When Should You Sell Gold?

One potential warning sign to watch out for...

THE AIM of any bull market is to keep you out of it. Corrections are seen as an excuse to take profits and move on, writes Greg Canavan for the Daily Reckoning Australia.

And so it looks in the great gold bull market. Gold is correcting after a stellar few months. That shouldn't be surprising. But all the talk of a gold bubble will have some of you worried.

Don't be. We've come up with a sign to watch out for. When it arrives, you'll know the bull market is probably within a year or two of topping out. That's plenty of warning we reckon.

There has been much angst about why the gold shares are not keeping up – or even outperforming – the price of bullion. Much of this has to do with the broking community that provides investors with information and valuations on the gold stock universe.

For most other companies, analysts nearly always assume a steady rise in revenue and earnings. Not gold companies though. In all broker forecasts we have seen, the assumption is Gold Prices will fall. So in their 'models' they assume prices will peak this year (for the past five years it's always been 'this year') only to decline sharply in subsequent years. Such assumptions have a big impact on companies' estimated values.

When brokers and investment bankers finally start putting rising Gold Prices into perpetuity into their models, you'll know the gold bull market is reaching its final, manic phase. Such a change will have a massive impact on valuations and send gold stocks soaring.

We think this is a good signal because it's a manifestation of an emotional response to years of rising Gold Prices. Once brokers and investment banks really start to believe in the story – and tell their clients to as well (to justify paying ever higher prices for Gold Mining stocks) – the long-term gold bull should start planning his or her exit.

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