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“Gold is going to get crushed”

So says Ric Deverell, head of commodities research at Credit Suisse Group AG.

Mr Deverell sees gold trading at US$1,100 an ounce in a year and below US$1,000 in five years. He says the lower prices are unlikely to lure more central bank buying. While central banks like to have diversified reserves, their managers wouldn’t want to lose money if gold enters a period of declines, he said.

“The need to buy gold for wealth preservation fell down and the probability of inflation on a one to three year horizon is significantly diminished”, he has told Bloomberg.

Investors have lost faith in the world’s traditional store of value, despite central banks continuing to print money on an unprecedented scale. However, it seems retail investors have seen the current price as an opportunity to buy gold bullion, bars and coins. The US Mint ran out of its smallest gold coins in late April, while the Perth Mint said volumes jumped to a five-year high. India’s gold imports are expected to rise by 47% to 225 tons in the second quarter to meet consumer demand, according to the All India Gems & Jewellery Trade Federation.

But Mr Deverell says this is just bargain-buying, bringing forward activity, but is not massive buying. Possibly contradicting Mr Deverell’s comments somewhat, the World Gold Council issued a report showing central banks bought 109 tonnes of gold in the first quarter.

Despite the retail and central bank buying though, fear over where the gold price will head is driving the market. With no real intrinsic value, and detached from its normal drivers such as inflation, it’s anyone’s guess where the gold price will be in six months or six years. A sudden global crisis could trigger a massive rise in the price; or the gold price could just meander down or crash below US$1,000 an ounce.

At that price, it’s estimated most gold miners will be lucky to break even, and could offer opportunities to pick up gold miners on the cheap. As the chart below shows, gold equities have fallen much further than the gold price, since the start of this year. Overnight, the gold price lost 0.7% to US$1,387 an ounce.

Gold Stocks vs Gold

Source: Google Finance

On the back of the falling price, ASX listed gold miners are being hit again this morning, with Newcrest Mining (ASX: NCM) down 2.8%, Regis Resources (ASX: RRL) losing 4%, Perseus Mining (ASX: PRU) falling 5.2% and Beadell Resources (ASX: BDR) sliding 1.6%.

Foolish takeaway

Gold mining stocks are either value traps or very cheap. The answer will depend on where the gold price goes from here, with the market suggesting investors stay away at the moment.

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More reading

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). Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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