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Are Precious Metals Due for a Rebound?

Ron DeLegge

Gold will post its first consecutive quarterly loss since 2001. And since mid-2011 gold has been a money loser. If you're perplexed by that, keep reading. Even silver - which has been a star performer over the past few years - has followed gold prices lower. Will precious metals rebound?

Mixed Performance

The precious metals market consists of four key metals: gold, silver, platinum, and palladium. Thus far this year, exchange-traded products (ETPs) linked to gold (GLD - News) and silver (SLV - News) have fallen 5.18% and 7.25% respectively. Conversely, platinum (PPLT - News) and palladium (PALL - News) have outperformed on a relative basis.

Has the enthusiasm for investing in precious metals faded?

According to the latest Kitco News Gold Survey, an overwhelmingly 78.57% are still bullish on gold compared to just 14.29% that are bearish. Similarly, Bloomberg's Commodity Sentiment Gold Bullish readings have doubled a low of 29.03 in late February to 64.

From a sentiment angle, this doesn't bode well for gold prices. Why? Because when the majority of market participants are in agreement about the direction of an investment, it typically results in an opposite or completely unexpected outcome.

Gold's Trend is Down

Despite a seemingly perfect macroeconomic backdrop, a la Europe's latest banking crisis in Cyprus, gold hasn't been able to make any headway. The buy-and-hold gold trade isn't working today and hasn't worked since August 2011 when GLD peaked at $184.59. (Watch our latest ETF video: Future Trends in Fixed Income ETFs)

What about investment demand?

Although investment demand for gold ETPs has surged over the past five years, growth is slowing. At the end of 2012, gold ETP demand had a year-over-year decline from 23% to 21%. Investment in gold was down to 424.7 tonnes when gold ETPs were combined with bar and coin investments. That compares to 462.9 tonnes in 2011. 

Interestingly, gold demand has been strong among world banks. In Q4 2012, global central banks accumulated 145 tonnes of gold, the second highest quarterly total since the height of the credit crisis in Q2 2009. But it still hasn't been enough to kick gold prices higher.

Stick with What Works

"Prices and trends are really the simplest indicators you can find," said Gerald Loeb. "Profits can only be made safely when the opportunity is available and not just because they happen to be desired or needed." This is a similar philosophy to how the ETF Profit Strategy Newsletter operates.

On Feb. 14, via our Weekly ETF Pick update we wrote about a high probability setup in the precious metals category:

"Despite a rising stock market, the Market Vectors Gold Miners (GDX - News) has lagged both the broader U.S. stock market along with the SPDR Gold Shares (GLD) by a very significant margin. The current downtrend for mining stocks is still in place. Furthermore, a double digit slide for gold would likely translate into a 20%+ loss in mining stocks. This scenario offers some big upside potential for bears. Buy the Direxion Daily Gold Miners Bear 3x Shares (DUST - News) at current levels."

Our DUST trade gained 29.6% in the week after we recommended it. And our GDX put options alert in that same report are still open and have already generated a +100% gain.

While it's true that gold equities aren't the same as physical gold, the subpar performance for both is a red flag for bulls. Another red flag is a lack of gold volatility (^GVZ), which has been a virtual replica of depressed stock market volatility (^VIX). Missing volatility is a tell-tale sign of complacence.

What price levels do gold and silver need to hold before a complete breakdown occurs? What levels would signal that a price rebound is underway? The ETF Profit Strategy Newsletter via its Technical Forecast identifies key support levels in metals, stocks, bonds, the euro and other major ETF categories.    

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