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Gold and the value of the companies that sell the precious metal have relentlessly fallen over the past few weeks:

Gold (GLD):

(click to enlarge)Gold Bugs Index (HUI)

(click to enlarge)

The HUI has shown even worse relative price strength than GLD, as it keeps making new 52 week lows.

The Euro Crisis

During last summer's debt ceiling showdown and Euro crisis, Gold buyers arrived en masse, nearly approaching $2,000 per ounce. The investment thesis centered on Gold's status as the only safe haven to put your cash in. Obviously, global stocks were being sold to their lows, commodities were plummeting, the Euro was selling off, and investors were losing confidence in America's ability to pay its bills, resulting in general USD weakness.

With low-yielding, low reward Treasuries and Bunds basically the only interest-bearing assets to invest in, traders turned to gold to take advantage of the rapid price appreciation. After all, gold had been in a decade long bull market, with relatively low price volatility but a rapid price increase. As the Eurozone further deteriorated and the U.S. economy stalled out, gold buyers went into a frenzy. The chart literally went parabolic, with GLD jumping 20% in a couple of months.

Much Different Signs This Time Around

The Eurozone is in worse shape, and closer to the brink, then it has been since the fall of 2011. Spanish bond yields are comfortable above 6%, while Italian 10 years have also begun to bump above the critical 6% level. The LTRO carry trade has run out, and banks in the periphery are being choked from a lack of liquidity. There is plenty of speculation that the Greek banks are undergoing the beginning of the final, frenzied bank run. With no access to outside funding, the Greek financial system is about to officially collapse. With no government, Greece is almost certain to drop out of the EU, leading to huge losses on those holding Euros subject to be converted to Drachmas.

With markets as vulnerable as they are today, the crisis in the rest of the periphery is about to get much worse unless the ECB lends out even more cash via LTRO (which, if they're lucky, would have a positive effect for about 2 or 3 months). Demand for Spanish, Italian, and Portuguese sovereign issuances will dry up, and banks could have a difficult time preserving deposits. After seeing the savings of unfortunate Greek citizens being converted to depreciated Drachmas, depositors will want their Euros in-hand, which they will either store, use to consume, or convert into another currency or asset.

The bull case for gold is that these depositors, and anyone else worried about the Euro, will flow into gold (the traditional store of value) and gold prices will catch a bid, as was the case in 2011.

The problem with this thesis during this year's crisis is that the gold market isn't foretelling of that sort of outcome at all. The dollar has done remarkably well lately:

(click to enlarge)This is a tremendously strong uptrend, and indicates that the current safe haven is the dollar. It's that simple. Those worried about the Euro are buying dollars. Is that the right thing to do? Not in my honest opinion, but people are doing it.

Gold investors right now want to try and catch a bottom that I don't think is coming until investors really capitulate. The great Jim Rogers explains this very well (as usual).

Over the long-haul, gold will act as the true store of value. When governments and central banks get out of hand, gold will, over time, reflect weakened currencies. Today, however, gold is labeled as a risk asset, and with easing (not quite) on the horizon and deflationary pressures abundant, gold is getting sold hard.

Don't be a hero. Take a look at what the market is telling us. Gold is out of favor and will not act as a safe haven during this crisis, unless investors start losing confidence in the dollar.

I am fully prepared for the ferocity of the gold bulls, and I understand, and agree with (most) of their enthusiasm for the long-term. It is well understood that if the economy improves, demand for commodities will rise. If the economy stalls, banks will print money, with gold reflecting the new devalued dollars. It's a win-win for gold investors over time, but a further correction is imminent and healthy.

Conclusions

Gold and gold stock investors should be hedging their positions with some equity shorts via the SPY or individual mining stocks. Companies like Goldcorp (GG), Barrick (ABX), and Newmont (NEM) keep making new 52 week lows as gold moves lower, and they've yet to catch a bid. Right now, the whole sector is a falling knife, and sentiment in a market like gold takes a long time to shift. No one wants anything to do with the sector, and so it will remain until a catalyst (like QE) arrives, which I expect will happen in a few months.

Disclosure:

I am long GLD and GG puts

Source: Gold And Gold Stocks: Likely To Keep Getting Pummeled