Gold: Avoid The Trap

Contrary to what most investors and gold buyers believe, the rally we've seen in Gold (GLD)($GOLD) in 2016 is just a counter-trend rally within a multi-year downtrend. Gold is only a few months removed from 6-year lows, and we haven't even truly seen panic and capitulation normally associated with a long-term bottom. Simply put, gold was due for a "bounce" or a "breather" before it can continue its decline. Don't get too excited!

Gold is in the midst of a major long-term bear market, ultimately headed to what I predicted in 2011: $700/oz.

Everyone has already seen the massive collapse which cut gold prices by nearly half, from the September 2011 high above $1900 to approximately $1050 by December 2015. Yet though gold has been performing very well so far in 2016 (already above $1250), it is inevitably doomed to resume the downtrend. My research strongly points to a further decline, including sharp drops and even price crashes as the "Gold Bubble" unwinds.

Though gold is, in our opinion, on its way to $700, it could not do so all at once. Trends and cycles do not exist in straight lines, and gold (like all other bear or bull markets) moves in fits and starts, switching on and off between sharp declines and counter-trend rallies. What matters most, however, is the long-term trend. And though gold bulls are convinced the worst for gold is now behind us, it is exactly this gold bounce or "false recovery" that tricks them into jumping back in right before the next plunge.

Gold could either reverse back to the downside right now or could continue to recover higher, but why buy gold when the upside is limited? If the bounce continues, gold has major resistance at $1300, $1400, $1550, $1600, and $1800; plus it is very unlikely that gold could even break above $1600 for many years to come.

Even if gold does continue higher, there are much better alternatives. Though many would like Gold to be considered a Currency, it has been trading like a Commodity. If commodities continue to recover from their major bear market, you'd be better off investing in Energy (USO)(UCO)(XLE)(UNG), Industrial Metals (AA)(X)(CLF), Coffee, Sugar, and even Platinum. The stock market doesn't look like a screaming buy, but even a simple Index Fund (SPY) could outperform Gold (GLD) going forward.

If you missed the bounce, move on.
This is not a new bull market, just a trap.
Gold is a lose-lose situation and a broken trend.
Don't double down, don't fall for it again, don't be a sucker.

Includes: GLD, GDX, GDXJ, ABX, NEM, GOLD, GG, USO, UCO, XLE, UNG, AA, X, CLF, JO, CAFE, SGG, SPY, DIA, QQQ, UUP

How To Predict The Next Recession - (Update: Uh-Oh)

Based on what I said almost 2 years ago, are we now in a Recession?

This doesn't mean a Recession is a MUST under these circumstances, but that a Recession is POSSIBLE and perhaps LIKELY.

Also, even in the case of a Recession, it is likely to be mild-to-moderate rather than severe.

Still...this doesn't look good!

How To Predict The Next Recession

Originally published: July 22, 2014
http://seekingalpha.com/article/2330345-how-to-predict-the-next-recession

Summary

Markets continue higher despite a multitude of huge risks & warning signs.

Historically, we are due for a 10%+ correction or even a recession.

However, we will likely not see a recession unless 6 key indicators are triggered.

How To Predict The Next Recession

The stock market's rise and global economic growth will continue as long as 6 key indicators are not triggered.

Despite a long list of major risks to the global economy, the trend for the stock market is still UP until proven otherwise. At this stage it is absolutely critical to be cautious and watch for signs of a market correction or peak, but it is our view that a recession won't take hold until 6 key indicators are triggered.

The stock market (NYSEARCA:SPY) has continued higher in the face of economic uncertainty, global deflationary threats, an emerging market slowdown, a European recession, Middle East upheaval, increasing Russian aggression, political stalemates, and a never-ending supply of doubters. However, even with the multitude of reasons to question the viability of the economic recovery, the market rally goes uninterrupted - without a 10% correction in over two years!

Though many are anticipating the inevitable correction, the market's rise may persist regardless of the underlying risks. The market's job, after-all, is to prove most people wrong; and if that is the case, it is only when the majority of bears give up that the market will "unexpectedly" fall.

While even I anticipate a large correction and even a recession over the next 1-2 years, we can continue investing so long as the upside momentum is intact. There are a few great investment opportunities right now and a multitude of incredible shorting opportunities coming within the next months. Until our 6 key indicators are triggered, a recession is not yet confirmed.

6 Signs of Impending Recession

1) Copper under $3.

As we've mentioned a number of times over the past few years, copper is a major indicator of the health of the global economy.

Why do we think copper is so important? Firstly because copper is a major commodity used heavily in many industrial settings and signals economic growth or contraction. Secondly, copper and the stock market have moved in direction so closely that their wide divergence since 2011 is a huge puzzle and may be a huge hint.

Since copper is so strongly tied to manufacturing and economic growth, falling copper prices are an early hint as to the future direction of the stock market. In fact, falling copper prices were an early warning before the May 2010 correction and the 2011 crisis and slowdown. Now, as seen above, copper prices are struggling to stay above $3 and even broke below $3 for a very short time earlier this year. If copper prices fall below $3 again, a major stock market correction or even global recession could be near.

2) Oil under $100.

Similar to copper, the price of oil also signals the health of the economy as well as the inflationary situation. As seen below, crude oil has not made a new high since early 2011. We actually predicted in 2011 that oil prices would not break out to new highs for at least a few years, and worse - that the falling oil prices were signaling a broader global economic slowdown in Europe, China, and emerging markets. Slower growth and weaker inflationary forces lead to lower oil prices, and oil found strong resistance at $110/barrel. Stuck in a range between ~$75-110, oil is at a critical turning point - it must choose between a breakout above $110 toward new highs or a breakdown below $75 toward the decade lows. However, since $100 seems to be a very important level where a lot of the price action has gravitated to, we view the $100 level as critical support. If prices fall below $100, and especially $90-95, the economic recovery could be in question as deflationary (and recessionary) forces take hold.

3) Apple (NASDAQ:AAPL) can't sustain new all-time high.

I am beyond shocked that Apple has made such a huge comeback after falling by 40% from its 2012 high. Our view is that Apple will never be as dominant and enormously exciting as it was in the past; we believe that Apple's best days are behind us. However, after cleaning up its blunders and attempting to establish investor enthusiasm via an upcoming product pipeline, a dividend, and a stock split, Apple has managed to make it back to all-time highs. It is at these levels where the truth about Apple's future and its effect on the overall stock market may emerge.

If you agree that the best, most exciting, and most innovative days for Apple are mostly behind us, AAPL is likely a poor investment choice. At this point in its business growth cycle, most of Apple's future success has been factored into the stock price and Apple is much more likely to disappoint, miss earnings estimates, or fail to live up to expectations.Going forward, it is not a stretch to predict that Apple may undergo a decade of stagnancy and loss of market share as Microsoft (NASDAQ:MSFT) experienced in the decade following the Dot-Com technology bubble. Poor management decisions, angry customers, and growing competition are just a few potential outcomes that generally follow one of the most epic success stories of the past century.

But Apple's stock price affects more than just Apple. It is the #1 largest company in the US by market cap, at over $500B; it has a huge weighting in the Nasdaq 100 and S&P 500; and it is highly-owned by both individual investors and large funds and institutions. A drop in AAPL therefore has much broader implications for the overall market - if AAPL suffers, many investors and funds could suffer as well and the stock market indices could be significantly impacted. As Apple now stands at all-time highs, now acting as major resistance, the continuation of the rise in the stock price is crucial for the performance of the overall market. If AAPL can't sustain new highs and continue higher, the entire market rally may be in danger.

4) Junk Bonds (NYSEARCA:JNK) falling.

The last place you want to be invested during a recession is Junk Bonds. So long as the economy is improving and borrowing remains cheap, even the weakest companies can survive and pay off their debts. It is no surprise, then, that one of the hottest investment themes since the end of the recession in 2009 (and a big hedge fund favorite) has been "junk" bonds and distressed debt. They pay higher interest to investors than risk-free US government bonds due to their much higher risk (though the junk bonds' ~5% yields are now near record lows due to such massive demand).

However, there is a reason why they call them "junk" bonds - they are bonds of some of the lowest-rated and financially-weakest companies. They were great investments coming out of the recession since the financial and economic situation was so terrible at the lows. But as the rally has continued, and as we approach an inevitable correction or recession, the major risks in junk bonds is magnified.

What happens when an economic contraction, financial hardship, or rising interest rates materialize? The companies which will likely suffer the most are those with the weakest financials. There is a reason why investors have so much faith in "safe" and financially-strong companies: They are much less likely to fall apart due to debt burdens or liquidity concerns. That is not the case with junk bonds, whose companies are some of the least-prepared to deal with a slowdown. Any financial shock can easily undermine the entire company's solvency. If a correction or recession ensues, junk bonds can plummet or crash. These companies may not be able to pay their debts, and many of these junk bond issuances can become worthless.

Yet junk bonds are not only important in and of themselves. Their performance also tends to signal the direction of the overall stock market:

In the above comparison of junk bonds [black] vs. the Dow Jones Industrials Average ($DJI) [blue], it is very clear that the rally in junk bonds has accompanied the rise in the stock market. Furthermore, it is highly noticeable that the stock market corrections since the 2009 bottom have also coincided with corrections in the junk bond market. The May 2010 BP Oil Spill, the 2011 financial crisis and European recession, and the following smaller market pullbacks have all seen corrections in junk bonds as well; sometimes junk bonds even lead to the downside and give an early warning indicator of the upcoming stock market drop.

To make matters worse, since mid-2013 junk bonds have severely lagged the stock market and have formed a large divergence in performance. The stock market has continued sharply higher but junk bonds are weakening. Moreover,while the stock market is still at all-time highs, junk bonds appear to be rolling over. If junk bonds continue their slide, there is a very high probability that the stock market will follow. And if junk bonds see a severe correction or crash, it is highly likely that a number of large financial institutions could be in danger or even insolvent.

5) M2 Money Supply shrinking.

The money supply is one of the key indicators of our growing or shrinking monetary base - a clear picture of the effect of monetary policy, money printing, and the devaluation of currency.

Paying attention to the money supply (published by the central bank) is highly important, since it could signal underlying changes in inflationary outcomes.

Monitoring changes in the money supply is very important due to its effects on price level, inflation, and exchange rates. The "Quantity Theory of Money" suggests a strong, direct relationship between the growth in money supply and long-term inflation.

In fact, while the US has undertaken a very loose monetary policy with low interest rates, the M2 monetary base has grown tremendously. Note the extraordinary growth in M2 since 1980 and especially over the past 5 years.

So long as money supply continues to grow, the Fed's easy monetary policies continue to support increasing asset (and stock) prices in an attempt to create the desired inflation. But there is a limit to how long such low interest rates and money printing can continue - political backlash, major financial risks, and the growing ineffectiveness of these policies stand as powerful opposition to this trend.

Since the money supply is (theoretically) highly correlated to inflationary pressures, any slowdown or decrease in money supply could be an early indicator of an upcoming economic slowdown or recession.

Just take a look at how the monetary base has grown by 400% since the 2008 recession (mostly due to Quantitative Easing [QE] and low interest rates):

It is clear that the huge increases in money supply have greatly supported the rise in the stock market. However, we may be approaching a tightening cycle that results in a shrinking monetary base. If that is the case, an economic slowdown or stock market correction may be upon us as deflationary pressures build. But first we need a confirmation - if the Monetary Base or M2 Supply shrinks consecutively for a 2-4 week period, a recession could be weeks or months away.

6) Dow Jones Industrials Average under 17,000.

It is crucial that the stock market (Dow Industrials) stays above 17,000 if the rally is to continue. Yes, it is going to be hard to remain at elevated levels, especially in the case of a 10%+ correction. However, the 17,000 level was a major milestone and new all-time high. We can therefore draw our "line in the sand" at 17k and make that our critical support level. 17,000 may not be the EXACT support level (it could very well be 16,800 or another close number), but by focusing on a defined level - and especially an easy to monitor round number - we can greatly improve our risk management. To put it simply: if the market falls below 17,000 we turn very cautious, but if it stays above 17,000 we are comfortable investing with the trend.

As you can see above, the stock market has seen huge ups and downs since the mid-1990s. Clearly visible are the 1999-2000 Dot-Com technology bubble peak, the 2007 housing peak and ensuing 2008 recession, and now - the 2014 all-time highs. We have broken above the top rising trendline, but we must hold these levels in order to ensure stability. It is not unreasonable to expect some sort of sideways movement, correction, or even crash at some point within the next few years.

Though we have only recently broken above 17,000 on the Dow Industrials, it is now a very important support level. As a very easy to track, logical, and psychological support level, 17k is our key indicator of future market direction.If the market stays above 17,000 we can continue to believe in the upward trend; but if the market drops below 17,000 we turn very cautious.

Conclusion

The second quarter of 2014 was largely a continuation of the same themes and concerns of the past few years: The stock market rising in the face of so many underlying risks, and a lot of investors and market participants expecting a 10%+ correction. Market jitters have escalated this year over the perceived overvaluation of momentum technology and biotech stocks, as well as the weakening performance of small-cap stocks (represented by the Russell 2000 index).

So far, the stock market has consistently overcome a number of scary moments and potential de-railers of the economic recovery. And though the risks of a major correction are growing every single day, the Fed is still supporting markets, the employment situation continues to improve, and China's economy looks much better than it did a year ago (though these may reverse at any moment). The economy is on the verge of a sustainable, self-feeding recovery; but if it doesn't catch hold soon, a new recession is not unlikely. Recession doesn't mean a major market crash, but falling stock prices are probable. However, until we see confirmation of a slowdown or peak, we can follow the uptrend and just keep our eyes open for the clues.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. 

Gold: When Will It Crash Again?

Originally published: October 28, 2013

http://seekingalpha.com/article/1778782-gold-when-will-it-crash-again

Gold is still going to $700, and it's not a question of IF, but WHEN it is going to crash again.

Why? Gold was in a bubble from 1999 until September 2011, rising from $250 an ounce to over $1900. The fundamental reasons all supported gold's rise, and the terrible economic situation and steep stock market drops led many investors and individuals to look to gold as the only "safe" and "reliable" solution. But just because gold is a tangible and historically-valuable asset doesn't mean that gold's soaring prices were justified. Yes, gold will always be worth something and will always have value, but who says that it should be $2000 and not $500? In reality, and as a rule of investing, when so many people crowd into one stock or investment, and prices rise to extreme levels, it is usually worth avoiding. Many times, as we've learned all too well in the case of technology stocks (Dot-Com Bubble) and housing (Housing Bubble), the reasons to buy make sense - but actually doing so may be foolish.

Gold has already proven to be extremely ineffective as a "safe haven."

Aside from all of the characteristics of a bubble which gold displayed leading up to the September 2011 peak (read my book), the huge volatility and severe drops we have seen in gold prices since then should be enough warning to investors. Down nearly 40% from over $1900 to $1200, such a massive price decline is proof in and of itself that gold is by no means a "safe" investment. Nothing that drops that much is safe, and the reliance on gold as "safe" by so many investors was actually one of the biggest reasons that gold was in a bubble.

$2000 gold will not be reached for years to come, if ever.

We have already seen the best days for gold; could the enthusiasm and extremely optimistic investor behavior we saw in 2010 and 2011 really be matched again? Now that prices have dropped so dramatically, hasn't gold proven itself a poor investment choice? Yes, you can buy gold on the dips and make some money as it bounces; but if we've seen the best already, why even buy gold if it most likely won't break above $2000? If anything, look for better opportunities elsewhere.

HOW I PREDICTED THE BUBBLE, and why it may get much worse.

The charts below represent the best visual example of why gold has much downside left. Comparing gold's run since the early 1970s, and especially the parabolic rise since 1999, to the general anatomy of a bubble, we can clearly see a number of similarities. Most importantly, the unfinished gold chart still has to play out; and according to the way a typical bubble collapses, gold has not even entered the sharpest phase of decline yet. For now, gold is just a "bull trap" - tricking many investors and gold bugs that gold is stabilizing for the long term, and that the worst is behind us. I think they're very wrong.

See the MAJOR similarities?

Chart and phases based on Jean-Paul Rodrigue

Canadianfinanceblog.com

Wikipedia.org - Jean-Paul_Rodrigue

WHY GOLD BOUNCED AT $1200.

After a long period of uncertainty about gold prices between September 2011 and April 2013, the market finally made a decision as gold crashed from $1600 to $1200 in just over two months. Gold prices had been stuck in a sideways trend, as they bounced between $1500 and $1800. Then, in October 2012, gold failed for the third time at $1800; I knew it was going down from there (SEE: Gold Fails 3 Times & FOX Business Gold to $700).

The sharp drop from $1800 to $1200, with a very strong breakdown through critical support levels ($1500-1550), signals the future direction for gold: DOWN.

But gold is not going to just collapse to $700 overnight. It takes time, with ups and downs along the way. Therefore, I predicted in 2011 that gold's collapse would pause at $1200 and $1000. Judging by previous key levels in late-2009 and mid-2010, I noticed $1200 as a high-potential support zone.

In late June 2013, the timing for my prediction couldn't be any more perfect. Using the chart below, I predicted that gold would likely bounce at the $1200 support nearby.

In my TV appearances (CNBC, Yahoo Finance, BNN) at the end of June, I predicted the EXACT bottom in gold prices. I was expecting strong support at $1200, and prices bottomed on the exact day I was on TV. (Click on images to watch)

Look at what happened on June 27th as I appeared on CNBC:

As CNBC had me on at 1-1:30pm, gold prices plummeted from $1225 to $1200 in less than an hour. Even better, I predicted that day that gold would bounce for "weeks or months" - and that exactly happened as gold bounced from $1200 that day to over $1400 by the end of August. Call it good research, excellent timing, and definitely some luck.

Since June 27th, gold has been in a "bounce." Notice how perfectly gold bounced off $1200:

Why did gold bounce?

1) The drop in gold was too fast and too sharp to continue without a pause.

Firstly, after a very devastating drop from $1800 to $1200, gold was due for a temporary recovery or "breather." Gold is not just going to crash to $700 without a few pauses, called "counter-trend movements." This bounce is just one of those moves.

2) Cost of mining/production is around $1200 (for now).

Secondly, $1200 is considered to be the cost of mining gold at this time. Though costs were only around $600 a few years ago, they have risen dramatically. And since the break-even cost of mining gold is $1200, gold bounced at that level because (for now) it would be unprofitable for mining companies if gold fell below the actual cost. However, as profitability in the gold mining sector continues to decline, competition will be greatly diminished - which will then lead to lower costs of mining. As costs decrease, the price of gold will also be able to fall further. On the other hand, gold could also just crash below $1200 before actual costs do.

3) China and emerging markets are bouncing or recovering here, so demand is more stable.

Thirdly, gold's bounce was signaled by the bounce in China (NYSEARCA:FXI) and emerging markets (NYSEARCA:EEM) as well as the bottoming in the US stock market in late June 2013. Since a large part of gold's rise in the past few years was fueled by Asian demand and emerging market growth, the recovery in those economies and stock markets helped gold find support. So long as China can continue to recover, gold could benefit. However, the recovery in both China and gold are likely not sustainable. (See: Large Gains Ahead In Cyclical Commodity Stocks, Depending On China Bounce)

4) QE still not over.

Though Quantitative Easing (QE) will eventually be terminated, its continuation further supports gold for the time being. We have already seen tremendous backlash against money-printing and government intervention, not to mention the enormous debt that continues to grow. That said, the winds of change are blowing, and gold's days are limited. Once QE ends or gold investors realize that monetary policy no longer helps support gold prices, a sharp drop is definitely possible.

WHY GOLD WILL FAIL AGAIN.

Gold's rise since $1200 is just a "bounce" and not a full "recovery." If that is true, it means that gold will not see new highs above $2000 for years, if ever! We expect gold's bounce to end in the $1500-1700 range before starting the next leg down, or even crash. $1800 is possible, but unlikely; and $2000 is almost certainly impossible. Even if you believe gold will continue rising, you're much better off investing in other commodities (steel, aluminum, platinum, natural gas) and select stocks - which will outperform. Investors should avoid gold for a number of reasons.

1) The best is already behind us.

With the parabolic price rise, extreme expectations, over-speculation, and massive media exposure, can we really say gold has even better days ahead than what it already saw leading up to the September 2011 peak? The days of fanatical investor euphoria and excessive reliance on gold are behind us. We've already seen all of the characteristics of a bubble (SEE: Chapter 3, "Signs of a Bubble," Gold Bubble). Nearly everyone who will invest in gold has already done so. Some gold investors got out in time, some learned the hard way, and the rest are just hoping that new all-time highs are ahead.

2) Reality setting in; gold not a safe haven!

Gold has proven itself NOT a safe haven. One of the main reasons for gold's rise was its public image as a "safe" investment, especially in times of recession and stock market volatility all-too-common since 2001. But gold's nearly 40 percent drop since 2011 has proven that gold is by no means "safe." Many investors are finally realizing that their over-reliance on gold has been misled and financially dangerous.

Gold has failed to perform even in times of turmoil, precisely when it was expected to rise (during the stock market declines of 2012, European economic crisis, Greece & Cyprus banking crises, emerging market slowdowns, Middle East upheavals, political brinksmanship, etc.). Gold is ineffective as a safe haven. Slowly but surely investors are starting to accept the fact that gold has been an "illusion of safety in an uncertain world." As more gold bugs snap out of their delusion, selling will certainly accelerate.

3) Gold in lose-lose situation.

Gold will fall regardless of the economic situation. On one hand, if the stock market continues higher and the economy improves, gold will fall because there will be less need for the "safe haven" and many investors will sell their gold in order to chase performance by buying stocks and other asset classes. On the other hand, if the stock market falls and the economy deteriorates, gold will fall due to the shrinking liquidity, falling commodity prices, and increasing correlations during deflationary periods (just look at gold's 30%+ decline during the deflationary recession of 2008).

In other words, gold prices will drop in either scenario: If you believe in the global economic recovery, you don't need gold; and if you believe in a renewed global recession, gold won't save you! Jeff Macke is right when he says gold is "a hedge against capital gains."

4) Debt ceiling & end to "easy money."

Gold's rise has been very strongly correlated to the rising debt limit and increase in money supply. The recent raising of the debt ceiling in October 2013 and prolonging of the debt debate helps gold for now. 

Gold's enormous rise was driven by the unprecedented increase in "easy money" - seen clearly by the comparison of the soaring M2 money supply and gold prices:

However, the trend has been broken over the past year (as gold fell sharply regardless of the high debt ceiling and increasing money supply), and the unsustainable debt levels are very close to a peak.

We're already seeing major changes underway in response to the dangerous and fiscally irresponsible actions taken by governments and central banks around the world. While their actions to stimulate the economy could end up saving the global financial system and supporting the recovery, time is running out. Most people don't realize that reaching the debt ceiling, increasing taxes, sequesters, and government shutdown are actually NOT good for gold because they all point to:

Less spending, less money printing, less QE = Less money in the system = Deflationary pressures = Stronger US Dollar = Lower gold prices.

Pressure for more responsible policy and behavior has radically increased over the past two years. Many politicians and economists, especially conservatives, have grown extremely dissatisfied with the growing risks of easy money and rapidly growing debt. We've already seen fighting over additional QE, the debt ceiling, and taxes - and the debate is not over.

Over the next year, political backlash and financial responsibility will likely result in a refusal of taking on additional debt or continuing QE. There is simply a limit to how high debt levels can soar; eventually they must be controlled - and that is a bad outcome for gold.

5) Long-term trend is broken.

I warned on a number of occasions that gold's long-term bull market was over. Aside from the facts that gold was in a bubble and that the fundamental reasons no longer justified gold's price, I pointed to severe warnings based on breakdowns in gold's price action and charts - known as technicals (SEE:Gold's Technical Picture Is Broken; Collapse Coming & Gold Fails 3 Times). Technical analysis is my expertise (hence "Chart" Prophet), so I am always on the lookout for where prices are headed next. Using technical analysis, I can spot trends, predict critical price levels, observe supply/demand factors, mitigate any risk, improve entry/exit for my trades, and understand what investors are thinking with nothing but charts (of course, I support my arguments with much more than just the technicals).

With gold breaking below the long-term trend, which started in late 2008, and then sharply falling through the critical support level of $1500-1550, the downtrend was confirmed. It was no longer a question whether or not gold prices were going to fall; a collapse was imminent.

Even worse, gold has failed in multiple ways, which almost guarantees that it still has much more room to fall. First, the parabolic rise from $250 in 1999 to over $1900 in 2011 was completely unsustainable. Second, the long-term trend from late 2008 to early 2012 was broken (see above). Third, the critical $1500-1550 support level was sharply broken in April 2013 leading to a very sharp drop to $1200. Fourth, gold violated key moving averages, which supported it on the way up, and even saw the infamous "Death Cross."

I pointed out the serious moving average violation in June 2012:

Gold has also broken below very significant moving averages - the 150, 200, and 300 Day Moving Averages. Usually, so long as price is above the moving averages, the momentum is positive and the trend is intact. But with a drop below the moving averages, prices have lost their support and now have room to fall as the trend is broken. Even worse, the moving averages above - which once served as support - are now acting as strong overhead resistance. With the 50-day MA crossing below the 200-day MA and the 150-day MA crossing below the 200-day MA, we now also have a confirmed "Death Cross" in moving averages, which bodes very poorly for gold.

Source: Gold's Technical Picture Is Broken; Collapse Coming

The first "Death Cross" and the first break below the 300-day moving average were a warning. Gold prices recovered temporarily from June 2012 until October 2012, when they failed again at $1800. Only in February 2013 did the second "Death Cross" and fall below the 300-day moving average take place; but that was definitely a sign of extreme danger, as gold prices have never looked back since.

6) Major overhead resistance.

Perhaps the most concerning aspect for gold going forward is the massive resistance now overhead. One of the main rules of technical analysis is that "Previous resistance becomes support" and "Previous support becomes resistance." What that means, is that when the price breaks above a resistance level, that level becomes support; and when the price drops below a support level, that level now becomes an area of resistance.

In the case of gold, the sharp drops below multiple supports signaled that those previous strong support levels are now strong resistance levels, which act as a barrier against rising prices. Hence, now we understand why gold's bounce from $1200 paused at around $1400 in late August 2013 ($1400 was resistance in late 2010, support in early 2011, support again in April and May 2013, and then became resistance in June 2013 when prices fell below it). Furthermore, there are still MAJOR resistance levels above at the previous levels and key moving averages, which acted as support before gold fell to $1200 (see previous two charts).

Gold could definitely continue its bounce, and will likely break above a few of these resistance levels. However, there are so many potential resistance zones/levels between $1400 and $2000 that it is almost a certainty that gold will fail again and continue its decline to $700.

7) Momentum to the downside, backed by heavy selling.

Though short-term momentum for gold is to the upside, it is absolutely clear that long-term momentum is to the downside. Aside from all the points above which signal a continued struggle for gold, things could still get much worse. For example, investors have still not fully accepted that gold isn't a safe haven; monetary and fiscal policy still haven't become restrictive, which would limit gold's firepower; and we haven't seen real capitulation by gold investors yet. There was enormous selling pressure as gold dropped, but we haven't even seen the real panic yet. Gold is bouncing, but don't get too used to it.

8) Bubbles fall much further, due to panic.

Gold has a lot more room to fall because the bubble is yet to fully deflate. Even if its intrinsic value is higher, gold is likely to fall below its long-term average because that is the nature of asset bubbles as they collapse:

The existence of a speculative bubble in gold makes the upcoming price collapse much more dangerous. Since the implosion of a bubble tends to drag prices down even below long-term averages, as panicked investors overreact to the downside, we can forecast prices to drop to levels near gold's long-term mean ($500 to $700) and below…The most important thing to remember is: once the bubble pops, the trend is down.

Source: Gold Bubble, page 79.

My long-term target for gold is $700. I expected the bounce at $1200, but consider it just a "sucker's rally":

I think we have absolutely confirmed an all-time peak in gold which will likely never be reached again. Therefore, though gold may find support at $1200 or $1000 (a big psychological number), it will ultimately fail again and fall to $700 or below. The bounce off of support could be sharp and could last months or even longer, but it will just be a sucker's rally to invigorate the gold bulls to load up again right before the next devastating drop.

Sources: wealthmanagement.com tarnished gold, CNBC, & notes to gold-no-longer-safe-haven

We haven't even seen the bubble fully play out. We are either approaching the "Return to 'normal'" phase or in the midst of the "Fear" phase, but definitely not yet in "Capitulation" or "Despair."

CONCLUSION

The ultimate direction of gold prices is towards the beginning of where the bubble began at $250 in 1999. Our target is $700, but it won't happen overnight; we will undoubtedly see gold find strong support a few times on the way down. Either way, however, you're fighting a losing trend. Now that the bubble has officially popped, gold is a broken trade. Why buy gold when it is clear that the best is behind us and when many negative catalysts are yet to play out? Gold prices will almost certainly bounce, but why chase a losing investment theme when you can, instead, look for new and better opportunities?

In June 2012, I recommended that investors play the gold bubble as follows:

Source: Brad Zigler, wealthmanagement.com / Rep Magazine

A year later, Brad Zigler followed up with the results of those gold shorting strategies:

Source: Rep Magazine - Tarnished Gold

It turned out that every single one of my recommendations was enormously profitable for those who paid attention. Not only did gold (NYSEARCA:GLD) and gold miners (NYSEARCA:GDX) plummet, but the pair trades I recommended - buying natural gas (NYSEARCA:UNG), platinum (NYSEARCA:PPLT), diamonds (NYSE:ZLC), and housing (NYSEARCA:XHB) - all greatly outperformed.

What should you do now?

First and foremost, forget about gold as an investment. Second, look elsewhere for much better investment opportunities (SEE: Large Gains Ahead In Cyclical Commodity Stocks, Depending On China Bounce). Finally, let the gold bounce play out and prepare to short it right before it crashes again.

Forget Gold, Buy Diamonds

Originally published: December 1, 2010
http://seekingalpha.com/article/239445-forget-gold-buy-diamonds

As investors, speculators, governments, and funds have piled into gold and other precious metals, they seem to have forgotten about the most valuable asset in the world – the diamond. Symbolizing wealth, quality, and love for centuries, the diamond shares many similarities to gold. Yet, while gold prices have surged nearly 500 percent in 10 years, the prices of diamonds are nearly flat. And though gold offers better use as a store of value and currency hedge, diamonds may begin to catch up as global demand increases and the gold/diamond ratio returns to its historical average.

I am not arguing with the underlying reasons that make gold attractive. Gold’s inherent value is understandable. As I mentioned in a previous article (“Gold Bubble: Final Warning?”), the rapid price increase in gold over the past few years is due to mounting fears over currency, poor investment alternatives, and the lack of stability in just about anything else.

What I am at odds with, however, is the justification of gold’s current price. Sure, demand has increased, uncertainty continues, and the threat of financial collapse still lingers over our heads. But at what point have we sacrificed our rational thinking by skyrocketing gold prices just to own a “tangible” asset? Believing that gold will “always retain its value” is a complete misconception – yes, gold will always be valuable; but its actual value relies on how much people are willing to pay for it. Gold would still be valuable at $800 an ounce. But if you buy it at $1400 and the price drops to $800 because people start to realize they have become a little too exuberant, you still lose a lot of money.

But even if you think gold is going higher -

7 Reasons Why Diamonds Are a Good Investment:

1) Diamond/Gold Price Disparity. While gold is up nearly 500 percent in 10 years, has surpassed its all-time record price of around $800 in 1980, and is nearing its inflation-adjusted record price (also in 1980), diamond prices have almost completely flat-lined since the early 80s.

Take a look at the charts:

click to enlarge

As you can see, both gold and diamond prices surged in the early 80s. But while gold prices have increased tremendously since 2000, diamond prices have lagged heavily.

If we compare gold and diamond prices over the past two years, it is even more apparent:

While the gold ETF (NYSEARCA:GLD) is up over 80 percent in the past two years, diamond prices based on the IDEX Diamond Price Index are actually down about 3 percent in the same period. With such a wide disparity in price movements between the two precious assets, it may be time to buy the lagging diamond – unless you think gold no longer listens to history and will stay far ahead of diamonds. History usually wins.

2) Diamonds have Industrial use. Having the highest hardness and heat conductivity of any bulk material, diamonds possess tremendous value for industrial use. Able to polish or cut any material among other uses, diamonds are used in saws, abrasives, construction, computer chip production, lasers, surgical equipment, and, ironically, mining. In fact, 80 percent of mined diamonds are actually used industrially. With such a staggering percentage used as non-jewelry and non-investment, the value of diamonds is even more apparent. It is not just valued based on jewelry demand or diamond speculation; it actually serves important industrial purpose.

3) Necessary for Global Growth. With emerging countries growing rapidly, large infrastructure development is necessary. Roads and highways have to be built, cities must be able to expand, and the required tools must be bought. And since diamonds are utilized in many tools used for stone cutting, highway building, and other technologies, demand for diamonds should increase alongside global growth. Therefore, if emerging economies continue to grow, we can expect diamond usage to grow as well. And if demand grows, prices will likely follow.

4) Developing Nation Wealth Will Increase Demand. Similar to reason #3, as developing nations and emerging economies grow, demand for diamonds will increase. Yet, while reason #3 stresses the industrial usage and demand for diamonds due to global growth, this one focuses on the individuals within these countries.

As emerging countries grow, their population will become wealthier. And as the individuals become wealthier, they will increase demand for diamonds because they will then be able to afford them. If there are many more people demanding diamonds across the globe, you can expect prices to rise.

5) Highest Value per Unit Weight. Diamonds are the most valuable items in the world. A handful of diamonds could make you a multi-millionaire. That said, diamonds are the best “portable emergency disaster fund” available. What I mean by that is that diamonds are the lightest and easiest way to store wealth in case of emergency. Stories have been told about people who had to flee their homes and were able to take their precious gems with them as portable wealth. Not that people will have to evacuate their homes and take all of their belongings with them any time soon; but if people are buying gold because it’s the best store of value in case of emergency, would you rather carry a diamond or a bunch of gold blocks?

6) If the Consumer is Stronger, Demand is Higher. If you believe that the economy is recovering, you could expect consumers to recover as well. Consumer confidence has actually improved recently. If that trend continues, you could expect disposable income and spending to increase as well. And if consumers have more to spend, and actually do spend more, you could expect them to buy more jewelry and more diamonds. Add to that some stronger holiday shopping, and diamond demand increases.

7) Diamonds Have Emotional Value. The value of diamond jewelry given as gifts is greatly increased by the emotional component involved. Engagement rings, anniversary gifts, and Valentine’s Day presents are just a few examples of how the value of an already-valuable item is exponentially increased. As long as men want to make their women happy, diamonds will continue being valuable assets.

3 Ways to Play This:

1) Sell Gold, Buy Diamond Retailers. There is currently no diamond ETF or fund, but a good bet on diamonds is either through diamond miners or diamond retailers. If diamond prices start catching up to gold, or if gold prices begin to drop to more sustainable levels, we can expect companies involved in diamond exploration or retailing to outperform gold and gold miners.

Therefore, a good pair trade would be to Sell Gold through the Gold ETF (GLD) or through the Gold Miners ETF (NYSEARCA:GDX) and to Buy diamond retailers such as Zales (NYSE:ZLC), Blue Nile (NASDAQ:NILE), or Tiffany (NYSE:TIF).

Take a look at the following chart, which compares the relative performances of the Gold ETF (GLD) and Gold Miners ETF (GDX) with the three diamond retailers mentioned above:

2) Sell Gold Miners, Buy Diamond Miners. If diamonds outperform gold, we can expect diamond miners to generally do better than gold miners. Therefore, you could Sell Gold Miners either through the Gold Miners ETF (GDX) or the Junior Gold Miners ETF (NYSEARCA:GDXJ), or by shorting individual mining companies such as Freeport-McMoran (NYSE:FCX), Barrick Gold (NYSE:ABX), or Eldorado Gold (NYSE:EGO). To pair that short sale, you could buy companies that mine diamonds exclusively such as Mountain Province Diamonds (NASDAQ:MDM) and Harry Winston Diamond Corp. (HWD).

Here is how those have performed over the past two years:

3) Sell Gold Miners, Buy “Multi-Purpose” Miners. If you want the best of both worlds, you could Sell the Gold Miners ETF (GDX) or the individual miners (see above) and buy Rio Tinto (NYSE:RIO), which mines a wide array of minerals such as aluminum, copper, gold, silver, and diamonds, or BHP (NYSE:BHP) which has its hand in everything from metals to diamonds to potash to crude oil to coal.

Diamonds have been the most valuable assets for centuries, and have generally moved together with gold. When gold prices surged in the early 80s, diamonds surged to record prices as well. But since 2000, gold prices have increased tremendously while diamond prices have been flat-lining. The price increase in gold is mainly due to increased demand, currency fear, inflation protection, and the need to hold onto a “stable,” “tangible” asset at a time when everything else seems to be in danger. Yet, while the underlying reasons for buying gold are definitely understandable, they don’t necessarily justify the exorbitantly high prices. Moreover, diamonds offer plenty of reasons as to why they should be rising alongside with, if not catching up to, gold: important industrial usage, highest value per unit of weight, necessary for global growth, and high emotional values. If the saying is really true that “a diamond is forever,” the time to buy diamonds may be now.

Disclosure: Short GLD, Long ZLC