Practical Investment Commentary - No Hype

Yup, I’m short on gold.

I still believe that by the end of the year gold will be trading higher than it is today, perhaps significantly so.  But, as I said last week in my post that it’s not looking good for gold, gold has some issues.  Let’s take, as an example, GDXJ, a security I don’t own and don’t pay attention to; it’s a Junior Gold Miners ETF.

The trend is clearly down, but more worrisome is that the break above the 200 Day Moving Average in February didn’t hold, and the attempted break this week didn’t get even close (see the two orange rectangles in the chart).  (Click the chart to enlarge).

I would not be surprised to see a test of the December low, below $28.

Not good.

Here’s a similar chart, but for gold itself:

You can draw the trend lines however you want, but regardless of how you draw them the downtrend remains intact.

A break below the previous lows of just below $1,220, or just below $1,200, will signal that we have significant issues.

So with that background, what’s the plan?

I have liquidated a sizeable portion of my gold portfolio.  I still hold some stocks for long term growth purposes, but I am largely in cash.

I have now deployed some of that cash in two speculations: DUST and JDST.

DUST is the inverse of NUGT.  DUST is a Gold Miners Index 3x Bear Fund, so it’s goal is to go down 3 times as much as the shares go down on a daily basis.  It’s not an investment; it’s a speculation, and because it uses options and other strategies to achieve three times leverage, it’s value degrades over time.

As you can see from the chart, the $24 level is relatively strong support, so I doubt it will fall much from this level.  In December it was twice as high, so if gold drops, DUST as the potential to double, or more, very quickly.

Of course it can also go bust, so be careful.

Want more risk?  Try JDST, which is the same as DUST, but it’s based on an index of junior gold stocks for even greater volatility.

The chart looks the same as DUST, but for added interest I’ve zoomed in with a ten day chart.

Key point: On June 14 the volume was almost 8 million shares (see the orange box), the highest volume ever.

So why, on a down day, was the volume so high?  I can only speculate that the big boys were buying.  Sure enough it bounced up the next day before pulling back on Friday, which is when I bought.

Again, this is a high risk speculation, but it is easy to make the case that a month from now it could be a double, or a triple.  Or not, we shall see.

To re-iterate: I like gold in both the medium and long term, but I also remember last summer where I gave back all of my gains from the first half of the year.  This summer I’m holding cash, and placing some speculative bets on the short side.

If they work, I’ll have lots of cash to deploy in very inexpensive gold miners at the end of the summer, and that’s exactly where I want to be to ride the next wave up.

Stay tuned.  Should be fun.

See you next week.