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Seeking Alpha

Tuesday, October 30, 2007

Sell Your Gold and Oil Now

(Stocks in this article: NYSE: ABX, NYSE: PTR, NYSE: XOM, NYSE: NEM, NYSE: GFI, NYSE: GG, NYSE: MER)

While gold hits new highs, I am boldly arguing that the price of the commodity and related shares should peak this week on the Federal Open Market Committee Policy Statement. I believe the impetus for dollar decline will be withdrawn, and gold and oil prices will appropriately recede. Thus, I advise investors to take profits in their high flying gold and big oil stocks ahead of the meeting.

Since before the last Fed cut in September, the dollar has dived while stocks have run up into this meeting on expectations of a history that repeats itself. In the past, big Fed easings have been followed by trend of continued rate cut, but things threaten to be different this time around, and this view is not unshared. Up until last week, many on the street, myself included, thought Fed inaction was at least as possible as a 25 point cut.

News flow abruptly changed that view, but I see this as a clouding factor. Last week's unraveling at Merrill Lynch (NYSE: MER) and the reported existing home sales weakness were viewed by the market as catalysts for cut. However, your columnist here points out that this was just the reporting of old bad news, though $2 billion more of it for Merrill. The important thing is that this was news the Fed was well aware of way back in August when it held its emergency meeting.

Thus, today, I advise that even a Fed 25 point cut might not be enough to sustain some of the recent rise of certain asset classes (read gold and oil). I expect the Fed will follow its action, or inaction Wednesday, with warning of dollar and inflation dangers. It's entirely possible that the Fed could communicate a neutral bias moving forward and point toward the solid Q3 GDP report expected that same day for support.

Now, it’s important to note that the third quarter GDP figure will likely be significantly inflated by improvement in the trade deficit. This improvement is due to dollar softness and related export strength, and ironically, also because of lighter domestic consumer spending and import softening. Therefore, I view the expected Q3 GDP strength as built on a false foundation.

In light of my Fed expectations, I am pounding the table, advising you to take profits in your gold and oil stocks for the near term. Shares of Barrick Gold (NYSE: ABX) are up 43% (through Friday) since their August 16 close, and I think it’s time to abstain from greed. Likewise, shares of Newmont Mining (NYSE: NEM) are up 21% and will report earnings on Wednesday. Goldcorp (NYSE: GG) has soared 55% and Gold Fields Ltd. (NYSE: GFI) is up 33%. Unless you foresee significant war breaking out in the next month, I think you have to trade in greed for dollars now.

Oil giant Exxon Mobil (NYSE: XOM) is up some 14% over that same time span, and we would take some profits there as well. PetroChina (NYSE: PTR) looks like an even wiser sell at this point, up some 96% during that span.

It takes guts to make this call as gold and oil hit new highs Monday, but if the Fed indicates further easing is suspect, the dollar should find some footing and these commodity plays become played out at least in the near-term.

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