This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Gold Prices May Be Falling but Not Forever

Stock quotes in this article: EBAY, GLD, SLV, DGZ, NILE, SIG, ZLC, GG, ABX, NEM, KGC

Investors not on the lookout for every opportunity, including shorting, missed out in May 2012. That's when I wrote about how to profit from falling gold. GLD fell about 40 points since. DGZ increased 40%, Blue Nile  (NILE) increased 50%, Signet Jewelers (SIG) increased over 60%, and Zale (ZLC) increased 500%. You can receive my real time trading ideas with actual entry and exit prices at Real Money Pro.

Investors should understand that as gold prices fall, production levels may increase, not decrease (at least in the interim). I know it sounds counter-intuitive, but I will explain. Think of cash as the life-blood of companies. If a company's cash is drained past a certain point, vital organs begin to shut down -- creating inefficiencies and a domino effect -- until the company dies.

For example, if a worker's paycheck bounces or cannot even be made, workers stop showing up. Gold then can't be mined -- instigating further cash flow issues and causing diesel suppliers to cut off fuel supplies until they are paid. And it just becomes a vicious cycle. One method to prevent a liquidity crisis is to sell more gold, not less. Leaving companies with high fixed costs, plus falling profits and margins, give little choice but to mine and sell as quickly as possible.

What's in any given miner's best interest is collectively detrimental for participants, not unlike the plight of the commons was to farmers, or OPEC members exceeding quotas because of falling prices.

We can see the impact on share prices of Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC). Some of the larger companies may not make it through to the other side, many of the smaller, higher cost of production companies won't. Absent a clear and compelling black swan event, you should anticipate continued challenges for miners and an accelerating decline for gold and silver in the short term.

Longer term, the price of gold will bottom and weaker miners will stop production, then the supply-demand equilibrium will happen again. But leave with this thought -- the short-term usually lasts a lot longer and travels much further than expected. In other words, when it comes to buying a falling market, it's not the early bird that gets the worm, but rather the late mouse that gets the cheese.

Don't be in a hurry to buy gold dips, and don't even consider a miner that isn't profitable at this level. I'm actively watching to become a gold bull again, but we're not there just yet.

At the time of publication, Weinstein had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,042.90 -28.32 -0.17%
S&P 500 1,972.29 -5.51 -0.28%
NASDAQ 4,493.39 -12.4620 -0.28%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs