Is It Finally Time to Sell Gold and Gold-Related Stocks?

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...two main reasons behind gold's rise may not be valid anymore, at least in the short term. At the last Fed meeting, interest rates were cut by 75 basis points to 2.25%. When that happened gold prices unexpectedly collapsed 100 dollars in 3 days. The reason was that investors in the metal were disappointed and the markets were actually looking for a 100 basis points cut. The Fed's next meeting comes in April and this time traders are expecting a 50 basis point cut.

Gold prices have been rising sharply over the last few months while the equity markets went into a sharp correction. Over a one year period, the popular Gold ETF (GLD) is up almost 40%. Compare that to the S&P 500 (SPY), which is down 10% during the same period.

The main reasons for the rise were basically inflation and the weak dollar. The explosive growth in emerging markets over the last few years has led to a huge commodities bull run and fueled global inflation, which in turn put pressure and weakened the USD against most of the major currencies.

And then to make things worse, a nasty credit crisis hit Wall Street last fall due to the collapse of the mortgage subprime market.

The Federal Reserve, in order to avert a complete collapse of the financial system, had to start slashing rates and add liquidity to the system. Interest rates went down from 5.25% to 3% in a few weeks. That's when gold prices had their steepest rise, going up 300 points since November.

So why do we think you should sell gold, and especially the mining stocks, if prices are so strong?

First, if you look at the mining stocks prices compared to the gold prices, while the GLD is up 40%, the mining stocks ETF (GDX) is up only 20% over a one year period. The reason for the underperformance is that it is getting harder and harder to extract the metal from the ground and also more expensive. The margins for mining companies are not as good as they used to be.

Second, and more importantly, the two main reasons behind gold's rise may not be valid anymore, at least in the short term. At the last Fed meeting, interest rates were cut by 75 basis points to 2.25%. When that happened gold prices unexpectedly collapsed 100 dollars in 3 days. The reason was that investors in the metal were disappointed and the markets were actually looking for a 100 basis points cut. The Fed's next meeting comes in April and this time traders are expecting a 50 basis point cut...

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