Gold in a Credit Crisis 31 comments
Hard Assets Investor
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Jon Nadler, senior analyst for Kitco Bullion Dealers (Montreal), is known for a fresh, clear-eyed perspective on the gold markets ... one that neither tilts too far into the gold bugs camp nor ignores the positive attributes of gold as a store of value.
He spoke recently with the editors of HardAssetsInvestor.com about recent trading in gold and the outlook for gold, silver, platinum and palladium.
HardAssetsInvestor.com (HAI): A lot of people are confused by the gold market right now. On the one hand, we have conditions that should be ideal for gold: the Federal Reserve printing money, tremendous turmoil in the market, etc. But gold is trading down sharply, and there is talk of deflationary forces in the market. What's going on?
Jon Nadler, senior analyst, Kitco Bullion Dealers - Montreal (Nadler): I think the first thing you have to do to answer that question is step back a bit and look at it from a broader perspective. There is hardly any historical precedent to evaluate gold's presumptive behavior in a deflationary cycle. The only example we have is 1929-1933, and we didn't have a floating gold price back then; it was fixed.
Gold did fall less than other assets back then, as the quest for cash became a question of survival. But it wasn't extraordinary.
From that perspective, I think that it's a decent possibility that gold will act as a reverse hedge here. It might fall, down to $600/ounce or even $500/ounce, but at the end of the day, it will likely fall less than other assets.
HAI: You don't see gold soaring as investors rush to it as a safety valve?
Nadler: You've certainly had a lot of doom-and-gloom newsletters telling us that this crisis is the big one ... the one that would push gold not just to $1,000/ounce, but to $5,000/ounce.
We've always said: Be careful what you wish for. Do you really want to live in a world were gold is $5,000/ounce? It's not a desirable scenario. Where would the rest of your portfolio be with gold at $5,000/ounce?
The newsletters told us people would be bartering gold at the 7-11 stores. But for the second time in three decades, gold has disappointed on that front. First it disappointed back when we had 16% inflation, because people came along and raised interest rates and lowered taxes. And now it's disappointing during the recent financial crisis.
At this point, you have to ask, what will it take to move gold to thousands of dollars an ounce? If gold couldn't budge past $930/ounce when Lehman Brothers and the whole house of cards was falling down, what will it really take?
HAI: So are we past the worst of the credit crisis?
Nadler: The crux of the matter is the still inflated real estate prices in the U.S. Prices are still at inflated levels, despite the 20%-30% pullback. Until that changes, we cannot get to the real bottom.
There are signs that the credit crisis is thawing. But the fall in equity markets reflects very tenuous conditions for the next year or two.
What bothers me is the one-off events we've seen this month, with Iceland and Hungary melting away, and Argentina looking like it will default. If those kinds of things start to look less abnormal and more like a simmering reality, you'll probably start to see loss of faith in all foreign currencies.
HAI: We've already seen the dollar respond positively in recent weeks.
Nadler: And then some. We've seen not just a resurrection of the dollar, but a second coming. That's surprised every single pundit in the book.
It's not internal vigor that the dollar is benefitting from, however. It was oversold, and there is simply a lack of alternatives, particularly with the sickly euro and the new infighting in the European Union.
Then you have these Russian meltdowns, and South Korea also. People are saying, you know what, the dollar may be a crappy currency up to now, but it's not going to lose its position entirely as a dominant reserve currency. If we have to sit on something, it might as well be this.
I don't think we're going into a Weimar-Republic-style hyperinflation in the U.S. One thing the Federal Reserve has learned is how to inject currency and then also how to mop it up. That's one of the key reasons that recessions since World War II have been half as long and half as deep as they were previously.
HAI: What other factors are at work in the gold and commodity markets?
Nadler: Two big items. The first is the post-election psyche among investors and institutions in the U.S. Whatever change there is, there will be change, and how people reflect on it will be important.
The other is hedge funds. We saw some $300 billion to $400 billion injected into the relatively small and concentrated commodities space over the past few years, which pushed some situations completely out of order. And once prices started stretching away from reality, it became a question of when the party would stop. I think it stopped around July 4, when people started hearing talk in Congress about intervention in the oil markets: speculative limits, profits taxes, etc. Once the hedge funds saw that, they saw the writing on the wall and said, well, you know, we've had a beautiful run for eight years and an unbelievable one for two ... what are we waiting for? So they pulled out. And now, in the credit crisis, they started to move into the dollar.
HAI: So what do you see in the future for the major precious metals: gold, silver, platinum and palladium?
Nadler: The industrial white metals will reflect the health or lack thereof in the demand for each of them.
Silver is still probably the best play among the white metals, given its low costs. Palladium might be as well, since it can substitute for gold and platinum at high prices, and people may look to cut costs. Both of those have been quite a bit oversold, and one can expect some relative strength there.
I think you're scraping the bottom of the barrel at $750/ounce platinum and $150/ounce palladium. Silver is probably almost there already: $7.50-$8.50/ounce would be a bargain for silver.
We're seeing in India this week that the festival season might turn into a silver festival rather than a gold festival, and Indians are quite happy buying silver below $10/ounce. The upside, however, for gold, silver and palladium is limited.
We don't normally make projections except twice a year, but I should think platinum has no trouble coming back to $950-$1,250/ounce range, with palladium in the $210-$280/ounce area.
As for silver, if we can get back to $13-$14/ounce area by the middle of next year, that would be great. I'm not one who puts much stock in the theory that the gold/silver ratio should be 60-to-1 or 80-to-1, but 25-to-1 sounds more reasonable.
That doesn't imply gold can't go its own way. People are wishing for a decoupling of gold from other commodities and a reattribution of its monetary attributes. I'm not sure I expect that, given its recent performance over the past three months or so. Some stability in a decent range of $650-$850/ounce is OK; it's nothing to lament. If everything else is falling, and falling a lot, gold staying put is OK. It's not the hyper end-of-the-world scenario people get so revved up about, but it's OK.
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And for those institutions who had gold in their positions to unload during this present-day dilemma to cash in to meet those overburdening margin calls and such, aren't you glad and relieved you had that gold to play with??
Yes, Gold and Silver will rally incredibly but once the job is done regarding US debt and the Amero Union they will crank up interest rates in a economically painful replay of Paul Volcker's years as FED chairman. Inflation will be capped and you should sell your Gold, Silver, Mining Stocks, Resource Stocks and Buy Stocks and Bonds at major lows. Though one would need to review how far along the BRIC nations have come in their Quest to match the current US a middle class way of life if they still have a long way to go then perhaps the resource sector has a ways to go unlike the early eighties. So we might see Stocks and Bonds bottom but Resources/Commodities could still have legs for further gains. Remember history merely rhymes . . .
Go check your own records Mr. Commodities expert. There have been huge (around 50%) corrections in oil, wheat, soybeans, corn, etc while all marched steadily up in price.
My guess is you're a FORMER employee for a reason.
You Greens never cease to amaze me. Don't be so ready to diss all that fur, you made need it to stay warm before it's over.
And the "magic" in gold has somehow managed to survive for thousands of years now, arsenic or no.
It is just a matter of time before the antics of idiots like Paulson and Bernake and the joke of a hearing that is going on in the congress will erode global faith in American financial system. It is just a matter of time before people realize that the U.S. givernment plans to flood the world with currency printed in presses that are running overtime. When this confidence falls where do people run to? I assure you it won't be another paper currency because it appears that the ROW central bankers are been equally irresponsible and their paper money is probably as worthless. For centuries Gold created the basis for a fiscally responsible financial system until the paper money standard took over and got us into this mess. It's scarcity creates value and through centuries it has held up its value through various civilizations and many ups and downs. To argue that all this has been undone in the last 20 years is a very a foolish thing to say.
Jon Nadler must be warm and snugly in that pocket. Why else would he not start his answer to the first question posted with something accurate and profound like: "The reason gold and silver are where they are today is due to ILLEGAL MANIPULATION by the elitist greedy pigs, namely U.S. banks, that are allowed to steal from the American public, and roam free from prosecution because the government officials entrusted to ensure that type of illegal activity doesn't happen, are in bed with the manipulators", period.
But, because he cannot do so, all you get from him is luke warm soup with a sprinkling of spice. Typical.
For Nadler to answer the questions posed to him in the manner in which he did says all you need to know.
Yes, virtually all gold ever mined is still around.
But central banks can't print gold like they can (and are) printing money.
Your view does make sense if you feel that all gold is is an industrial product used primarily in the jewelry industry.
I think it is hard to make a case that it is not a monetary asset, however. Even much of its use in jewelry is precisely because it is viewed as something of intrinsic montary value, unlike paper money which can be printed without limit at virtually zero cost, and which is backed not by any inherent value but merely by governments and the police and military forces that back them up.
1The supply destruction due to current low base metal and precious metal prices. NO ONE can produce at heavy loss indefinitely. They must shut down if profitability does not return soon.
2.Investment demand. This is not just from desire to own physical safe haven assets during crisis times, but also the fact that any thing selling FAR BELOW their production cost has to attract investments. Because you can pretty much buy and sit back, kowing prices MUST return to a fair level ensuring moderate profitability for producers.
Read more on the discussions:
seekingalpha.com/artic...
More on the topic of intrinsic values of physical assets:
seekingalpha.com/autho...
As for recent commodity plummet and dollar rally. It is NOT a result of any fundamental change of supply and demand, but rather, the supply chains in the middle are being squeezed due to liquidity squeeze. It generated a surge of supply when inventories of the supply chain is dumped into the market, generating a false over-supply condition. This is not sustainable as suppliers are being destroyed.
I see an abrupt and sudden switch from current deflation, to hyper inflation. The change will come within one or two weeks, and will be very abrupt and surprise every one. I shall talk about why it will be abrupt in the next article.
Gold might only be useful if the civilization collapses, but by then 90% of us would be dead anyway, and the survivors would be feeding upon corpses in order to survive.
And yes, I say that Kitco is in the business of buying dollars because that is what they do. Most metals dealers are basically market makers; they trade metals and paper for one another and make their profits on the spread. You can see this at some of the more reputable dealers; as supply from mints has been shut down by secret order, they have raised both their bid and ask prices in an attempt at price discovery. That's why guys like CNI still occasionally have at least a little stock: they're capturing large spreads (and taking large risks) at price levels 10 to 80% above COMEX "spot" levels. Kitco, on the other hand, has no stock and is not making bids that can be called even halfhearted. They are in the business of borrowing gold from their customers and using the proceeds to buy dollars; they do this by accepting dollar-denominated payments and then simply waiting to deliver the promised metals until they feel like it (more properly, until they have made enough money using their received cash as collateral to short gold for more dollars on COMEX).
It's hard to prove this particular brand of fraud, but no one I know trusts Kitco just the same. Nadler just seems to fit right in. He probably creeps out at night to visit Bernanke and Paulson and share a few drinks with them, and perhaps a few laughs at the expense of his "customers". So why should anyone be surprised by his commentary? At least he's consistent: bullish on the dollar when it's rising, bullish on the dollar when it's falling. That anyone still pays any attention to him at all must be a broken clock effect.
There once was a goldsmith quite bold
who gave paper for storing folks' gold.
He found this more fun:
issue paper for none
and thus his integrity sold.
Now, one thing that may change things fast is a strike on Iran mullahs between Nov 5th and Jan 18th (or in the future under Obama)-- you will see oil spike to the old high of $140 overnight -- In fact, some speculate the reason oil has been driven down artificially is due to the very fact that an attack on Iran is in the cards. By pushing down oil to $65, it will spike to $150 after the attack, rather than to $250 had the attack on Iran happened when oil was at $140 --
Gold will respond by quickly going to $1000 and above upon the attack.
A speculative short position is NOT A FUND LIQUIDATION, it is capital at risk. A speculative short position in a silver secular bull market - equal to the entire COMEX warehouse stockpile - is an INSANE level of risk...
...unless one knows it is a sure thing.
For an alternative view on these matters, check out www.investmentrarities...
seekingalpha.com/artic...