Get Out Of Gold Stocks -- Right Now

Few investments are driven by psychology and fear as much as gold. Concerns about ruinous inflation, global tensions or economic instability can send investors out of stocks and right into the seemingly safe harbor of gold.

Is the fear trade back on? A double-digit rebound in gold prices since the year began has led some investors to wonder if gold is poised for a great 2014 after a dismal slump in 2013 when gold prices fell more than $400 an ounce. Junior gold miners have fared even better: The Market Vectors Junior Gold Miner ETF (NYSE: GDXJ) is up roughly 35% in the past three months.

Much of the impetus for an upward move in gold prices was the building tensions in Ukraine, which led to concerns about potential military escalation. It's now apparent that financial sanctions, and not a deepening of a war posture, will characterize the hardening Russia/European Union relationship, and the risk factor is slowly receding.

Also, concerns had arisen that a slowing Chinese economy might create higher global uncertainty. China's economy is slowing, but the Chinese government will restore stability if necessary by increasing stimulus spending.

Yet the key reasons behind gold's massive slump in 2013 still remain in place. Massive sums of money were spent a few years ago to develop new mines, when miners salivated over very high selling prices. Even though prices have slumped, many of those mines are still in the process of development.

Capital Spending by Gold Miners in the XAU Miner Index ($millions)

As a result, gold supply keeps rising. According to Barclays, global gold mining output will rise 3.4% this year, to 2,787 tons, and to 2,838 tons next year.

The demand side of the equation is harder to quantify, as low prices lead to selling by leading gold exchange-traded funds (ETFs) and higher gold prices lead to ETF buying. Other factors, such as domestic consumption for jewelry, are more traditionally price-sensitive. For example, Chinese consumers tend to buy less gold when prices move higher.

The Rate Picture

In previous economic cycles, higher interest rates came in response to a firming economy. Eventually, stronger economic activity creates capacity bottlenecks, and signs of inflation emerge. And higher inflation is a good reason to own gold.

The key reasons behind gold's massive slump in 2013 still remain in place. Will a firming U.S. economy push gold prices down further in 2014?

Trouble is, there is so much slack in the economy that a return of price pressures is quite unlikely. As Federal Reserve Chairman Janet Yellen recently noted, even when short- and long-term rates do move higher, they still likely to remain below historical averages far into the future. The economy's potential growth rate simply isn't what it once was.

Goldman Sachs analyst Damien Courvalin thinks the U.S. economy is a key factor in determining where gold prices go from here. He sees a firming economy, which counterintuitively will push gold prices down toward his $1,050 per ounce price target.

Why would greater economic activity trigger lower gold prices? Because he believes that even as the economy strengthens, it will be accompanied by continuing very low inflation, which will prove to gold bugs, once and for all, that gold-hedged inflation fears are simply misplaced, as they have been for quite some time.

Chinese economic strategies may also play a role. In years past, China has signed massive commodities import contracts with gold used as collateral. Courvalin anticipates "a gradual unwind of Chinese commodity financing deals," which means China will need to hold less gold in its central banks.

Risks to Consider: As an upside risk, a re-emergence of global inflation or a deepening of tensions in the world's various hotspots, may lead to a perceived flight to safety that gold offers.

Action to Take -- The key takeaway is that few real reasons exist for a big move in gold. Indeed, in recent days we've already begun to see the process of profit-taking begin. If you've been fortunate enough to ride the recent mini-rally, this is a good time to get out of gold (or gold miners) now.

As I noted a month ago, if you do want exposure to the gold mining sector, it's wise to focus on the lowest-cost operators. These firms can still generate profits if gold slumps to Goldman Sachs' $1,050 target price. Goldcorp (NYSE: GG) remains as a top play for the low-cost production angle.

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By: David Sterman

15 thoughts on “Get Out Of Gold Stocks -- Right Now

  1. I couldn't agree more -- gold is definitely among the most overrated investments, if not *the* most overrated one. And yes, tradition and habit sure have a lot to do with its popularity even in these days; which is probably understandable, considering it used to get people out of debt and so on.
    Spot on article, thanks for posting!

    1. In my opinion gold price is fair value right now. With political uncertainties coming back, I would not wonder, if it raise again.

  2. Yes!!! Someone who gets it! Gold is the most over-hyped investment of all time. Get out now before it goes to $750-800/oz. Everything's perfectly fine. Banks are only buying up all this gold because of tradition like Ben Bernake famously said...
    I'm of course completely kidding... Why would you be telling people to sell after we've already seen drops of 20% in the miners the past couple weeks? This is the FINAL shakeout before we see the rip we've been all waiting for. I pity the fool who doesn't have the conviction to stay this trade.

    1. The merits or demerits of gold-buying aside, I will certainly agree that anybody who bases their financial advice to you based on the premise that Everything Is Just Fine, is not somebody to whom you should listen, about anything.

      1. As well someone should not listen to one who has been dead wrong. Their credibility is already gone, and further "predictions" that happen to be right, do not make that person suddenly credible and "right."

  3. Last opportunity to buy gold under 1,300 Major move starts before the month is over.

    1. Knock of the time-based predictions, you have no idea when gold is going to move. It is guys like you who give the internet a bad name. Maybe you work for one of these filthy banks too, putting out misinformation to keep investors wary. Whatever your intent, take it somewhere else.

  4. What, nobody took this opportunity to revive the old tungsten rumor? I'm disappointed!

    1. It's probably good advice, as I was just forced to sell 250 Kinross Gold Co shares to meet a margin call, and thesewere my life-time security shares. But it's also a fact from my past that every time I sold shares, the entity soon rocketed up shortly afterward. OK, opening my TDWaterhouse account, looking to see how much KGC last sold for, mine went for US$ 4.46, and they're now US$ 4.24... Wow, that's different! Mind you, I only sold 16.66% of my total, so it's not as if I abandoned the company.

  5. Hmmm

    It was painfully obvious that the main stream media trumped up the "crisis" as a driving force behind the rise in gold. This in turn allowed them to claim that once the "crisis" was over gold would go down. Of course that massive illegal manipulation in the futures markets and the perfectly timed FED "announcements" continue unabated and unchallenged. I find it curious that the entire Western Media remains conspicuously silent about the ongoing and ever expanding international investigation of the price fixing in the precious metals market.

    But hey keep banging that drum like the rest of the MSM; gold is bad, sell your gold, run run as fast you can........away from gold. So at this late date I have but one question: If gold and silver are such terrible investments why are the world richest individuals, investor groups and banks buying all that gold and silver? I mean we have the likes of Goldman Sachs bashing silver until the cows come home---and then upon closer investigation you come to find out they have just about cornered the market on................................silver. And in fact they believed in the metal so strongly that they have take PHYSICAL POSSESION of a very large percentage of their position. And why has the MSD repeatedly failed to inform the public that China, Russia and India between them have been buying the equivalent of the entire years production of gold for the last 3 years running. And in fact this year are on track to set another new record for gold purchases?????????

    1. Hmmm
      deleted my last paragraph.

      "And in fact this year are on track to set another new record for gold purchases?????????"

      Commodities Markets have seen huge price swings (that always seem to benefit the biggest "investors") that occur in direct contradiction to supply and demand. These crooks consistently make money precisely because they can manipulate a commodity in direct opposition to supply, demand and common sense. Simply put, basic economic rules of supply and demand do not apply to rigged markets like gold and silver and various other commodities markets. This is how they fleece their marks.

  6. Gold mining shares recently slumped to their lowest levels since early February, with GDXJ dropping from 46.00 to 36.89--almost 20%. Selling now would be like selling the S&P 500 or the Russell 2000 in July 2009 when they suffered their first real correction since they had plummeted to historic lows in March 2009. Investors should take advantage of the recent pullback to add to any holdings which they hadn't finished accumulating near the five-year bottoms of 2013.

    1. Great points, Steve. I like how commodities and emerging markets have been strong lately. Gold's recent sharp move above its 200dma is encouraging too.

  7. This article doesn't take into account the looting by the USA and perhaps the UK of the gold formerly in the central banks of Libya, Iraq, and other recently invaded nations. They would have taken syria's as well had that nation fallen.

    If there is so much gold in the world, why did the US recently refuse to return its WW2-seized central bank gold of Germany, which it claims it was safe-keeping in the NY Fed's vaults? Instead it claims it will take SEVEN years to ship it back.

    Why does China --even though it's now the world's largest gold miner-- refuse to sell gold outside the country, and continue to buy all it can?

    What happened to the 200 tons of gold that was in the WTC before Sept. 11, 2001? All signs now point to its removal before the event.

    So many deficits, so little time....

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