Göran H., a reader from Sweden, recently sent me a note asking the following…
“When did your system trigger a sell signal on gold stocks? And have you been close of getting a buy signal since 2011?”
With gold’s recent rally from $1,050 to about $1,200, I thought now would be a good time to address this question.
But before I answer, I want to warn you…
If you’re a gold bug who thinks gold can only go up… well, I think you won’t be too happy with what I have to say.
But I tell it like it is. So let me start by telling you a little story…
A few years ago, around 2010-2011, when gold was making its big run up, I called Goldline.com.
At the time, they were running commercials on TV and radio nonstop, telling people they should buy gold coins–often marked up by a huge margin over the actual price of gold (they ended up in a government investigation and settlement).
So when I started talking to one of their salesmen on the phone, I asked the simple and straightforward question: “If I buy gold, when do I ever sell it?”
Their answer was pure comedy. “Gold has never crashed,” the salesperson said. “If gold was to go again from $800 to $200 you would have plenty of warning to sell.”
“Who is going to give me that warning?” I asked. He said (drum roll, please), “We will.”
I wonder if they called all their customers when gold started to crater in 2011.
Please, don’t get me wrong.
I have nothing against buying physical gold as a way to diversify a portfolio and hedge against a possible collapse of our monetary system.
In fact, last night I had a call with my friend and legendary investor Jim Rogers. He told me he thinks that collapse is very possible. (Stay tuned for my upcoming podcast with Jim).
For some people, buying and holding gold bars and coins might make perfect sense. It’s very hard to trust currencies. And central banks can be damaging to say the least.
But holding physical gold as a wealth protection strategy is one thing. Speculating in gold ETFs and gold stocks is something completely different.
If you want to make money from trading gold and gold stocks, it makes no sense to “buy and hold.”
In fact, buying and holding commodity investments may be one of the quickest ways to lose a fortune.
The Dumbest Strategy Ever?
Commodities are famous for their boom-and-bust cycles. It’s really hard to make money if you’re simply buying and holding, instead of trading.
Look what happened with gold stocks after 2011.
In 2011, when gold was trading at an all-time high, I warned many of my clients that just buying gold ETFs with no exit plan in place was a recipe for disaster.
I told my readers, “Is there a lot of swimming naked in gold markets today? You bet.”
Instead of following the trend, most people just used the “buy and hope” strategy.
They bought and hoped gold stocks would continue to move higher—with no exit strategy. And that’s why most people lost a lot of money.
Something similar happened with silver.
When the Federal Reserve started printing money in 2009, silver started moving higher.
For the following two years, silver kept moving higher.
A lot of investors thought the sky was the limit for silver—and that it had to go up.
At the time, one market commentator said, “Folks, silver is going to go to $400.”
And CNBC featured a money manager saying, “Silver could peak at $620 per ounce.”
But in 2011, while everyone was dreaming about making a fortune in silver, the trend
Most people, however, didn’t have a strategy to sell when the trend turned.
People like Donna B., a fifty-five-year-old retiree in Florida. She was so certain that silver would rise that she put 60% of her net worth in it.
When silver started moving lower in 2011, she said…
“I don’t believe the correction will last long. Silver will hit $100 before the end of this year. I have never felt so sure in my life about something.”
Another investor who lost money in silver said, “I don’t understand. Silver is supposed to do very well this year.”
Here’s the cold hard truth: the market doesn’t care about what you, I, or any financial taking head “expert” thinks.
When it moves in one direction, you either get on board on the right side of the trend or you get killed. Guaranteed. That’s life.
Is It Time to Jump Back In?
Do trend followers trade gold? Absolutely. When it is going up, they are long. When it is going down, they are short. They follow the trend.
That brings me to the question asked by Göran, one of my readers from Sweden.
He wants to know how my proprietary system acted in 2011, and what’s it saying today about gold stocks.
Let’s take a look at the chart of GDX, the most popular gold miners ETF. To answer Göran’s question, my system triggered a sell signal in late 2011.
Has it triggered a buy signal yet? No, but it’s very close.
Look, it may be very tempting to get into gold stocks now. After such a big move recently, this could be the beginning of a major bull market.
And when there’s a bull market in mining stocks, you can really make a lot of money.
But, ask yourself…
How many times since 2011 you’ve heard: “Now is the time to jump back into gold stocks.”
I’ll take a guess and say you probably heard that a lot.
Gold bugs are funny.
Ever since the crash in 2011, every time gold jumps a little higher they say: “Ok, now gold is heading back to $2,000.”
But gold has been in a downtrend, interrupted by a few sideway moves, since 2011.
And so have gold stocks.
Until we get a buy signal from my trend following system, I’m staying away from gold stocks.
Better be late than sorry. There have never been truer words to live by.
Courtesy: Michael Covel
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