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Why Newcrest sunk 8% yesterday

It was a rough day on the stock market yesterday for gold mining stocks with the gold price plunging to its lowest level in over two years. Having fallen over 20% from its highs, gold is now officially in bear market territory. With the gold price falling, there is nowhere to hide for gold mining stocks, including the giant Newcrest Mining (ASX: NCM) which sunk over 8% and hit an intra-day 52-week low. Newcrest is now down nearly 20% in 2013.

The reasons for weakness in the gold price are many and varied but include the failure of money printing to ignite inflation. Adding fuel to the fire was yesterday’s Chinese growth data, which came in below expectations and appeared to cause quite a shock to the market. The data showed the Chinese economy grew 7.7% in the first quarter to March; consensus expectations had been for 8%.

The gold price is certainly creating headaches in investment circles. Hedge fund billionaire John Paulson has seen his personal fortune and his investors’ funds slashed as his aggressive bets that the gold price would keep rising fail to materialise. Paulson is just one of many hedge fund managers with large gold positions, which sets the scene for a potential massive squeeze as speculators all rush for the exits at the same time. If this scenario plays out, expect it to send the gold price down much further.

Few gold miners have been spared in the fallout, with the mid-cap companies faring particularly badly. Medusa Mining (ASX: MML) is down close to 40% this calendar year, while Perseus Mining (ASX: PRU) and Kingsgate Consolidated (ASX: KCN) are both off about 30%.

Foolish takeaway

There are plenty of experts who try to predict the price of a metal that pays no yield to its owners and just sits in a vault. In the meantime, there are many productive businesses available that produce reliable and dependable earnings streams selling a product whose value doesn’t constantly change.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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