Turkey of the week: victim of the gold bubble

By Paul Hill Jul 03, 2009

Paul Hill

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Gold is in a bubble. I realise this view is not shared by the rest of the MoneyWeek team, yet to me the anecdotal evidence is compelling. Firstly, demand for jewellery, especially in places like India, has fallen about 25% in 2009 due to the sky-high prices.

This weakness hasn't affected the gold price, at around $900-$950 an ounce, because it has been more than outweighed by inflows from speculators.

In just five years, exchange-traded funds (ETFs) have become the world's sixth-largest owner of gold, behind America, Germany, the IMF, France and Italy. But this can't go on forever.

In addition to this, there have also been some bizarre goings-on of late. For instance, a German company has just started selling bullion from vending machines in airports and railway stations – which smacks of taxi-drivers tipping internet stocks back in 1999. And that's not all.

Randgold Resources (LSE: RRS), rated a BUY by Bank of America

Another danger sign has been the drought of merger-and-acquisition activity across the gold sector, in stark contrast to the takeovers announced in base metals. I suspect the scarcity of deals is because those in the know (i.e. directors of gold miners) believe that buying an expensive rival at top-of-the-cycle prices will destroy shareholder value.

Lastly, it's worth remembering that even though we only just avoided a financial Armageddon, the gold price has failed to consolidate above the $1,000 an ounce barrier – a sure-fire sign that prices are way out of kilter with fundamentals. If I'm right, then it's bad news for precious metal stocks such as Randgold.

This FTSE 100 stock owns gold mines in Mali and the Ivory Coast, and has seen its shares rocket eightfold over the past five years. It now trades on one of the highest multiples of any London-listed miner, at over 60 times 2009 earnings. It's also worth mentioning that all Randgold's assets are found in the frontier regions of West Africa, meaning geopolitical risk.

To cap it all the board has ruffled the feathers of the influential Pensions Investment body, who recently advised shareholders to vote against the executive pay awards, in response to the CEO being paid $11.6m in 2008, up from $3.3m.

I appreciate gold's merits as a safe haven and the ultimate hedge against a currency collapse or hyperinflation. What I don't like is the premium you have to fork out for this type of insurance. Time to take profits. Interims are due out on 28 July.

Recommendation: TAKE PROFITS at £40.50

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

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