Most investors would love to forget the last six weeks.
After all, even the most robust and time-tested investment strategies have suffered. Ray Dalio’s Bridgewater All Weather Fund — one of the largest hedge funds in the world — sailed into stormy waters and tumbled 6% through June 25. It is now down about 8% for the year.
For experienced market hands, it’s the same old story.
???Investors have (yet again) thrown the baby out with the bathwater.???
Now there’s not much an aircraft carrier of a $70-billion fund like the All Weather Fund can do, except wait for the storm to pass.
Yet, this is perfect time for smaller and nimbler investors to place their bets to make some real money.
After all, in today’s hyper-connected markets, your only real edge is psychological.
You have to look at market consensus, convince yourself it is wrong, and trade against it.
So hold your nose, grit your teeth, place your bets, and get ready to make some big money…
I. A Leveraged Bet on Gold.
If you’re a gold bug, 2013 has tested your faith in yellow metal’s magical powers.
Over the past six months, gold has gone from ???safe haven??? to ???contrarian bet??? with remarkable swiftness.
Down 25.24% in 2013, gold fell below $1,200 an ounce last Thursday for the first time in three years.
And even after a rally of 2.73% last Friday, gold ended the fourth quarter 23% lower — its biggest decline since 1968.
So what explains the remarkable collapse in gold prices?
Investors have held gold for two reasons.
First, investors feared the inflationary impact of the Fed’s aggressive monetary policy. But whether you think the government fudges the inflation numbers, we have not entered a world of hyperinflation, Weimar Republic-style.
Second, investors were convinced the financial system was going to implode.
If you’re a dyed-in-the-wool doom-and-gloomer, you’ll argue that you weren’t wrong. You were just early.
But for this week, at least, both of these concerns have abated.
No wonder investment banks are reducing their target prices for gold. Morgan Stanley, Deutsche Bank, UBS and HSBC have cut their average 2013 gold-price forecasts to $1,409, $1,431, $1,440 and $1,396, respectively.
With gold closing at $1,257 overnight, each of these forecasts imply a higher gold price in the second half of 2013.
And with gold as technically oversold on Friday as I’ve ever seen it, I believe that the yellow metal is due for a big bounce.
That’s why I’ve recently recommended the ProShares Ultra Gold (UGL) Exchange Traded Fund — a double-leveraged exchange-traded fund (ETF) in my trading service, Bull Market Alert.
I believe you’ll see double-digit percentage gains in this position as gold moves back toward $1,300 an ounce.
II. A Leveraged Bet on the Markets U.S. Investors Love to Hate
Emerging markets have had a grim year so far in 2013, with year-to-date losses of 12.9%. That compares with a gain of 13.76% in U.S. blue-chip stocks.
So hedge funds that ignored the mantra of global diversification are looking pretty smart.
That’s a big change. After all, riskier emerging markets handily outperformed the S&P 500 in both 2009 and 2010. They did the same in Q4 of last year as well.
And money flows follow recent performance. So it’s no wonder investors have pulled more than $7 billion from the two largest emerging market exchange-traded funds in June alone.
In my book, that’s all the more reason to go the other way.
After all, the best way to make money is betting against extremes of market sentiment.
The 26.6% outperformance of U.S. equities, compared with emerging markets over the past six months, is as wide as I can ever remember.
And if the past is any guide to the future, that ???performance discount??? is going to narrow sharply.
In fact, the emerging markets catch-up may have already started. Several top-performing markets like the iShares MSCI Philippines Invstble Mkt Idx (EPHE) and iShares MSCI Mexico Capped Invstbl Mkt (EWW) have bounced strongly, up 10.81% and 11.96%, respectively, just over the past five days.
And a leveraged bet on the sector — the ProShares Ultra MSCI Emerging Markets (EET) — a current recommendation in my Triple Digit Trader trading service, is up a whopping 13.8% in a single week.
I’m looking for 20%-plus gains in this leveraged bet over the coming month or two.
Disclosure: I own iShares MSCI Philippines Invstble Mkt Idx (EPHE) and ProShares Ultra MSCI Emerging Markets (EET).
Nicholas Vardy, CFA
Editor, The Global Guru
P.S. Join me for the San Francisco Money Show, Aug. 15-17, at the San Francisco Marriott Marquis. There is no charge for this conference, but you do need to register. Call 1-800/970-4355, and mention code #031736.