Why Rally In Gold Prices, Miners Will Be Short Lived


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Gold prices have shined at their brightest in four months so far this week. And gold miners' stocks have left the rest of the stock market in the dust, soaring to the top of the Leaderboard this year in a dramatic reversal of fortune after coming in dead last in 2013.

Some market watchers believe worries over economic growth in China and political turmoil in emerging markets sparked a flight to safety in hard assets.

But investors best refrain from chasing them, because the recent uptrend will be short-lived, say some gold analysts.

Gold ETF Outperformance

Gold bullion as tracked by theSPDR Gold Shares ETF ( GLD ) has gained 10% year to date, paring its 12-month loss to 18%.

Market Vectors Gold Miners ( GDX ), tracking a basket of large gold miners, has surged 23% year to date on the stock market, while the SPDR S&P 500 ( SPY ) has hardly budged. GDX's rally this year lightened its one-year decline to 33%.

Market Vectors Junior Gold Miners ETF ( GDXJ ) surged 33% this year, shaving its 12-month collapse to 38%.

Gold closed down at $1,330 an ounce Wednesday after rising for 22 of the past 30 trading days. Gold prices climbed the past two months as many mutual fund managers rebalanced their portfolios, said Erica Rannestad, senior precious metals analyst at London-based Thomson Reuters GFMS. Rebalancing entails selling securities that rise above desired weightings and buying those that fall below the mark. Demand seasonally rises in January ahead of the Chinese Lunar New Year.

Rannestad is seeing physical gold demand ebb as prices rise. But a break above $1,300 an ounce triggered fresh buying in futures and options contracts, she said. She believes physical gold demand will be capped at $1,380 and expects the gold price to fall back to $1,000 within the year as the Federal Reserve continues tapering its stimulus and inflation remains low. Investors will prefer equities over gold as the U.S. economy improves, decreasing economic uncertainties that tend to trigger gold buying, she added.

"Total open interest of gold futures has not broken out of the downtrend from the 2011 top," Tom McClellan, editor of The McClellan Market Report, said in an email. "Doing that would say that it is a confirmed new uptrend for prices, and so far we do not yet have that message."

Countertrend Rally

Gold bugs believe gold prices have finally bottomed after sliding the past 2-1/2 years. But the recent uptrend is merely an oversold bounce or countertrend rally in a long-term downtrend, says David Hunter, chief market strategist at KCCI Ltd., a brokerage firm in Jersey City, N.J. He forecasts gold prices falling below $1,000 an ounce this year to as low as $800 to $900 an ounce.

"At a true bottom, most of these so-called long-term bulls will have thrown in the towel, as global deflation becomes the dominant reality," Hunter said in an email. "I do think the precious metals will put in an important bottom later this year, but only after another big leg down."

"The precious metals are the leading edge of the deflation trade and will likely bottom once it becomes obvious that the global economy has entered a deflationary contraction," he added.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: GLD , GDX , SPY , GDXJ

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