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Gold Is Entering Its Liquidation Phase

NEW YORK ( TheStreet) -- In the next year, the outlook for gold prices will go from bad to worse.

Particularly for the next three to six months, a liquidation phase in the current cyclical bear market in gold is likely to develop. Unless investors have an unusually long-term timeframe and an extraordinary level of tolerance for short-term losses, investors should eliminate any holdings of ETFs, such as SPDR Gold Shares (GLD), Market Vector Gold Miners (GDX) and Market Vectors Junior Gold Miners (GDXJ) or individual gold stocks such as Newmont (NEM - Get Report), Barrick Gold (ABX - Get Report) or Goldcorp (GG - Get Report) from their portolios.

Below I'll lay out why gold is very nearly in a lose-lose situation.


From September 2009 until late June 2011, I was quite bullish on the prospects for gold due to a confluence of factors that created a sweet spot for the yellow metal. On June 29, 2011, I called off my bullish call on gold due to a series of adverse fundamental factors. However, in August 2011, I emphasized that not all the "shoeshine boys" were not in yet, and that there would probably be an upside speculative blow-off in gold. This blow-off, of course, occurred, but since October 2011, I have been loudly warning investors to stay away from commodities, including gold.

In particular, in virtually all of my writings since October 2011, I have emphasized that gold is extremely overvalued on almost any fundamental measure relative to stocks, real estate, production costs and the CPI basket of consumer goods. I have emphasized that at current prices, gold is a medium for speculation regarding macroeconomic conditions; it is not a suitable instrument for long-term investment or wealth preservation.

Why Gold Prices Will Probably Collapse

Gold prices should continue to fall sharply for eight reasons:

1. Lose-lose macro scenario: growth accelerates. The only real hope for gold-supportive inflation to get started is for U.S. and global growth to accelerate, causing an increase in the so-called "velocity" of money. This would create an increase in effective aggregate demand relative to aggregate supply. However, such a scenario would merely trigger an end to the Federal Reserve's quantitative easing (QE). If U.S. growth speeds up, even the most vocal doves on the Fed are saying that QE will be would down during the second half of 2013. The end of QE would effectively take away the most important source of support for gold prices.

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ABX $11.14 0.00%
GLD $113.75 0.00%
GDX $18.47 0.00%
GG $18.19 0.00%
NEM $22.02 0.00%


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