitulation sell off yet. Capitulation is generally the last phase of a bear market. It flushes out weak hands. Prices can’t stage a lasting rally as long as weak hands continue to sell every bounce.

Gold sentiment is very bearish (bullish for gold) and prices may bounce here. However, without prior capitulation, any rally is built on a shaky foundation and unlikely to spark a new bull market.

We would like to see a new low near-term resistance is at 1,255 +/-. “

Any gold and silver rally prior to a new multi-year low seems doomed. Nevertheless, the string of higher highs and lower lows has yet to be broken and a close above the highlighted gold and silver trend lines would temporarily extend the current bounce and unlock higher targets.

How low will gold and silver have to go? There is a strong confluence of trend lines (similar to the ones highlighted above) that should act as a magnet for prices and serve as a foundation for a sizeable rally.

Detailed targets for a lasting low are outlined by the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Silver ETF Still Lacks Classic Signs of a Major Low

Precious metals will enter the history books as worst performing sector of 2013. Silver prices are down 60% from their 2011 high. Surprisingly, silver investors seem to be equipped with a cast iron stomach … which may be needed until a bottom is found.

The iShares Silver Trust ETF (NYSEArca: SLV) chart is about as ugly as it gets.

From 2011 to present, silver prices have tumbled some 60%. That’s already more than the S&P 500 (NYSEArca: SPY) lost during the ‘Great Recession.’

The UltraShort Silver ProShares ETF (NYSEArca: ZSL), a leveraged short silver ETF, has doubled since the beginning of the year.

There’s light at the end of the tunnel, but silver investors do not appear to have thrown in the towel yet. Typical markets don’t bottom until the last towel is thrown in, trampled and abandoned.

The chart below plots the price of silver against the tons of silver held by the SLV silver ETF (based on iShares’s data) and SLV trading volume.

Silver investors must have a cast iron stomach. The amount of silver held by SLV seems nearly immune to the bear market.

The 10-day average of SLV trading volume lacks any hint of panic selling.

A sustainable low remains an illusion as long as weak hands continue to hold silver.

Weak hands are ‘on the fence’ investors, unconvinced about silver’s up side, scared of the down side, and on the fence for now. Once the weak hands have capitulated, silver can break free of its bearish shackles.

As subscribers to my Profit Radar Report know, my down side silver target has been below 20 for well over six months.

The down side target is comprised of various support levels, creating a dense support cluster and probably a good buying opportunity (once we get there). Forgive me for keeping the actual target price exclusive to subscribers of the Profit Radar Report.

How about silver’s precious cousin, gold?

A similar analysis of the SPDR Gold Trust gold ETF (NYSEArca: GLD) actually provides more ‘noise’ (in a good way) and texture for a better analysis. The GLD analysis is available here: Tell Tale Sign of a Gold Market Low

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Is this Gold Rally Real or ‘Fool’s Gold?’

A novice wouldn’t be able to distinguish fool’s gold from real gold. Even gold experts have trouble telling the difference. Miners have come up with the acid test to avoid getting fooled.

Most metals tend to bubble or fizzle when they come into contact with acid, precious metals don’t. Placing a small drop of a strong acid, such as nitric acid, onto the metals surface quickly and unmistakable differentiates real gold from fool’s gold.

Is this gold rally the real deal or is it a fool’s gold rally?

The results of this analysis won’t be as conclusive as the acid test for gold (nothing ever is in investing), but there are some worthwhile indicators to consider.

CBOE Gold Volatility Index

The April 28, 2013 Profit Radar Report examined a pattern in the CBOE Gold Volatility Index to ascertain if the April low at 1,321 was here to stay.

The CBOE Gold Volatility Index is basically a VIX for gold as the VIX methodology is applied to options on the SPDR Gold Shares (NYSEArca: GLD).

An update chart of GLD plotted against the Gold VIX is shown below. Major gold lows in 2010 and 2011 occurred against positive gold VIX divergences, where gold prices dropped to a new low, but the Gold VIX didn’t.

Such divergences are nothing new. I’ve used similar divergences between the S&P 500 (SNP: ^GSPC) and the VIX (Chicago Options: ^VIX) to nail major stock market lows in March 2009, October 2011, and June 2012. See S&P500 Forecasting History for more details.

There was no such divergence in April 2013 when gold (NYSEArca: IAU) dropped as low as 1,321. This suggested new lows and the April 23 Profit Radar Report stated that: “A new low would be the best buying opportunity.”

We got that new low on June 28, but it didn’t have all the hallmarks of a lasting bottom. We were long for parts of the rally from the June low, but never committed fully.

Our focus was on the iShares Silver Trust (NYSEArca: SLV) where we just closed out a very nice trade. We went long gold again with Thursday’s move above 1,345 (GLD trigger was 130.15).

The move above 1,345 is bullish, but gold has already reached your initial up side target around 1,365 (see resistance lines in chart below).

If gold can move above resistance here, it is likely to extend its rally and move to our second target. Otherwise watch out.

Gold prices have a huge effect on gold miners (NYSEArca: GDX). One unique valuation metric – which correctly predicted the 2001 and 2008 low for mining stocks – just flashed a rare signal. Read more about the Gold Miner’s Signal here: By One Measure Gold Miners Are as Cheap as Ever.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow him on Twitter @ iSPYETF or sign up for the Free Newsletter.

Has Gold Bottomed?

Gold’s second quarter will enter the history books as one of the biggest declines ever. Until yesterday, gold’s third quarter performance has been boring at best. Monday’s one day pop begs the ‘real rally or bull trap’ question.

Gold is special for many reasons. For example, a single ounce of gold can be stretched into a 5-mile long thread or beaten out into a 300-square foot sheet.

Gold is also non-toxic. In fact, you may find gold metal flakes in exotic foods or unusual Swiss liquor. I still have an old bottle of GoldSchlager schnapps in my bar.
This strong gold flake liquor may help drown the pain of this year’s gold performance, but other than that investors don’t care much about gold’s taste or pliability.
Investors buy gold as protection. What kind of protection? That’s a fair question. I guess unless you were looking to buy protection against making money, gold has been little more than an expensive placebo (ask John Paulson).
                                            
When central banks around the world started to quantitatively ease economies out of the ‘Great Recession,’ gold was considered an inflation hedge.
Quantitative easing (or QE) continues, but gold is trading 30% below its 2011 high.
This line of fundamental reasoning doesn’t make sense, but many investors still base their gold buying/selling decisions on a similar rationale.
Yesterday gold saw the biggest one-day spike of the year. Why? Perhaps you can make sense of this, I can’t.
Abe’s (Shinzo Abe, Japanese Prime Minister) party and its coalition partner won a majority of upper house seats in the weekend vote, boosting his opportunities to stimulate the economy.” – San Francisco Chronicle
Nutshell explanation: More easy money will mean higher gold prices.
If plenty of easy money over the last two years coincided with the steepest gold decline in decades, why would it propel prices higher now?
Has Gold Bottomed?
To answer the question that really counts – has gold bottomed? – I rely on technical analysis.
Technical analysis is not always correct (nothing ever is), but it got us out of gold when it traded around 1,800 and to this day I receive thank you e-mails from subscribers.
(Original August 21 and 24, 2011 subscriber update: “I don’t know how much higher gold will spike but I’m pretty sure it will melt down faster than its melting up. At some point investors will have to sell holdings to pay off debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”)
The chart below plots gold prices against the S&P 500. The resulting chart illustrates two key points:
  1. The S&P 500 and gold have been moving in the opposite direction since late 2011.
  2. The basic technical picture for gold.

Here’s what’s worth noting from a gold technical analysis point of view:
  • The June low occurred against green trend line support.
  • Monday’s bounce hoisted prices above resistance at 1,300.
  • Gold is bouncing against next resistance around 1,335.
After gold’s second quarter meltdown prices had to bounce. Until yesterday, it lacked the escape velocity needed to break above resistance (at 1,300), and still another move above 1,335 is needed to unlock higher price targets.
Since there was no bullish RSI divergence at the June low (not shown on chart), I’ve been hesitant to embrace this rally. In fact, I would prefer a new low.
But the market cares little about what I like. So, as per the July 10 Profit Radar Report, I recommended to take partial long positions in the SPDR Gold Shares (NYSEArca: GLD), or iShares Gold Trust (NYSEArca: IAU), and iShares Silver Trust (NYSEArca: SLV).
Thus far the positions have done well and we’ve locked in some profits already and increased our stop-loss to guarantee a winning trade.
Gold (and silver) will have to move higher to validate employing more capital on the long side.