Monday was a bad day for gold and gold mining stocks. The metal itself was down about 2% on Monday, and the Market Vectors Gold Miners ETF (GDX) — an ETF representing many of the major gold stocks — imploded another 6%. By day’s end, GDX settled 56% below its 52-week high and almost 70% off its all-time high.
There are some very important reasons why gold and gold stocks are cratering, and why you must sell all these holdings now.
How Gold and Gold Stocks Got Here
Gold had an initial run up to $1,000, peaking there right as the financial crisis hit in 2008, as it got caught up in a general asset bubble. It sold off into the $750 area by year end, then began its multiyear run to $1,923 in 2011.
The surge in gold, as well as gold stocks, was driven by a number of factors.
- First, quantitative easing was considered to be bad news for the dollar — that as the Fed printed more money, the dollar became worth less, and thus hard assets like gold became worth more.
- Second, after the financial crisis, there was a rush to get into hard assets – tangible things of value like gold and real estate.
- The market also became extremely liquid, as consumers started selling off their personal inventories of gold jewelry. You remember all the “we buy gold” stores popping up everywhere? That created this rush of demand as gold buyers scooped up as much as they could, turned around and scrapped it like a banshee. That’s why you saw huge gains in pawnshops stocks like Cash America (CSH) and EZCorp (EZPW) and First Cash Financial Services (FCFS), as well as the gold miners.
- There was extreme uncertainty about the overall economy, too. All this attracted even more speculators.
However, all of that has changed.
Where We Are Today
It turns out quantitative easing doesn’t actually alter the money supply, or create inflation. The rush into hard assets has abated. The uncertainty about the economy has gone away. Sure, the American economy stinks and we’re barely growing, but we aren’t facing the same level of fear we did during gold’s run.
Finally, the consumer has sold out of most, if not all, of his gold holdings. Those gold stores are closing down. Pawnshop earnings have fallen precipitously. Once gold started to fall, the speculators sold out.
The virtuous cycle has become a vicious cycle.
Today, gold’s technical chart looks terrible, and the path of least resistance appears to be down.
The Central Fund of Canada (CEF) has historically been a decent indicator of gold sentiment. The closed-end fund holds actual metals — roughly 77 million ounces of silver bullion, as well as nearly 1.7 million ounces of gold. Where CEF trades in relation to its net asset value tells us what sentiment is like in the precious metals.
Presently, the Central Fund of Canada trades at a nearly 8% discount to NAV, suggesting further downside before a possible rebound.
There was a point at which holding a small percentage of precious metals in a diversified portfolio was a good idea, but at least for now, I don’t think that’s the right move. There’s no real purpose to holding gold because the reasons for the big run-up are not likely to recur for some time. What led us near $2,000 was something of a perfect storm.
Thus, the path of least resistance is down. Why hold securities with that bias?
I feel the same way about gold miners. Demand isn’t what it was, and if gold stocks aren’t mining, they aren’t selling, so they’re not making money. That means whatever proven reserves they have are just that — reserves. Reserves that aren’t generating any cash flow.
So whether it’s individual gold stocks like Newmont Mining (NEM), Barrick Gold (ABX) or Goldcorp (GG), or the gold miners ETF, I’d sell now and redeploy that capital.
But one last word of warning: Don’t short anything. Gold prices are too volatile to get mixed up with.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.