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Don’t Buy Into the Gold Hype
Gold at $1,000. Better buy now or you will miss the greatest investment since tulips in the 1800s.
Or so they say. I say what a bunch of baloney. Why on earth would I want to put hard-earned cash on something that may look pretty but has no real
tangible value?That’s right, gold has no tangible value. Well, that’s not entirely true since there is a vast cult of worshippers out there that say gold is the
only thing with value. As a result of their diehard belief, gold actually does have value, as we now see with AU trading for $1,000 per ounce.A thousand dollars per ounce? Are you kidding me?
Oh, that’s right, I need a gallon of milk so I better take that gold bullion down to the gas mart on the corner and trade for it. We stopped exchanging
gold for a reason. It is a failed currency.So why do so many investors absolutely love gold?
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Why Investors Fall for Gold
Who knows? I suppose it has to do with fear. The idea that hard work can be exchanged for paper currency just does not sit well with people, especially
if that currency is manipulated.The cult will tell you that paper currency is worthless. Too much is printed and circulated. In this country, both the Federal Reserve and the Treasury
are conspiring to destroy the dollar, they say.With so much paper floating around, inflation will surely follow. That means hard assets like gold will be the only thing that retains any value.
Well, I believed in the tooth fairy at one point in my life, so I guess any story is plausible. To see grown men and women fawn over gold, though,
is a bit much for me to take.Being a rational person, I will not be swayed. Paper currency is fine by me, and I have faith that such a currency is about the only thing that
makes sense in a capitalist economy.As for the current monetary policy, there is no inflation. I repeat there is no inflation. We are awakening from the worst deflationary event in
our lifetimes. To think that we will swing to inflation in the immediate aftermath is irrational.The risk we have now — and will have for many years — is deflation. It will be many years before we ever have to worry about inflation
and even then, it is likely that central bank policies will support its mission of stable pricing.As such, owning gold, and by default gold stocks, makes no sense to me. Here are five gold stocks that I would sell immediately…
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Gold Stock #1 to Sell – Barrick Gold (ABX)
Barrick Gold (ABX) announced that it would begin eliminating its hedges against a collapse in gold
prices. In so doing, the company is raising some $3 billion with the sale of stock that will dilute current shareholders.While the gold hedges may have acted as a brake on revenues and profits in a rising gold price environment, the strategy was prudent. To eliminate
the hedge now when gold hits $1,000 is either a sign of the apocalypse or an incredibly stupid thing to do.Since I don’t believe in the apocalypse, I will say that the covering of the hedge is incredibly stupid. To me, it is a sure sign that gold prices
have peaked. This move by management does not give one confidence in its ability to run the company.I would sell ABX for this reason alone.
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Gold Stock #2 to Sell – AngloGold Ashanti (AU)
AngloGold Ashanti (AU) is one of the largest gold mining operations in the world. The gold cult has
made this company very wealthy — AU has a current market capitalization of more than $15 billion.I highly doubt the jewelry market could support that valuation, but the wacko gold bugs certainly do. The credit crisis brought sanity to AU’s nosebleed
valuation, but the crazies jumped on this stock this year. As a result, shares trade near late 2007 levels. Though shares traded higher in 2006, I
would not want to bet on prices continuing the trend.The V shape recovery in AU stock does not jive with the current economic environment. A V shape rally assumes that inflation will be roaring back
to life in the very near future. That is simply not supported by the facts. I would sell AU.
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Gold Stock #3 to Sell – Yamana Gold (AUY)
One of the hottest gold stocks is Yamana Gold (AUY). With a share price that is affordable to the
retail customer, smaller investors have been gobbling up shares in 2009. But like AngloGold, the credit crisis knocked the wind out of the Yamana
trade.Shares were actually fairly valued when they bottomed below $5 per share. Now, with more than 100% recovery of that value, AUY trades above $10
per share. As a result, the valuation is way ahead of itself. Shares of AUY trade for more than 17 times trailing earnings and 18 times forward earnings.
Gold prices would have to continue increasing by 15% to 20% per annum in order to justify these prices.Do you really think gold is going to $1,200 per ounce in the near future, in this economy? I think not.
I would sell AUY and lock in one-year profits that have been ridiculous.
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Gold Stock #4 to Sell – Goldcorp, Inc. (GG)
Imagine what happens to gold mining stocks if gold were to trade for less than $500 per ounce? It would not be pretty. These stocks are priced to
perfection and beyond. That is why they should be sold.Add Goldcorp, Inc. (GG) to the list of overvalued gold miners. At $40 per share, GG now trades within
spitting distance of previous highs. Those highs were attained at the end of an expansionary period, not at the beginning.What the gold fanatics fail to tell you is that we are at the beginning of a new period, not the end. Prices should adjust to a deflationary world,
yet they trade as if we are in the midst of a horrible inflationary period. Earnings at GG will not support this share price, and if the price of
gold drops, the situation goes from bad to worse.I would sell GG immediately, as shares trade for more than 40 times forward earnings.
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Gold Stock #5 to Sell – Harmony Gold Mining Co. (HMY)
In my perusal of gold stocks only one, Harmony Gold Mining Co. (HMY), trades rationally, but that
is not enough to justify holding the stock if you believe, as I do, that gold prices are likely to fall.Even with gold at $1,000 per ounce, HMY trades for a modest 12 times trailing earnings and 15 times forward earnings. For this valuation to hold
up, gold prices need to continue their ascent at a fairly significant clip. If gold is truly a hedge against the end of the world scenario and collapse
of the dollar, investor expectations should be to protect capital. These gold mining stocks, including Harmony, trade like growth stocks.Do you see my point?
In a more rational world, a gold mining stock would trade for a single-digit multiple of earnings. That means all gold mining stocks should be sold
until they trade at such levels. In some cases we are talking about a 50% correction to get to that point.Sell HMY, despite its relatively cheap price. Don’t be fooled by that valuation. It too shall plunge if gold prices drop significantly.
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