Attention Gold Bugs:
Be Afraid... Be Very Afraid
By Jeff Clark
August 23, 2007

There's something horribly wrong in the gold market.

Normally, when fear runs through the financial markets, investors flock toward gold. Gold is solid. Gold is a safe haven. Gold is the best insurance against a financial catastrophe.

But last week's subprime meltdown wasn't covered by our policy.

As stock markets around the world sold off, gold sold off, too. And gold was the worst-performing sector in the stock market.

This is disturbing because the conditions were nearly perfect for a rally. If gold couldn't rally during last week's turmoil, then what's it going to take?

I've often written that you should look to buy stocks that rally in the face of bad news. What do you suppose we should do with stocks that decline when conditions are perfect?

That's right... It's time to sell gold.

I realize I'm not going to win any popularity contests by talking bad about precious metals. Gold investors are passionate about their holdings. They're emotionally tied to the metal. Telling a gold bug to sell his bricks is like telling Charlton Heston to give up his gun collection.

But one look at a chart of the Gold Bugs Index tells the whole story...

The arrows point to the last five failed breakout attempts. You may recall that I wrote about each one as it was occurring and suggested they were all false breakouts. You can also see last week's breakdown from an ascending-triangle pattern. This is a very bearish development for the gold sector. And it suggests that after a brief oversold bounce, we're going to see some more downside action.

Gold stocks are a leading indicator for the price of gold. If the stocks rally, then the metal rallies shortly thereafter. If gold stocks fall, then it doesn't take long before the price of the metal turns down as well.

Last week's big spike down in the HUI should lead to a sharp spike lower in the price of gold. And it could happen within the next week or two.

I know this is tough to hear. No one wants to read that his favorite investment is in trouble. After all, I doubt there are very many people enjoying the recent contraction in housing prices.

Nonetheless, my job is to let you know what I'm seeing. And, I'm seeing bad times ahead for gold.

Best regards and good trading,

Jeff Clark