Earlier in 2014, gold was one of the best performing asset classes, up as much as 15%, trading at 1,390 on March 17. Here are some headlines from that time:

• “Ride the Gold Rally” – Barron’s
• “Why Gold is Back in Vogue” – Yahoo Breakout
• “Why Gold Appears Cheap and May Just be Entering a Bull Market” – MarketWatch
• “How the Big Money is Betting on Gold Now” – CNBC
• “Gold Losing Stigma for UBS, 2014 Forecast Increased” – Bloomberg

As often is the case, such lopsided sentiment brought out my inner contrarian, and moved me to this conclusion (published in the March 16 Profit Radar Report):

“Perhaps there’s a new gold bull market unbeknownst to me, but generally this kind of optimism is seen towards highs, not new bull markets. We will short gold or the SPDR Gold Shares ETF (NYSEArca: GLD) if it spikes to 1,425.”

Unfortunately gold didn’t make it to 1,425, but we still avoided a nasty decline.

My longer-term forecast, published in the December 29, 2013 Profit Radar Report, explained why any gold rally was likely to be fragile and followed by new lows:

"Gold prices have steadily declined since November (2013), but we haven’t seen a capitulation sell off yet. Capitulation is generally the last phase of a bear market. It flushes out weak hands. Prices can’t stage a lasting rally as long as weak hands continue to sell every bounce.

Gold sentiment is very bearish (bullish for gold) and prices may bounce here. However, without prior capitulation, any rally is built on a shaky foundation and unlikely to spark a new bull market. We would like to see a new low (below the June low at 1,178).“

Gold is now approaching new lows. The $200 drop since mid-July has soured sentiment significantly. In fact, sentiment may be bearish enough to cause a rally near current prices.

Although we haven’t yet seen the kind of capitulation-washout-throw-in-the-towel sell-off that would provide the best possible buying opportunity, we are getting much closer to a bottom worth buying.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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