Recently, gold appears to have entered The Mother of All Bull Markets. Even though gold has backed off of its $1,072/oz record from two weeks ago, as of Thursday's close, the market was still up 18 percent for the year and climbing. Interest in the yellow metal—from both individual and institutional investors—has never been higher.

But don't be fooled, says Jon Nadler, metals market analyst and PR head for Kitco Metals, Inc. The precious metals expert says the current bull market in gold is all an illusion—one that the fundamentals can't support for long.

With over 30 years' experience in precious metals markets and investment, Mr. Nadler is a well-respected authority on gold. He writes a popular daily gold market commentary for Kitco, and his metals expertise is frequently sought out by the Wall Street Journal, Bloomberg, Reuters, the Associated Press, Financial Times, CNBC and more.

Recently, HAI associate editor Lara Crigger discussed gold fundamentals with Mr. Nadler, including what investors should look for in a gold bull market, why gold supply and demand are so out of whack with prices, and what two events should kick off a price correction.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): You've written before, "Gold is not in a bull market. The dollar is in a bear market." How do you know? What telltale signs indicate a gold bull market?

Jon Nadler, metals market analyst, Kitco Metals (Nadler): This phenomenon here has largely been a dollar-driven, dollar-based story, but the requirements for a bull market in gold extend beyond a simple anti-dollar relationship. There are four factors that truly make a gold bull market.

First and foremost, you have to have demand that far outstrips supply. Like any commodity in higher demand than supply makes available, you'd obviously see a price reflection.

Secondly, you'd have to have a falling stock market. The old adage is that gold is an inverse asset to currencies, stocks and other assets—so where's the bear market in stocks? Stocks have been up 50 percent-plus this year.

Third, you'd have to have an actual, tangible inflation level, and the threat of much higher inflation on the horizon as well. We don't see that either, which we'll talk about later.

And fourth, you'd need an increase in the price of gold across all major currencies—no exceptions. You can't have Aussie dollars and the South African rand going one way, while the euro and U.S. dollar is going the other.

Those four factors are not satisfied by the current picture in gold—not even remotely. What we really see is a momentum- and index-fund-driven speculative move that started almost on cue on Sept. 1. They've been piling in, hand over fist, with margin positions and futures positions that have now mushroomed to a level that's unreal—historic highs, on the order of 750 tons of long positions. They outnumbered the shorts 9:1 as of the week before last; it has since narrowed to 7:1 [as of Tuesday, Oct. 27]. Still, that's way distorted.

But I have to say from the get-go, I'm not a gold bear. I know that anybody who doesn't say "$2,000 gold!" is automatically a bear, but I'm just a realist who looks at supply and demand.

Crigger: But isn't gold supposed to be this ideal anti-dollar play?

Nadler: It's not that simple. In fact, statistically speaking, if you look at the correlation between gold and the dollar since 1971-72, it's -0.27. In plain English, that means if you are betting gold as an anti-dollar play, you're likely to lose money 73 percent of the time.

Then other people will say, "Well, it's a perfect inflation hedge." But gold's correlation to inflation is about 10 percent. So, perfect inflation hedge? Far from it. In fact, it's rather ineffectual against the mundane, everyday 5 percent (or sub-5 percent) inflation that we had for 25 to 30 years. It is very effective against Zimbabwe- or Weimar Republic-style inflation—and if that's what you see the U.S. coming to, then be my guest: Overload on gold.

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