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Top Picks 2017: Direxion Daily Gold Miners Bear
01/11/2017 6:00 am EST
I assess markets using my 3G investing framework, which evaluates the three most critical forces, or gravities, that impact asset prices: fundamental, quantitative, and behavioral, explains Landon Whaley, editor of The Whaley Report.
As we begin 2017, all three gravities are decidedly bearish for gold; this indicates that gold is one of the best short opportunities of the next year.
For a leveraged play on gold, consider being short gold miners. The Direxion Daily Gold Miners Index Bear 3X Shares ETF (DUST) will be one of the best-performing equity ETFs in 2017.
Fundamentally, there is no worse environment for gold than the current trajectory of both U.S. growth and the Fed’s monetary policy.
The Fed has just hiked rates for the second time in 12 months and has officially begun the rate-normalizing process.
On the growth front, after slowing for five consecutive quarters, the U.S. economy is starting to pick up steam. That is a bearish fundamental one-two punch for gold.
Quantitatively, the U.S. dollar has cracked the critical $100 level, and U.S. yields have jackknifed straight up since Trump’s victory.
Gold simply can’t compete with the combo platter of a strong USD and higher U.S. yields.
In fact, this type of entrée produces gold’s worst performing time periods: the last time the U.S. dollar and yields moved higher in tandem was September 2012 through March 2014, and gold lost almost 28%.
Behaviorally, speculators still maintain long exposure to gold that is well above historic norms, and the number of long futures contracts is still outpacing the number of shorts.
This positioning tells me that bullish gold investors have yet to figure out that the recent decline in gold isn’t a buying opportunity, but rather the beginning of a much larger move lower. Once those longs figure it out and capitulate, the floor is going to fall out.
Again, to play this trade idea, use the Direxion Daily Gold Miners Index Bear 3X Shares ETF, my Top Pick for aggressive investors.
Keep in mind that DUST is a volatile ETF, and because 2017 may well start with a countertrend gold rally, DUST could trade as low as the $46.00–$31.00 range before beginning its next leg up.
Editor's Note: Last year, Landon Whaley picked the Market Vectors Gold Miners ETF (GDX), which rose 51%. He now says, "I fully expect a countertrend rally in gold and gold miners to start the year. But after January, I think gold will perform poorly this year. The countertrend rally could push GDX as high as the $23.25-$24.50 area before the next leg down. I would sell any strength in GDX above the $22.50 price level."
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