Gold in a Credit Crisis

by: Hard Assets Investor October 24, 2008 | about stocks: GLD / PAL / PTM / SLV    
Hard Assets Investor

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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This article has 31 comments:

  •  
    Oct 24 06:53 PM
    To say that people will lose faith in foreign currency and rush to the useless currency of a massively debtor nation (U.S.A) sounds highly off the cuff to me. What the dollar has had is a short term rally while people are trying to get their bearings. When they see that the dollar is backed by a debtor nation whose productivity has been abysmal over the past several years and whose inflation numbers have been massivley doctored to fool its citizens and the rest of the world -- the flight from dollar will begin. Where will people run to then? Gold!!! The reason why you can't look to the past to forecast the future is we have never had a situation where people even contemplated running away from the dollar. When that happens it will change the rules of the game.

    Gold at $5000 an ounce will be a bargain a few years from now.
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  •  
    Oct 24 09:52 PM
    Oil at $200 plus will jack up Gold. That scenario is a gimme now that most of the new Oil and Nat. Gas projects are being aborted due to high input vs low output costs.

    If the world's economies are linked, then the present oncoming Global recession will also produce a Global rebound at some point. Inbetween, oil production levels will decline but with the expected replacement projects aborted or delayed, The next upswing will be far faster and greater than anything seen before.

    The current Financial crisis is not only draining funds from Oil expansion projects but also the Funding of the Alt. Energy innovations as well.

    The Dollar is experiencing Forced Buying not because its the world's reserve currency but Because All Commodity Prices are priced in Dollars.

    So the Fed and Treasury are pumping Trillions into the System and at the same time Trillions more are being created by the Forced Selloff not only of Commodities but currencies as well. Here its the forced liquidation of foreign assets by Hedge and Mutual Funds.

    Overseas, Russia began selling Billions of Dollars of its US reserves to support the Ruble, Brazil started doing the same thing yesterday, S. Korea is considering it also.

    Next week the Treasury and Fed will pump more in earnest and interest rates will drop anywhere from 50 to a 100 basis points. At some point the repatriation will stop and the world will be awash in Dollars. Neither the Treasury or Fed will be able to put The Genie back into the Bottle.

    There will be another Flight to quality. This flight will spell the end of the Dollar's strenght. It will plummet to new lows.

    Reply | Link to Comment
  •  
    Oct 24 10:18 PM
    The speculative ownership of gold far outweighs the annual demand and has driven the real users of gold - Indian jewelers - to silver. Eventually gold will have to price itself into real users ie real demand and as it does so gold bugs will get killed. Gold at $5000/ounce? Don't forget every bit of gold ever produced is still above the ground in circulation. This commodity has no monetary significance other than in history books and won't ever again without the collapse of civilization; in which case we ought to stock up on bullets & whatever else you survivalists guys bought back just before January 1, 2000.
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  •  
    Oct 24 10:36 PM
    Antibug,

    You're absolutely wrong about gold (and silver) as a currency.

    en.wikipedia.org/wiki/...

    And while it's true that all the gold's still around (because it's indestructible), there still isn't even one ounce for every person on earth.
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  •  
    Oct 24 11:14 PM
    PaulTaut's comment is interesting - of course, timing is everything. In the long run the world will get back to trying to become like America and eventually it will succeed - so increasingly the wealthier world will have more and more money to spend on limited menu of goods - so inflation should result as almost unlimited wealth chases whatever few goods and assets and resources we have. So owning land and other assets will be a good thing. Resource ownership will be a key chokepoint also. Still, that's in the long run ... we have to survive and prosper until then.

    Right now the USA is the only game in town - the world must see must make certain that USA succeeds so that the dollars they hold don't become worthless, or if they sell their dollars they will appreciate their own currencies and kill their own exports. So the world needs to keep exporting their oil or their plastic toys etc to the only place buying it - USA - if US consumers don't buy the world's goods, or if US businesses don't pick up the slack of any decrease in spending by US consumers, the tranquility in China and monopoly on power both Putin and the Communist Party in China enjoy may end sooner than later. The dollars have to come back here. The World will have to keep financing its Engine of Growth. That is true for the short term and the medium term - at least for the next 3-5 years. It will be even longer than that probably before anyone/anything approaches the size of the USA consumer sector. What is the number? 72% or so of annual GDP which is $13 trillion so $9 trillion or so? I don't know exactly ... until the world truly de-couples or at least hugely reduces its appetite of exporting to USA than USA is in no danger of world slitting its own throat and not financing our trade deficit and savings/investment gap ....

    Probably we are better trying to buy US equities at the bottom ... wherever you think that is (another discussion).

    Having worked for years for Louis Dreyfus Corp I think that an individual buying individual commodities is almost ridiculous as a non-institution with no deep knowledge of the fundamentals and/or no heads up of a complex and constanly evolving supply and demand picture puts you at such a huge disadvantage. Every major exporter/trader/produc... has major informational advantages over us. Once the bubble in the farm belt pops and land out there drops massively in value, it may make sense for those of us who like to tour farmland and can lease it out at a 5 to 10 percent yield when wheat or whatever prices are low (once they get there) or to buy stocks that represent the same play. Anyway ...



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  •  
    Oct 24 11:15 PM
    I hate to admit it, but Jon knows better than the average gold bug.
    Reply | Link to Comment
  •  
    Oct 24 11:28 PM
    Mr. McHugh,

    I respectively disagree - saw nothing in the link to make me respect gold as a usable monetary currency.

    I also believe that it is irrelevant that there isn't an ounce of gold for everyone on the planet. I also think there will be a trend that sees gold as extremely disgusting from an environmental standpoint - modern mines using the arsenic piles to eat the rock away from the gold or whatever ruining whole local ecosystems in the process; I think it will become like fur eventually and drop in value to the women of the world and then it is all over.

    Plus I have heard the buy gold thing for so many years and even at the darkest hours of the current crisis gold has ended up down. Give it up.
    Reply | Link to Comment
  •  
    Oct 25 01:30 AM
    first, this article is dead right based on what we know today. i want gold to be a reserve currency but the reality is that gold is acting like a commodity tracking the value of oil. it is important to separate what should be true from what is true.

    over the last 12 months, many economic beliefs i have had have been shattered:
    1) decoupling of the world economies from the usa
    2) the decay of the usa dollar due to national debt and trade surplus
    3) economic safeguards which can prevent depressions
    4) i never believed in peak oil arguments but now even the fundamental that oil does not retreat in price has been shattered
    5) money flows towards economies with the highest interest rates
    6) japan's ability to control its currency value against the dollar
    7) australia's unstoppable economic growth
    8) the relative safety of swiss banks
    9) the euro becoming the worlds prime currency

    i could keep going but it is plain we are in uncharted territory. whatever beliefs we have. now need to be tested and validated based on current events. your economic survival depends on it.
    Reply | Link to Comment
  •  
    Oct 25 08:23 AM
    Come on the US dollar is a doomed currency with massive structural problems with its twin deficits - and the recent rise in value is a massive increase in the trade deficit. There is also a bond market crisis looming as bonds pay far too little - you can get more on government guaranteed accounts in banks all over the world. I would not give the dollar rally more than six months, then gold and silver will show their strength. But I agree it is scary world where precious metals rule - but then who doubts a deep and severe global recession is not at hand? Fools who jump into the dollar will be crushed like the holders of stocks today.
    Reply | Link to Comment
  •  
    Oct 25 08:42 AM
    Thank you HAI for sharing a view that probably upsets your followers. I happen to agree with Mr. Nadler. When I submitted an article two weeks ago (and almost $200 per oz ago) suggesting gold was overvalued, it was met with such vehement protest that it gave me a lot of insight into why gold has been slow to roll over. I never understood the Beanie Baby craze, and I can't understand how anyone would think that gold will benefit from the greater fool theory.

    To arabianmoney.net, the "twin deficits" have been here for quite some time. I recall first learning about them in 8th grade - that was 1979! One thing that the nay-sayers don't understand about the U.S. is that it has signficant assets on the other side of its debts that go beyond the future taxes. I guess I will be worried when we start selling off our timber resources, coastal right-of-ways, etc., but I guess it could happen. We also have the strongest military in the world - put a price on that!

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  •  
    Oct 25 08:59 AM
    Perpetum mobile. Take 5500 USD for paper and ink. Stamp one bilion USD , put on market, 1 st time you can buy gold for 900 USD/ oz, second time gold is 880 USD/oz. After thousend times gold is 680 USD/ oz.
    This is real world now. But very danger and very short, We will see the future very soon. World market should be based on work , instead of trust and religion.

    Reply | Link to Comment
  •  
    Oct 25 09:37 AM
    During the Weimar hypinflation debacle, those who held and used gold weathered the crisis far better than those who didn't. History has a tendency to repeat itself.

    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??
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  •  
    Oct 25 09:54 AM
    One point which the AntiGold parties do not seem to be aware is that the US has unsustainable levels of debt. Debt that if paid off legitimately would leave the US barren and owned by the Rest of the World (ROW). So how does one get from under such large amounts of debt on an individual basis? One declares bankruptcy . . . ( at least before the Banksters paid the lobbyists to change bankruptcy law right before this debacle) How does a nation do this ? Simply by devaluing their currency way beyond their currencies of their creditor nations, it's about the only way out unless you have made a major technological advance that the US can control, develop and sell to the world. As your currency is devalued then your debts can be paid off with cheaper dollars. Once that is done you can further your socialist agenda and create a North American Trading block with a single currency for US, Canada and Mexico, the Amero, to compete with the Euro, Yuan etc. saying that in order to compete with the rest of the world, control inflation etc we need to join forces with our North American neighbors. Thus using the same tactics of recent years to push Americans to give up more of the rights granted us by our founding fathers via the Declaration of Independence, the Constitution and the Bill of Rights. So understand that Hyperinflation is is simply a tool to pay off excessive debt easily, to force the US populace to relinquish their rights and sovereignty & to further a one world agenda of the Elite Class.

    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 . . .
    Reply | Link to Comment
  •  
    Oct 25 10:43 AM
    John Nadler has his head up his %&( as usual. He's been wrong on GOLD since $250. Liquidity can never be drained from the system. The $7trillion already pumped in will be used to start the fuse to Weimer. He is obviously oblivious to the planet killers OTC derivatives. 95% of the these toxic $1 quadrillion were manufactured here in the USA. $62 trillion in the category of credit default swaps are held by major corp and banks in the USA. What entity is going to guarantee that risk? Someone who is a commodity expert knows nothing about currency valuations should stick to what he knows only and should commenting on something he has absolutley no clue about. I guess he was for the Grand theft bailout to.
    Reply | Link to Comment
  •  
    Oct 25 11:21 AM
    $1 Trillion plus deficits on the horizon for as far as the eye can see say you're wrong antigoldbug. As does history. Gold was $250 or so 7 years ago. It's about triple that even after a big correction. How's that stock market looking in comparison? Or Real estate? Or bonds? If this shiny stuff is so worthless except as jewelry why is this the case?

    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.
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  •  
    Oct 25 12:33 PM
    Anti,

    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.
    Reply | Link to Comment
  •  
    Oct 25 02:11 PM
    Antibug doesn't get it.

    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.
    Reply | Link to Comment
  •  
    Oct 25 02:54 PM
    Again I say to the posters, THANK YOU! You show any CLEARLY THINKING PERSON, who is accurate on the subject at hand. All one has to do is read, think, and research.

    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.
    Reply | Link to Comment
  •  
    Oct 25 03:25 PM
    Gold anti-bug:


    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.
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  •  
    Oct 25 08:28 PM
    Most metals analysts forget two very important things:

    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.
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  •  
    Oct 25 10:27 PM
    If central banks print too much money, I would rather have food, oil, medicines, and weapons.

    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.
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  •  
    Oct 25 11:54 PM
    Funny, but Nadler is the last person whose opinion on gold I'd seek out. Yes, he's Kitco's main consultant. Weird.
    Reply | Link to Comment
  •  
    Oct 26 01:50 AM
    Nadler is a well-known dollar lover who does not understand or appreciate the role of gold throughout 5000 years of human history but lavishes praise on the central bankers. I don't think it's weird at all that he consults for Kitco; they are in the business of dumping gold for dollars. Seems like an ideal fit for him.

    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.
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  •  
    Oct 26 08:07 AM
    How fractional reserve banking was born

    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.
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  •  
    Oct 26 11:27 AM
    If gold and silver are such dogs why is it that there is essentially no retail inventory available anywhere in the Western world. Kitco itself cannot give any date for delivery. Demand is strong. Producers are ignoring retail products because the demand for 1000 oz bars of silver is taking all of their production. Somebody with big money is buying. Somebody who is smarter than the lightweight analyst who has "defeated" gold by slaying the paper dragon he has constructed.
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  •  
    Oct 26 02:22 PM
    After quickly paging donw through Antibug's tedious posts; I must say that the Nadler articel is a good one.

    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.
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  •  
    Oct 26 02:34 PM
    The coming Iran war will send oil to $175 and Gold to $1200.
    Reply | Link to Comment
  •  
    Oct 27 12:05 PM
    That there is no commentary on the recent unusual & overwhelming short positions taken by the largest 2-3 traders in gold and especially silver, leaves one wondering who is speaking the truth anymore.

    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...
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