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Is now the time to dump gold miners?

Gold has had a stellar run so far in 2014. The price for the precious metal is up 11% in just three months and the sudden U-turn has sent investors flooding into gold mining companies, many of which have favourable prospects at higher gold prices after heavily slashing production costs.

Shares in Northern Star Resources Ltd (ASX: NST) have increased 49% so far in 2014, while Newcrest Mining Limited (ASX: NST) is up 25% and Evolution Mining (ASX: EVN) has climbed 37%. These are big gains, but according to Jeffery Currie, the bearish head of commodity research for Goldman Sachs, the good times could be coming to an end.

Mr Currie is cited in the Wall Street Journal’s Market Watch saying the price of gold has been driven up by the ‘three Cs’ so far this year: cold weather, Chinese credit concerns and Crimea tensions – factors which are likely to lose momentum going forward.

The extreme cold weather and polar vortex which froze parts of the U.S. earlier had the effect of a short-term slow down on the U.S. economy. This impacted economic data which gave the impression the economy was doing poorly, driving up gold demand. This is likely to correct as the U.S thaws and normal business resumes.

Concerns over a slowdown in China’s heavily credit built economy have also helped to push worried investors into gold this year, but Mr Currie believes these are short-term worries.

Fears of conflict and economic trouble in Europe spurred by Russia’s occupation of Crimea were the third ‘C’ pushing up gold prices. However with the situation currently advancing quickly and relatively cleanly these fears are expected to subside.

The result, Currie says, is an outlook of falling support for the price of gold which will bring it down towards his target gold price of US$1,050 per ounce. If this was to eventuate listed gold miners could again be in for a tough time as operating margins get squeezed, threatening future earnings and thus share prices.

Foolish takeaway

Regardless of whether Mr Currie is right or wrong, his views are a timely reminder for gold investors to review their comfort with gold exposure given the big gains many miners have had and the potential for volatility in the year ahead.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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