Own Gold? Here's Why It's Time to Sell

BALTIMORE ( Stockpickr) -- "He who has the gold makes the rules." Hmmm. Somebody had better tell Mr. Market.

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Since 2008, gold has been a safe haven investment for scores of investors. Every concern during the height of the financial crisis seemed to be solved by everyone's favorite precious metal.

Worried about inflation? Buy gold.

Worried about how the dollar will perform versus other currencies? Buy gold.

Worried about a zombie apocalypse? Buy more gold.

But in 2013, gold's safe-haven status is coming into question in a big way. Worse, it's pointed considerably lower from here; so, if you still hold the yellow metal, it's time to hit the sell button. Let me show you why.

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First of all, I'm sure that I'm ruffling some feathers by saying that gold's a sell. The amount of emotional attachment that some people have for gold is absolutely incredible -- but I get why the gold bugs like the metal so much. After all, it's treated them pretty well over the last decade.

Since 2003, gold prices have rocketed more than 223%, providing a whole lot of returns in a very tough market. Maybe even more strikingly, gold actually gained value in 2008 (when stocks were shedding more than 36%) and then went on to match the S&P's bounce-back performance in 2009.

You would've had to be nuts not to be enamored with gold back then. But things look very different right now.

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What's The True Value of Gold?

Gold bugs might want to stop reading right now. This part is going to be a little unpleasant.

Fact is, gold doesn't have any fundamental value -- or at least very little. It's got precious few industrial uses (unlike silver, for instance). And those it does have become more specious at high prices where substitutes become comparatively superior.

You can't eat it (well, with the exception of Goldschlager, I suppose), and it's pretty worthless for building, hunting or transportation.

Sure, there's a finite amount of gold on this planet. But scarcity alone doesn't give an asset value; if it did, 8-track copies of Barbara Streisand's Christmas album would be selling for more than $2.99 on eBay. Sometimes, stuff is scarce for a reason.

So, no, gold isn't like most other commodities. But that's just fine because gold isn't a commodity in the first place.

That's right, gold isn't a commodity. It's a currency.

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And lucky for gold bugs, other currencies don't have much in the way of intrinsic value either. They're only worth what the market says they're worth.

That means that it makes sense to start with a technical look at gold. And judging by the charts, it's not a pretty sight:

The chart above shows gold's price action for the last year. It doesn't take an expert technical analyst to figure out the fact that gold prices, as measured by the SPDR Gold Trust ( GLD), are in a downtrend. Every attempt to push above that blue trendline in 2013 has been swatted down by a glut of selling pressure in the precious metal; that doesn't bode too well for buyers.

Momentum adds some extra evidence that sellers are in control here - any moves in 14-day RSI above the 50 level have been met with swift selling. That's an indication that gold is locked in bear-market mode right now.

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But for context, let's zoom out a bit:

The message from this weekly chart of spot gold prices above is just as clear. Gold was in a stellar rally coming off of the lows of 2008, but something big changed in late 2012. The uptrend that had been intact for more than three years got broken, and gold prices started making lower highs and lows.

Take the labels off the chart and forget that it's gold for a second. Is that a chart you'd want to own? Any trader is going to answer that question with a resounding "no."

The change in gold's trend isn't just happening in the intermediate term, however. This breakdown looks like the beginning of a major secular shift lower. This monthly chart of spot gold says it all:

This chart should be a good reminder that buying gold hasn't always been such a slam-dunk trade. In fact, if you bought the metal in the early 1980s, you would have spent the next two decades under water, waiting for gold to get back to even for you. Assets move in big, secular cycles -- and the long-term chart for gold makes it look like the bull cycle is rolling over in 2013.

Gold broke down below its decade-long uptrend line earlier this year, only to retest that newfound resistance level with a pullback. That's a textbook bearish move. And after such a swift move higher in the last five years, there's a void of missing support levels on the way back down.

Once again, ignoring the fact that we're looking at gold here, would you want to own this chart? I wouldn't.

Gold, the Currency

I said earlier that gold didn't have much fundamental value. But that was as a commodity. Now that we've established that gold is really a currency, there are a few fundamentals worth exploring.

The first is gold's biggest enemy. I'd bet that most investors believe that inflation is gold's biggest adversary. When inflation is high, gold becomes more valuable. But while that would be true for a commodity, gold's real adversary is interest rates. When U.S. dollar denominated assets -- such as treasuries -- sport high yields, gold gets shellacked (just look at what happens when rates were at sustained high levels in the 1980s and 1990s).

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And while interest rates can't get much lower from here, they do have a lot of room on the upside. That would be a disaster for gold.

Another important valuation tool for currencies is the exchange rate. Today, gold's real goods buying power per ounce is near all-time highs. Gold bugs are normally quick to point to that fact as a byproduct of the waning value of the dollar, but remember we're not weighing that metric in dollars (or any other fiat currency).

As a currency, gold looks overpriced.

Avoid Miners!

I think the case for selling gold is very strong right now. But the case for selling miners is even stronger.

That's because the economics of a gold miner are strikingly different from the metal itself.

At their most basic, gold miners make money by pulling the yellow metal out of the ground for X and selling it for some value greater than X. Thing is, as gold prices have risen to all-time highs, gold miners have brought pricier gold operations online -- and average gold production costs per ounce have tripled in the last decade.

That model of bringing pricier gold mines online works really well when gold is in a bull market. But it's extremely painful when prices start to drop. It means that miners' margins get squeezed very quickly, especially as they bare the costs of re-shuttering their most expensive production mines.

In short, gold miners are a leveraged bet on gold on the way up, but they're a leveraged bet on gold on the way down too. Caveat emptor.

No matter how you slice it, gold looks like it's set up for a move lower.

As long as the metal stays in bear mode from a technical standpoint, it makes sense to stay far away. (If you're looking for a new place to park your newfound gold proceeds, stocks are looking pretty good right now.)

Even real gold could end up looking like Fool's Gold pretty soon.

-- Written by Jonas Elmerraji in Baltimore.


Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji

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