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Gold In A Credit Crisis – Features and Interviews – Hard Assets Investor
| Friday, 24 October 2008 15:10 |
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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