Although the above headline may have many Members believing that we have changed our tune with regards gold this is most definitely not the case. In light of recent gold price moves, we are advising Members to reduce exposure to both Randgold Resources (LSE, RRS) and Lihir Gold (NASDAQ, LIHR), however the fundamentals all still point to the continuation of the prevailing long term bull market. Accordingly, the take profits recommendation applies more to long term holders of both stocks.

So why reduce our exposure to the yellow metal? Well, much like the equity markets since March, after such a tremendous surge in the gold price over recent weeks the likelihood of a period of consolidation or price weakness in which ‘steam is released’ from the gold trade has increased significantly.

Similarly, the decline of the structurally impaired US dollar is also due a shift in momentum. It is not often that positive economic news has translated into bad news for investment markets however in the case of the surprisingly positive US economic data recently released (please refer to the market comment for details), that is exactly what happened. The news prompted fears that the US Federal Reserve would have to raise rates sooner than previously expected.

This in turn saw an impromptu unwinding of the US dollar carry trade, which has been a driving force of equity and commodity market strength of late. The US dollar rally that the unwinding caused was all the encouragement markets needed to sell off, with gold perhaps the highest profile victim.

The key question for investors is whether gold’s increased price volatility is indicative of a change in trend. Rising volatility is certainly often associated with at least a near term directional change in prices and this may well be the case in this instance.

Gold stocks have typically underperformed the metal’s price performance on the upside in recent years, while participating enthusiastically on the downside. It is for this reason that we consider it prudent to remove some profits from the table through a sell half recommendation on two of our major gold stocks.

In the case of both Randgold Resources and Lihir Gold, Fat Prophets Members in the main will be sitting on extremely handsome profits.

Since our initial recommendation of Randgold, at £15.60 back in September 2003, its shares have embarked on a protracted climb which has seen the holdings of those who bought on our initial recommendation increase by 221%. When sitting on gains of such magnitude, history tells us that the most prudent course of action is to take some money of the table.

Randgold is trading on an extremely high forward earnings multiple of around 107 times (dropping to 46 times in 2010) and although gold miners typically trade on premium ratings, a period of gold and equity market weakness could set the stage for an even more pronounced fall in its near term share price.

We remain steadfast in our view that Randgold has the production, development and exploration levels to live up to current expectations. As in our last report (FAT 308), the acquisition of Moto Goldmines brings much to the table and although 2009 has proved a challenging year operationally, the Mali based Gounkoto project will join the Tongon mine in the Ivory Coast, Massawa in Senegal, and Kibali (formerly known as Moto) in the Democratic Republic of Congo, to keep long term earnings extremely secure.

With this in mind, we are only recommending this ‘sell half’ recommendation to Members whose have held Rangold for a significant period of time, and who will have substantial unrealised gains. For those who entered Randgold Resources relatively recently we advise leaving the position unchanged and to ride out any near term turbulence with a view to a long term hold.

Flicking to the charts, Randgold Resources has had an exceptional run during 2009 seeing its share price more than triple in value in the past twelve months. Given the near exponential rise in the price of the underlying gold commodity we are not surprised to see a correction as the market takes a pause for breath and clears out the weak longs.

Looking at the daily chart of Randgold Resources we can see that the recent surge higher has moved a good distance from its technical support. We have decided to use the recent spike higher as an opportunity to take profits on the spectacular run this stock has had. We will be watching the correction in both the physical commodity and the gold mining stocks closely for an opportunity to top up our remaining holdings at more appealing levels.

In the case of Lihir, the case is clearer cut and we recommend all Members sell half their holding. Since our initial buy recommendation in May 2005 at US$16.20, Lihir’s share price has increased by 82% and such a gain is not to be taken lightly even in light of one of the most robust market moves in recent times.

As in the case of Randgold we remain extremely upbeat with regards Lihir’s future prospects. Recently released results for the third quarter illustrated that the company is well on track to meet full year production guidance of 1-1.2 million ounces.

The company has also upped its reserves at Lihir Island by 7.5 million ounces to 28.8 million ounces. And what’s more, whilst many of its contemporaries struggle to hang on to operational efficiencies management at Lihir have managed to keep a lid on total cash costs and are set to keep them below US$400 per ounce for 2009 as a whole.

From a charting perspective much like Randgold, Lihir has performed exceptionally well this year, rallying long before the recent run in gold and benefiting lately from the eventual move higher in the physical commodity. The stock remains in a long term uptrend but has corrected in recent weeks.

We can see on the daily candle chart that Lihir Gold has pulled back to support at the confluence of its short term uptrend and horizontal support. We are still bullish on the long term potential of gold and gold stocks but we have decided to err on the side of caution and book some profits on this holding.

We should re-iterate however that both these recommendations are nearer term orientated decisions driven by our view that gold stocks are susceptible to a period of weakness following gold’s correction. It does not reflect an alteration to our view that gold is in a secular bull market. Indeed, our longer-term view of gold and the US dollar remains unchanged and we will certainly look to increase our exposure as opportunities arise.

And here is why. Despite the perception that the latest unemployment data may hasten the Fed’s eventual decision to tighten monetary policy, the reality is that gold and the dollar’s fundamentals simply have not changed.

There is little chance that the Fed will raise interest rates while unemployment remains at considerably elevated levels. As we discussed in our commentary going into 2009, policy makers do not have an appetite to risk premature tightening. It is far more palatable from a political perspective to move a little late, thereby risking inflation rather than a possible return to a deflationary scenario.

While US economic data does show that a recovery is in process, it will be a slow and steady affair. We do not expect a rate increase from the Fed prior to the second half of next year. When it does come, US rates will still be at exceptionally low levels. This will prove a significant factor in the US dollar’s valuation and we do not expect its latest bounce to prove sustainable.

The other factor specific to gold is of course the structural change to the metal’s supply/demand dynamics. As we have discussed in previous reports, central banks’ move from net sellers to net buyers of the metal is of critical importance. Moreover, once central banks such as China and India’s set their course towards a greater allocation to gold (as they have), the strategy will remain in force for many years.

Global gold production has declined over much of the last decade, from 85 million ounces to around 75 million this year. This has exacerbated the shortfall between supply and demand. Central bank selling has previously served as the primary source of missing supply. With this supply switching to additional demand, the ‘stronger for longer’ mantra seems entirely appropriate for gold.

Higher prices do of course encourage more scrap to enter the gold market, while jewellery buyers may defer their purchases in many cases. These aspects of the gold market however, pale into insignificance in the face of central bank buying and investment demand more generally.

Egon von Greyerz, writing for Matterhorn Asset Management, neatly quantified the impact of increased investment demand for gold in a recent paper. He highlights that there is only $900 billion (at current prices presumably) of physical gold held privately for investment purposes. This represents less than 1% of total global financial assets. A global re-allocation to gold of just 2% or 3% therefore has the potential to drive the metal’s price considerably higher in the years ahead.

As we outlined above though, it is likely that gold will pause for breath after what has been a phenomenal push through the US$1,000 barrier. This is likely to cause some loss of investor interest in gold stocks and potentially further erosion of the gains that we have achieved to date.

Turning to the price action, gold has seen a sharp correction this week pulling back by over 100 points from its US$1226 high that was made on the 3rd of December. The recent rise has been very steep and has travelled a good distance from its nearest horizontal support level of US$1033. This recent pullback has been tough on late to the party buyers but is healthy and necessary if the long term uptrend is to be sustained. For long term gold bulls this may be an opportunity to bank some profits and wait for a better re-entry point closer to the US$1000-$1033 support zone.

As a result, we recommend that Members sitting on substantial gains in Randgold Resources (LSE, RRS) reduce their exposure by half. In addition we advise all Members to reduce their exposure to Lihir Gold (NASDAQ, LIHR) by half.