How to Trade the Next Downturn in the Gold Price

We certainly live in crazy times.

Following their worst yearly start in history, US stocks hit a fresh-all time high last month.

Is it a time to celebrate?

I’m not too sure.

Stocks have started to pull back, and huge uncertainty remains. The combination shouldn’t bode well for Aussie stocks, which tend to track those in the US. Looking forward, Aussie gold stocks could take a decent hit, which would offer a huge buying opportunity in the months ahead.

I’ll explain…

Expect the unexpected

From a medium to long term perspective, gold stocks remain possibly the best investment.

There are plenty of reasons to own them — terrorism, an emerging World War, negative interest rates, looming electronic currencies, terrible fiscal management, and an imminent banking and sovereign debt crisis. I could go on…

Greg Canavan, Editor of Crisis and Opportunity, agrees with my medium to long term view on gold. Having backed the best gold stocks on the ASX, Greg’s made some tidy gains for readers who followed his recommendations.

In the short term, however, Greg — like myself — isn’t convinced that gold is ready to take off.

In his new free report, Greg warns readers about a potential gold correction. Based on his bullish long term outlook, Greg recommends taking advantage of the correction and buying the best gold stocks on the dip. You can read about his recommendations here.


Of course, as the saying goes, there are million ways to make a million bucks. My short term strategy involves sitting on the sideline until:

  1. Gold crashes to US$931 or below; or
  2. Gold proves itself and breaks out into a fresh bull market.

Unfortunately, despite surging to a new high last month, gold failed to impress. Having exceeded the number on an intra-month basis, gold closed below the US$1,360 per ounce major resistance level. You can see it in the monthly chart below, with the main resistance shown in blue.


Source: Resource Speculator
[Click to enlarge]

Because gold didn’t formally break through US$1,360, and the major blue resistance line held, there’s still the risk that it could collapse to US$931 per ounce. That’s shown by the green line. The pink line shows the majority of support dating back to 2011. That needs to break, for my forecast to come about.

I’ve argued multiple fundamental reasons why gold should fall in the months ahead. Another reason is the commitment of traders report (COT). The most recent COT report (dated 26 July) is shown below.

gold COT

[Click to enlarge]

The COT report shows how many traders are long or short the market. In other words, it tells you how many punters believe that gold will move into a bull (long) or bear (short) market. At this particular time, there are more large speculators who are buying gold — and more institutions who are selling gold. The gold shorts are at a near record high.

It’s a major warning…

Based on my experience — no matter how bullish the market is — when the commercials COT report is negative, gold tends to fall. In 2011, when gold was trading at its peak of US$1,920 per ounce, it looked like gold was going to scream higher. But the next thing you knew, gold fell off a cliff quick and hard. A big reason for that was the COT report.

When you least expect it, the commercial short contracts could kick in, and gold could be trading US$300–$400 per ounce lower. For this to happen, the US Fed probably needs to signal that it will raise rates in the months ahead. You can take that however you want. But, it’s another BIG reason why I’m not recommending Resource Speculator readers to buy gold stocks — YET.

Talking strategy

Looking forward, at the very least, you should have a strategy and stick with it. Sure, traders can make a lot of money shorting gold — and gold stocks — and then buying them back near the low. Traders can also make a lot of money buying the best gold stocks during the dips and holding them for medium to long term.

In Greg’s view, the coming correction won’t be as big as I think. He believes the bull market has already started. For this reason, you should buy the best stocks when they fall. If gold falls by more than Greg expects, don’t worry. Greg’s implemented a stop-loss strategy to protect your capital and gains. Plus, if you don’t want to sell them, you should still make a lot of money on them in the medium to long term. It’s a solid strategy. To read more about it, click here.

As for my approach, if gold collapses to US$931 per ounce — or lower — I believe that Resource Speculator readers will make life-changing gains buying the best gold stocks near the low and holding them for the medium to long term. While we wait, I’ve found three stocks that could make you huge profits in the months ahead. To find out more, read your free report here.


Jason Stevenson,
For Markets and Money

Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:

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