Is the Selloff in Gold and Silver Overblown?



In case you missed it, the year-end selling in precious metals (GLTR - News) is intensifying. The euphoria of gold investing has turned from blissful glee to worry and in some quarters, even panic. 

The CBOE Gold Volatitity Index (^GVZ) spiked 5.83% today. GVZ measures the market's expectation of 30-day volatility of gold prices by applying the VIX methodology to options on SPDR Gold Shares (GLD - News).

Over the past three months, gold is down more than 7.5% while silver is down by 14%. What's going on?

After GLD made its yearly high in October, it's been all downhill and GLD now trades below both its 50 and 200 DMA, a sign of technical weakness.

Too many investors got caught up in the hype of investing in gold, instead of listening to market prices and paying attention to technicals. This is a rookie mistake, especially when it comes to investing in an asset that has no earnings or dividend yield.

Here's a quick snapshot of famous 2012 gold predictions that once upon a time, looked smart:  

"Gold to Hit $2,000 by Year-End on More Fed Easing: Merrill" - CNBC, 7/11/12

"Gold May Reach $2,000 an Ounce by Yearend, Bank of America Says" - Bloomberg, 9/5/12

"JPM and Goldman See $1,800/oz Gold By Year End" - ZeroHedge, 9/7/12

"Russia's Polymetal Sees Gold above $2,000/oz in 2012" - IB Times, 1/19/12

Instead of making grandiose gold predictions, it's better to let gold's movement and performance to tell us whether to be long, short, or neutral.

Here's what the ETF Profit Strategy Newsletter wrote to subscribers on 12/2:

"GLD ($166.05) now sits right on its 6 month trendline and a break of this trendline is a good sell signal. Similar to the rest of the markets, sentiment remains mixed, but given the technical structure, GLD remains in a precarious position. SLV ($32.36) provides support to the technical setup in GLD as well.  SLV actually made a new short term high last week but then sold off hard again, in a negative divergence between price and momentum."

Since our 12/2 alert, inverse gold ETFs like the Direxion Daily Gold Miners Bear 3x (DUST - News) is ahead by +7.03%, the ProShares UltraShort Gold (GLL - News) is +6.79% and the ProShares UltraShort Silver (ZSL - News) is +23.29%. (thru 12/20 market close)

On 12/16 we followed up with this update:

"The breakdown of the GLD trendline occurred and now it has resumed its selloff.  Price sits near its original trendline breakdown level at $164.13 and continues the sell signal. A price close below the recent lows at $162.5 would be a welcomed sign and also another sell setup. SLV is in a better position as it hit the aggressive sell area at $32 and after a shakeout rally has since fallen into the more conservative sell zone below $31.50."

What about the longer-term picture?

Analyzing gold's relative performance versus other asset classes gives us clues about its strength or weakness. As Table 1 illustrates, gold (IAU - News) is underperforming six out of eight asset class peers year-to-date. Only the total U.S. bond market (AGG - News) and broader commodities (GSG - News) which are highlighted in red, have underperformed gold. 

What about the Fiscal Cliff?

The Jan. 1, 2013 automatic increase in long-term capital gains tax from 15% to 20% impacts stocks (IVV - News), but not gold or silver. The long-term gains for precious metals, like art and other collectibles, are already taxed at a higher rate of 28%. Some of gold's selloff is probably attributable to a re-positioning of assets.

Despite gold's short-term weakness, gold is still in a multi-year bull market and it's still in a position to record its 12th consecutive yearly gain. Nevertheless, we let gold's future market movements dictate our moves - not emotion, and most certainly not analysts' pie-in-the-sky predictions.

The ETF Profit Strategy Newsletter outlines key support/resistance levels for high probability trades in stocks, bonds, metals, and currencies (FXE - News).

Follow us on Twitter @ ETFguide

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