6 Stocks to Play for Lower Gold Prices

NEW YORK (TheStreet) -- Gold bugs continue to take a beating on concerns of the problems in Spain and Greece spreading across the rest of Europe. Gold, priced in dollars, rises when the dollar weakens relative to other major currencies and falls with dollar gains.

Along with currency moves, gold moves based on economic activity. Fears of continued sluggishness in Europe (along with fears of a slowdown in China) has removed some glimmer gold has enjoyed as an inflation hedge. The market is discounting liquidity promises by Germany as gold prices sink to the lowest prices of this year. Fears of elections in Greece rejecting bailout proposals are weighing gold down as well.

Investors have many choices to gain exposure in gold. The SPDR Gold Trust ETF ( GLD) is one of the most popular and liquid methods to play gold prices.

Some analysts are calling recent weakness as an opportunity to buy gold. Indeed, gold trend lines based on weekly charts are decidedly bullish. The 60-, 90-, and 200-week moving averages are all trending higher, with the shorter time period averages above the respective longer periods.

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A daily chart view of GLD is the opposite with a bearish outlook. All three moving averages, 60-, 90-, and 200-day moving averages are moving lower and the famous "death cross" of the 60-day (some use 50-day) moving below the 200-day moving average triggered some trend followers to short.

Global Economies

I have written for months about the woes Europe faces and I believe the worst is yet to come. Protests in Spain are likely just warming up and Greece's population has made it abundantly clear they have no intention of living within their means or paying back their debt.

Finally, if France moves to the left, Germany will be lone sober designated driver. At some point, one has to believe Germany will tire of chauffeuring "drunk on debt" countries and cut off the beer tap.

With gold prices moving down so much in such a short period of time, I would expect a "dead cat bounce" soon. I also expect gold to continue downward, trading under $1,300 within a year absent a substantial bull catalyst. In the short term, look for gold moving higher as an opportunity to short.

Investors Shorting GLD will profit if gold prices continue lower. On the supply side, shorting mining companies can be tricky. Most mine several products and lower prices can take a long time to impact depending on how much a company is hedged (already sold future production). Few companies are not at least in part hedged; however, shorting mining companies is not for the faint of heart.

The DB Gold Short ETN DGZ ( SFLY) offers equity similar to an ETF, but unlike GLD, share price should rise as gold falls. DGZ is thinly traded; however the spread is tight with large bid and asks. Owning a "short" ETN has other hazards, resulting in DGZ not being appropriate for most long term investors.

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There are other ways to profit from falling gold prices without shorting. On the demand side, companies that consume gold have lower input costs with lower gold prices. Jewelry stores reportedly use over 80% of gold consumed each year. Naturally, one can expect jewelry stores to benefit from lower costs. Coins and bullion make up the next largest consumer, followed by the electronics industry (gold is a great conductor of electricity).

Tiffany & Co. ( TIF) through its subsidiaries, engages in the design, manufacture, and retail of fine jewelry. Tiffany trades an average of 1.6 million shares per day and has a marketcap of $7.8 billion. Tiffany is the largest public company by market cap in the jewelry industry I reviewed. Tiffany sells much more than jewelry, however, I find Tiffany desirable because of their wide product offering.

Signet Jewelers ( SIG) shares trade an average of 686,000 shares per day, and the company has a market cap of $3.9 billion. Signet pays a 48 cent dividend yielding 1%.

Signet is reporting earnings this month, so expect increased volatility in price. Estimates per share are between 90 cents and $1.01.

Blue Nile ( NILE) operates as an online retailer of diamonds and fine jewelry. The company has a market cap of $398 million.

Blue Nile reported a record year in 2011 -- $348 million in sales. Blue Nile trades at a 24,000 gold premium with a forward price-to-earnings multiple of 37. Short sellers have jumped on Blue Nile; a massive 29% of the float is sold short. Up to now shorts have called it correctly, with share prices making recent 52-week lows.

Blue Nile needs to improve margins and not miss earnings expectations. Lower gold prices may help achieve investor objectives. Analysts are expecting 0.07 cents per share this quarter.

Zale ( ZLC), through its subsidiaries, operates as a specialty retailer of fine jewelry. Zale is thinly traded with share volume averaging 242,000 per day, and the company has a market cap of $79 million. Zale is expected to report last fiscal quarter's results before the opening bell May 23.

On average, analysts expect a drop of 94 cents in earnings per share compared with last quarter's results of 78 cents. The reporting quarter's mean estimate is for a loss of 16 cents per share.

While losing money in the past three out of four quarters, the last quarter was profitable and Zale did manage to beat earnings by a penny.

Short interest is much lower with Zale than Blue Nile at 11%, but such a large short interest is decidedly bearish, and the shorts clearly have made the right call up to now.

>>To see these stocks in action, visit the 6 Stocks to Play for Lower Gold Prices portfolio on Stockpickr.

Author does not hold a position in any stock mentioned.

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