Gold And Gold Miners Have Topped Out

by: Thomas Dionian is as unstable and unpredictable as your most volatile relationship after a night of heavy drinking. It can end up with you in the throes of a crazy night of unforgettable passion still to be remembered 20 years later or with a beer poured over your head, an ugly public breakup and a fight with some random interloper at the bar. Either way, you end up with some bumps and bruises!

I write this article as a response to the recent massive move in spot gold over the past 45 days, rising from 1,200 to a high of over 1,320 as of trading on February 14th - roughly a +10% move. This move has resulted in the Market Vectors Gold Miners ETF (NYSEARCA:GDX) rising 25.8% over the same time period and Direxion Daily Gold Miners Bull 3X Shrs (NYSEARCA:NUGT) rising by over 78% during the same time period.

There seem to be many reasons cited as to why gold has become "interesting" again to investors - including China's significant appetite for hard assets in 2013, potential regulatory changes in India, concern over U.S. recovery, emerging market implosion, hyperinflation and underweight portfolio managers playing catch-up at the beginning of a new capital allocation cycle. While some of these explanations have merit for slowing down the decline in gold, they simply cannot lend sustained support for the increase in spot gold prices. The fundamental fact is, gold serves the investor primarily as a risk-aversion play. It is a safety net should the world go to hell in a hand basket through socio-economic instability, financial markets instability, currency instability, or the coming of the apocalypse. When these risks are "in check" gold is simply not a viable investment. Thus, in my view, the recent run-up in gold is solely a factor of speculation and doomsday prophesying. Given reasonable stability in most, if not all, of the aforementioned factors above, gold is more likely worth well under $1,000 per ounce.

According to Tom Kendall, Head of Precious Metals Research at Credit Suisse, "I think it's realistic to think of gold having a test of the $1,000 level at some point this year."

Jeffrey Currie, Head of Goldman Sachs commodities research, told CNBC on Monday "he had an end-of-year price target of $1,050 per ounce for gold." The main culprit? Economic recovery.

The argument for the miners is even less compelling; it rests on two simple ideas:

1) Gold prices are increasing, so miners will benefit

2) Miners have been so beaten up over the past few years that they must now be positioned for recovery

While the first argument on gold prices holds sounds reasonable, it assumes that gold is going to continue to rise or at least stabilize and hold at the 1,200 - 1,300 per ounce level. This is a huge and risk laden assumption.

Secondly, the idea of miners being 'too beaten up' to continue being 'beaten up' is preposterous. Look at the fundamentals and balance sheets of these miners. Their losses and performance in 2013 have been nothing short of a Greek tragedy. Their current financials are extremely weak, they've cut and cut and cut and they are still running the risk of significant further losses. The idea that they have leaned out and are now well-positioned to prosper at current gold prices is a fallacy. Bankruptcy, and at the least significant debt offerings, are still quite realistic for many of the weaker mining companies. As a wise man once said, "Hope is not a strategy."

I would contend that this is a big setup and gold bugs are about to get an entire pitcher of beer poured on their heads, as well as experience a brutal ass-kicking by the yellow metal.

I would encourage those getting sucked into the "gold vortex of irrational thought" to take a step back and view the facts. Ignore the articles and pundits arguing how gold is going back to 1,400 or 1,600 or 2,500. Ignore those spouting how gold miners are now starting to look good at these levels - the absolute lowest of levels. You want to know why?

Because the move up has already happened. Whatever buying opportunity gold and gold miners were going to experience in 2014 is over. You've missed it. A basket of twenty well-known gold miners listed below is up on average a whopping 45% from their 52 week lows through the trading close on February 14, 2014 (see Table 1.0 - Gold Miners)

Miner Symbol 52 Week Low 2/14/2014 Close % Above 52 Week Low
Kinross Gold Corporation KGC 4.23 5.22 23.4%
Gold Fields Ltd GFI 2.92 4.09 40.1%
Primero Mining Corp. PPP 4.06 6.75 66.3%
Barrick Gold Corporation ABX 13.43 20.34 51.5%
Rio Tinto plc RIO 39.14 58.90 50.5%
Goldcorp Inc GG 20.54 27.55 34.1%
Yamana Gold, Inc AUY 8.31 10.57 27.2%
IAMGOLD Corp IAG 3.15 4.18 32.7%
AngloGold Ashanti Ltd AU 11.14 17.47 56.8%
Randgold Resources Limited GOLD 59.19 79.65 34.6%
Newmont Mining Corporation NEM 22.34 23.83 6.7%
Eldorado Gold Corp. EGO 5.35 7.13 33.3%
BHP Billiton Limited BHP 55.66 68.32 22.7%
Stillwater Mining Co SWC 9.78 13.23 35.3%
Royal Gold, Inc RGLD 38.63 66.81 72.9%
Sibanye Gold Limited SBGL 2.62 7.22 175.6%
Freeport-McMoRan Copper & Gold Inc FCX 26.37 33.75 28.0%
Harmony Gold Mining Company Limited HMY 2.35 3.19 35.7%
Hecla Mining Co. HL 2.63 3.47 31.9%
Agnico Eagle Mines Limited AEM 23.77 33.72 41.9%

Table 1.0 - Gold Miners

Gold is up 10% from a 'disastrous' 28% decline in 2013. As referenced earlier, gold indices have spiked up massively in the past 45 days. Yet, fundamentally, the U.S. and Europe are continuing to stabilize, the dollar will continue to get stronger with tapering, China's buying spree on gold will decline in 2014 and interest rates in the near and mid-term will not support a higher inflationary environment. Simply put, there is no logical support for what has occurred in gold and miners over the past six weeks other than speculation.

How should you position your portfolio for this short-term dislocation? I'd recommend you short GDX, short NUGT or buy Direxion Daily Gold Miners Bear 3X Shrs (NYSEARCA:DUST). These are all excellent ways to take advantage of the unfounded jump in gold and gold miners. This short-term rally in gold and gold miners has offered a significant shorting opportunity as gold marches downward to its proper price levels in a more stable economic world - sub 1,000 per ounce.

Then go pour yourself a beer, drink it, and see if you can spark some new, extraordinary passion with your significant other.

Disclosure: I am long DUST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.