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7 Vulnerable Gold Stocks to Sell - 9401 views
It seems like the entire world is bullish on gold. Every trader I talk to, everywhere I turn, and everything I read is predominantly bullish on the future prices for gold. Every time I turn on the financial news channels, I seem to catch a guest talking up gold. Even central banks around the globe rarely say or do anything that is considered bearish to gold.
Just take a look at a few of these gold bull examples. Famous hedge fund manager John Paulson recently said that gold could hit $4,000 an ounce. According to permabear Peter Schiff, who has a target of $8,000 to $10,000 an ounce, gold is still a bargain. Jim Rogers is calling for gold to hit $2,000 in five years, a more tepid forecast. Even Barron’s came out with a bullish piece on gold this weakened called “A Golden Era for the Yellow Metal,” which forecasted that gold prices will average $1,500 an ounce by 2015.
Now even the investment banks are getting in on the party. Just this morning, Goldman Sachs Group (GS) announced an upward revision for its gold forecasts to $1,400 an ounce, $1,525 an ounce and $1,650 an ounce on three-, six- and 12-month horizons, respectively.
And if all of that isn’t enough for you, we had the ridiculous news last week that gold vending machines are coming to the U.S. That’s right, a German company called Gold to Go plans to have 35 machines in place by the end of December, with the first machines to be installed in Florida and Las Vegas. Consumers will be able to purchase gold with debit cards in 1-, 5- and 10-gram and 1-ounce bars.
So you see why I think it seems everyone is bullish on gold. Sure, some of these bulls, like Paulson and Goldman, are smart money, and their bullish stand on gold shouldn’t be taken for granted. But what I don’t like about all this bullish gold chatter is that it’s all happening at the same time, when gold prices are trading near all-time highs.
Fundamentally, I can understand why everyone loves gold here, since the arguments for higher prices are sound. These arguments are well-known, ranging from worldwide currency devaluation ( currency wars ) to a hedge inflation to a permanent hedge against global and political dislocation.
But the thing that every gold bull now needs to think about is how much of this is already priced into gold at its current level. How much of quantitative easing (QE2) is priced in? How much of the demise of the U.S. dollar is priced in? How much of the supposed hyperinflation down the road is priced in? An even more important question for the gold bulls is: Who is left to buy gold now?
I ask that that last question because the Daily Sentiment Index for gold is now at a euphoric 98%, and for silver it’s at 97% -- yet another sign that hardly anyone is expecting the price to drop. Who is left to be converted into gold bulls as the price hovers around $1,340 an ounce?
>>Also: Base Metals vs. Gold and Silver
Now before you try and label me a gold bear, I would like to point out that I am far from it. I am actually very bullish on the price of gold in the longer term. In fact, back on Aug. 24, I wrote a very bullish piece on gold, when the SPDR Gold Trust ETF (GLD) was trading at around $118 to $120 a share. I also featured the SPRD Gold Trust ETF in a breakout stocks article on Aug. 16.
But that was then, and this is now. Gold has put in a huge run, and I just can’t continue to like it when the market psychology for the yellow metal is at this feverish pitch. The current psychological environment for gold is the type of scenario you often see before a big pullback -- and that’s exactly what I think is about to happen. It wouldn’t surprise me to see gold sell off 100 to 200 points over the next couple of months.
With this mind, how should you play a potential pullback in gold and gold stocks?
Here's a look at a number of gold-related stocks that you should consider selling or taking profits in before gold makes a sharp selloff.
For starters, I would look to lock in profits or short some of the gold-miner stocks that have had fantastic runs. A name like Agnico-Eagle Mines (AEM), which is up 33% year-to-date is probably due for a pullback. This company is a gold producer with mining operations in northwestern Quebec, northern Mexico, northern Finland and Nunavut and exploration activities in Canada, Europe, Latin America and the U.S.
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Agnico-Eagle Mines has a market cap of $11.34 billion and now trades at a pricy 26 times forward earnings. From a technical standpoint, it looks like Agnico-Eagle has already put in a top at $74.40 a share. I am expecting a pullback in gold to take this name down to mid-60s or high 50s.
Another name that looks ripe for a pullback is Barrick Gold (ABX), which is engaged in the production and sale of gold as well as related activities, such as exploration and mine development. Barrick is up 22% year-to-date, so a pullback is very possible in this stock if gold puts in a short-term top.
Barrick has a market cap of $47 billion, and the stock trades at a forward price-to-earnings of 14. From a technical standpoint, Barrick could easily pullback toward $42 a share, from its current price of $48.
>>Who Owns Barrick?: Duquesne Capital
Another name I would be cautious on in the short term is Newmont Mining (NEM), a gold producing company with assets or operations in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. Shares of Newmont are up a whopping 30% year-to-date. This company has a market cap of $30 billion and trades at a forward price-to-earnings of 15.
From a technical standpoint, shares of Newmont look like they’ve put in a double top at around $65 a share. I think Newmont could easily trade down toward $55 a share before buyers might return to this stock.
One gold stock that is up massive year-to-date is Allied Nevada Gold (ANV), a gold producer that operates the Hycroft Mine and has a large number of exploration claims in the State of Nevada. Allied shares have jumped over 77% so far in 2010, so this stock looks very vulnerable for a pullback.
Allied Nevada has a market cap of $2.28 billion and the stock trades at a very pricey forward earnings multiple of 42. From a technical standpoint, this stock looks like it has put in a double top at $28 a share. My short-term target for Allied is a drop toward $20 to $17 a share.
>>Who Owns Allied Nevada?: George Soros
Of course, if gold does experience a sharp pullback in the near future, then the SPDR Gold Trust ETF should drop pretty significantly. My short-term target on the GLD is going to fall somewhere in the range of $125-to-$115 a share. More aggressive market players could short the GLD by using put options or just by outright shorting this ETF.
Another way to short gold is by using bear ETFs such as PowerShares DB Gold Double Short (DZZ) and PowerShares DB Gold Short (DGZ). Both of these plays should do very well if gold does get hit with some heavy selling. Note that these should only be used for short-term trading -- they’re not investments.
If you do decide to go short any of the gold-related stocks I have mentioned in this article, I would highly recommend you use very tight stops on any positions. The euphoria in gold could easily continue and take the spot price of gold to brand new all-time highs, so shorting should only be done if you’re disciplined enough to stop out of the trade if it starts to go against you.
The best approach might just be to lock in profits if you’re long any of these names, or look to buy these names on meaningful pullbacks.
At the time of publication, author was short the GLD.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.