Is it Finally Time to Sell Gold and Related Mining Stocks?

Gold prices have been rising sharply over the last few months while the equity markets went into a sharp correction. Over a one year period, the popular Gold ETF (GLD) is up almost 40%. Compare that to the S&P 500 (SPY), which is down 10% during the same period.

The main reasons for the rise were basically inflation and the weak dollar. The explosive growth in emerging markets over the last few years has led to a huge commodities bull run and fueled global inflation, which in turn put pressure and weakened the USD against most of the major currencies.

And then to make things worse, a nasty credit crisis hit Wall Street last fall due to the collapse of the mortgage subprime market.

The Federal Reserve, in order to avert a complete collapse of the financial system, had to start slashing rates and add liquidity to the system. Interest rates went down from 5.25% to 3% in a few weeks. That's when gold prices had their steepest rise, going up 300 points since November.

So why do we think you should sell gold, and especially the mining stocks, if prices are so strong?

First, if you look at the mining stocks prices compared to the gold prices, while the GLD is up 40%, the mining stocks ETF (GDX) is up only 20% over a one year period. The reason for the underperformance is that it is getting harder and harder to extract the metal from the ground and also more expensive. The margins for mining companies are not as good as they used to be.

Second, and more importantly, the two main reasons behind gold's rise may not be valid anymore, at least in the short term. At the last Fed meeting, interest rates were cut by 75 basis points to 2.25%. When that happened gold prices unexpectedly collapsed 100 dollars in 3 days. The reason was that investors in the metal were disappointed and the markets were actually looking for a 100 basis points cut. The Fed's next meeting comes in April and this time traders are expecting a 50 basis point cut.

However, we think it is very likely that the Fed will only cut by 25 basis points and that might disappoint investors again. Even if the Fed cuts by 50 basis points, and rates go down to 1.75%, that might be the last time we even get a cut. Very few people are expecting rates to go lower than 1.75%. The ECB, on the other hand, is expected to just start cutting rates later this year when the EU economy shows more signs of weakness. All that could stabilize the dollar in the coming months.

As for inflation, the numbers are finally starting to moderate due to the weakness in the world economies led by the US housing crisis. The PCE inflation numbers just released show inflation for the last year at 2% which is still inside the Fed's comfort zone. Actually, the Fed has been predicting inflation to moderate for some time no,w but no one on Wall Street really believes them.

Finally, if you look closely at the GLD chart, you can see that the short term uptrend has been broken. For the first time since gold broke out last year, it has fell through its 10-week moving average and it has done so on high volume in the last week. This surely is another sign of weakness.

Gold might still be in a long term bull market, but for all the reasons mentioned above, it is now due for a correction in the short term.

Disclosure: No positions in any gold or gold mining stocks.

Comments

[bhakta]

IMHO selling GOLD right now is madness. The paper money is being printed by the trillions; in Asia people DO NOT trust paper money, never have and never will, it is part of the culture. MAYBE gold drops 10-15-20%, but it is temporary, and not at all certain. In my view, with the economies all in jeopardy, financial institutions losing all the accumulated equity and being forced to beg for new capital, with real interest rates below the rate of inflation, to put faith in anything other than gold/silver is risky.

[fxtrader07]

only clueless morons think that an inevitable slowdown in rate-cuts will mean less debasing of the dollar. hundreds of billions of capital injections, implied guarantees for gses, "tax rebates", unfunded future healthcare and pension obligations, bank-bailouts and junk mortgage-securities purchases will ensure that the dollar's purchasing power will go down the toilet going forward even faster than during the past years. It's more than ever before "inflate-or-die&q... for the govt and the fed (until the whole house of cards comes crashing down anyway, despite asnd because of all inflationary efforts). The problem with gold as the ultimate hedge is that it is sort of a digital investment. the moment the masses really get the fact that the fed and the govt have delibereately inflated their way out of current problems and will always do so (because no other choices exist anymore other than outright seizure of all assets from amrican and foreign citizen) the very moment they will all rush towards gold and silver. However, there is so little gold and silver available that at that point you won't be able to buy it in any meaningful quantities at any reasonable price. Until then, however, the price of gold will probably languish - going steeply up for a few years only to struggle for the next ones. And in all ikelihood, until that final day of reckoning occures, gold will underperform most financial assets.
So if you think you are the smartest of them all, you might hold stocks and bonds and switch into gold right on the eve of judgement day.
I for my part, certainly would not take the chance...
Keep a part of your wealth (at least 10%, better 20-30%) in physical gold and silver and put the rest into financial assets like high quality stocks and bonds (avoid us treasuries and most other govt bonds however!). and do not measure the appropriateness of your gold holdings by their performance versus stocks or bonds. keep in mind that they are an insurance - to be kept for the day that will come with ultra high probability but which will be impossible to time

[Alan vonAltendorf]

I agree that it's time to sell GLD and miners. If I buy gold again it will be bullion coin at $700 or thereabouts.

[fxtrader07]

Hey Alan, you may be right, but the question is, is it really worth the risk to sell at $930 in the hope of getting in at $700 again ? Two major risks are here: one, that $700 will never be seen - quite likely, imho. I haven't seen many people having the guts to reenter a market at a higher price than they exited at - missing out on the subsequent run almost in 98/100 cases. Will you buy into gold again when your drop to $700 doesn't play out and instead it hits 1.050$?
second: will you really get in at 700$ - when gold hits $700 , it might look like a terrible drop making many people rethink that earlier plan of re-entering)
regarding the miners, they have barely followed gold's rise. that is only in part due to escalating costs. It is also due to investors and speculators doubting the sustainability of gold's rise. I mean, everybody knows the chart from the 1980s, right, and nobody wants to buy a similiar top? If one carefully lokks at it, even if gold were to stay at $700-$950 for the next 2-3 years many gold miners will make a ton of money and you will see the reverse of the past 2 years: gold miners rising way faster than gold or rising in the face of a stagnating gold price.
So it may pay off, to hold back opn mining stocks for the time being but selling gold or GLD here will in all likelihood be a very costly mistake, imho.

[f00syerd00s]

So, "it is getting harder and harder to extract the metal from the ground and also more expensive" [=supply shortage], but you portain that it is a good idea to be pulling out of owning this asset class right now because "for inflation, the numbers are finally starting to moderate due to the weakness in the world economies led by the US housing crisis" [Current Oil Price>$100bbl].

On top of all this the uptrend has been broken.........
www.the-privateer.com/...

What a load of utter nonsense.........I hope you are not paid to spout this guff.

[yank]

You are going to use a 10-day MA as a support level? Please. No one and I mean no serious investor uses a 10-day MA as a support level. On the contrary, the long-term uptrend for gold (&silver) has NOT been broken despite the recent pullback from $1000. As for your expectation for the ECB to cut interest rates, I guess you didn't get the memo. As reported today by Bloomberg, inflation in the Eurozone was reported at its highest level in over 20 years. Not exactly a recipe for LOWERING interest rates. Your article is a lot of wishful thinking and is another case of "commodity bashing" when there is in fact no "commodity bubble" as you call it. Jim Rogers NEVER called this a "speculative bubble". There is nothing speculative about 3 billion people choosing a "consumer-based&q... society like we have in the West. Your article is way off-base and not very useful for investing purposes.

[D Johnson]

I will hold my gold and silver as long as interest rates remain below the real rate of inflation. Period.

[robby]

Almost every reason given as far as I can see are bullish for the precious metal stocks.

[Freemarketman]

That's right Robby...because every bullish reason is backed by a bearish reason of fiat money.

[GaryD]

D Johnson has it right. Nice and simple plan based on solid monetary reasoning.

[GaryD]

Anyone know why gold lease rates have collapsed?

www.kitco.com/lease.ch...

[cheapybob]

I really don't see gold going much lower before foreign buyers, drowning in US dollars, decide to shift some of it to gold.

[misterchan]

Thanks, all of you, for reiterating what I have been thinking . However, having a large portfolio which is hibernating lately, is not fun. It seems that gold mining companies are being punished too much. Even the great ones. Unless maybe the big boys on Wall St. are talking them down so they can buy them dirt cheap? (unintended pun).

[Marc Azar]

Yank, the article mentions a 10-week moving average, not a 10-day average.

[mkreisel]

Gold is strong buy at 800.

[TheNetAnalyst]

I have to agree with just about everyone here. If you look at the chart for gold stocks they are right on track and unless they break through their lower trend line then things should be fine. All the feds actions of injecting cash into the economy can only weaken the dollar. The more cash out their the less each $1 is worth.

[irishricky]

Just for the record-with gold $850-$900,the majors have huge upside via average gold price for 2007-circa 40%-so just do the maths-^hui
should be circa $600(>33% upside from here)-so hang on to those great mining stocks until May and then cash in to buy the juniors to replenish gold reserves for the majors.

[jt]

GaryD...the rates have not only collapsed buy gone NEGATIVE!!!...ie, the Fed and the rest of the anti-gold cartel are PAYING the bullion banks to lease gold. Why??...there is always and forever only ONE reason to do that...and that is to SUPPRESS the price of gold, as they've been doing for years. That leased gold is only used for one thing--to sell into the market, take the proceeds and invest them in interest-bearing bonds/funds--easy money for the Fed lackies that play their game. It's criminal collusion. But then the Fed likes its infinite money-making machine: create "dollars"/Fe... Reserve Notes out of absolutely nothing, loan it to the treasury (and now just about anyone else they want to, it would appear), and then get paid interest on it!!!!...nice scam yes?

Buy and hold gold and silver physical. Do NOT buy shares in the ETFs...they have busy backdoors for dumping their gold and silver back on the market in these takedowns and almost ALL are under the control of members of the anti-gold cartel.


But we will be heading back up...no doubt about it. There are literally hundreds of TRILLIONS of derivative $debt out there. Gold in real value has just barely begun to rise. And silver is even worse b/c it is consumed in industry and we have been in deficit for nearly two decades now. There is now a paper price (manipulated price) and physical price disconnect. Delivery default can't be far behind.

jt

[joe gold]

I have to agree with all the bull sentiment.
Central banks in Asia and the Middle East are sitting on uncomprehensible quantities of USD's and it would be prudent on their part to load up on the metal in this pullback trying to avoid the sinking ship of the USD. With their multiples, every ten-thousandth of a point loss in dollar value has real value consequences on their side.
I do have to admit that my stock positions with mining companies has dissapointed me over this push. I vaguely remember Newmont rising to over $70 a couple of years ago while gold was breaking new ground at $550. Now we just had $1,000+ and it sat there at under $50.
I've heard a lot of people mention rising production costs but its not nearly as high as is being talk about. My impression is that the gold producers are clearing the deck for higher prices to come, and in the comming quarters results will begin to hit the P&L's.

I'm sticking to my instincts on this one.

order to diversify.

[dowdy]

hi all, I'm new to this and want to invest in gold, but I am a little confused about buying stock in gold or gold it self and how to do it or what to buy. Help... newbe

[Brian inMontreal]

Checkout Kitco.com You can buy everything there and get great commentary. I like to sell gold stocks after the morning run up, after Asia buys gold and New York starts selling it.

[jt]

dowdy...I wouldn't buy a thing from Kitco...there prices are not very competitive and their charges for shipping, esp of silver, are outrageous. Kitco is a decent site for information, but IMO not for buying silver/gold coins/bullion. On top of that, John Nadler, who works for Kitco and is considered their "analyst" is a "goldbear" in sheep's ("goldbug") clothing. He must have some connection with the anti-gold Cartel, b/c he finds every opportunity he can to trash gold and goldbugs while pretending to be pro-gold. And he mocks GATA, despite the fact that they/Bill Murphy have been absolutely on the money for 10 years now concerning the suppression of the prices of gold and silver by the Fed and the Western Banker aided by their bullion bank lackies such as JPMorgain4Elites and GoldmanSuchs....

If you haven't bought yet, I'd first make sure you have at least some store of actual physical silver and/or gold. The easiest and cheapest to buy in terms of minimal to no premium over spot price is "junk" silver, ie, bags of pre-'65 silver coins (dimes/quarters/half dollars). They are sold by $10/$100/$1000 face value, eg, 1000 pre-'65 dimes would be $100 face value. Every $100 face value of those coins contains 71.5 oz silver. So you multiply 71.5 time the spot price of silver and that will give you value of the silver in the coins with no premium. I have bought a number of $10 and $100 face value bags from bulliondirect.com, using esp their NucleoExchange to put in bids, esp when price is getting taken down. In that way I have not infrequently been able to buy them actually at a DIScount to spot price of silver. You can also check with your local coin store. I would also recommend buying 99.99% pure silver 1 oz rounds...no numismatic value and the smallest premium to spot price.

If you want gold, you can go buy 1/10/100 oz bars...or 1 oz bullion coins, such as Canadian Maples, or Kruggerrands, etc. To get an idea of prices, check some place like bulliondirect.com and look at NucleoExchange to see what the bids and asks are.

I would do this before even considering buying mining stocks. Then I would recommend buying a subscription to the newsletter of someone like Jay Taylor or Doug Casey to get some good recommendations on good junior explorers, etc.

[dowdy]

thanks for the feedback. jt, so you are saying to buy gold or silver physically and have it shipped to me? if that's correct then what would be the next step to sell it if I made a profit? who would I sell it to, the same place I bought it? My dad told me to buy kruggerrands also, so I think that's what I'm going to do. Thanks again....

[User 173148]

GaryD & jt - Enjoyed reading both of your comments very much.

Re-negative gold lease rate - The normal 1% gold lease rate which the Fed usually lends gold to the bullion banks has gone negative. On the surface it appears that the Fed is paying the gold bullion banks to lease gold. However one probably needs to dig a little deeper to understand what is really happening. Back in the 1990s the Fed likely leased a large amount of it's gold to the gold bullion banks (such as JP Morgan) in order to surpress the price of gold (The Great Gold Fiddle) to hide the fact that Greenspan was busy printing money and creating more credit. After leasing the gold from the Fed, the bullion banks then turned around and sold the gold for cash. With the cash the bullion banks then bought U.S. treasuries paying say 5% for a net profit of 5% - 1% = 4%.

First you need to understand that the so called gold leased by the Fed to the bullion banks has been phyically sold by the bullion banks at prices (say at $500/oz.) which are much lower than today's $900/oz. prices. That means neither the Fed or the bullion banks phyically have this gold in their vaults. Second, under current accounting rules, an IOU from the bullion banks can be counted as gold and entered on the books as gold held in the Fed's vaults. This allows the Fed's to issue accounting statements "implying" that they still phyically have the leased gold their vaults. In reality this gold left the barn a long time ago.

One can also probably assume the bullion banks are underwater on these gold lease transactions. Since these same bullion banks are likely underwater on a whole bunch of other stuff (subprime, etc.), then likely they are technically insolvent. The only thing keeping these banks solvent (probably with the Fed's blessings) is not "marking to market" the true value of their assets.

I think you can now see that the Fed has a problem. If it lets these bullion banks go under, then it would have to fess up that it no longer phyically owns all the gold that it claims to have in its vaults. That would expose the Fed's accounting lie and result in a considerable lost of confidence. The Fed probably figures it is cheaper to pay the bullion banks for leasing the gold so they can keep the game going for a while longer!

Regards, Au

[Silver-Bullet]

Thanks folks! I was just having my doubts on GDX, but after reading this, I am not going to yank it out of my portfolio.

I am still extremely bullish on the metal itself, just that the stock is a little more speculative.

Anyone has a take on Jinshan (JIN - Canadian)? I have been reading articles about it, and it claims to have the world's largest gold deposit situated in the northern belt of China.

[Silver-Bullet]

One of the problem of technical analysis is short-sightedness. Buying and selling base on daily numbers is pure madness. After moving in and out of a position will increase your chance of making a wrong call.

I think gold mining stocks will go higher compared to physical gold as it provides more leverage. Buying 1 stock in GDX is like buying 1 oz of gold on the cheap. With the US leading the global pack in printing money, folks will soon know they are being cheated and start buying precious metals. We all know there isn't enough gold to go around, so prices will start climbing.