HardAssetsInvestor

Written by Lara Crigger  |

October 30, 2009

Jon Nadler: Gold Not In Bull Market

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Crigger: How has mine de-hedging played into the supply/demand picture?

Nadler: For the past several years, mine de-hedging has been a major contributor to the rising gold price, since obviously, that's taking gold back from the market. De-hedging has slowed immensely—90 percent in the first half of 2009.

So as we move forward, if miners start hedging again, then we'd expect a decent amount of gold to be coming onto the market in the form of forward sales. At $1,000/oz, if a miner isn't hedging, shareholders might start questioning, "Hey, no price risk hedging? What are you doing here?" And you have to wonder, where is the price support going to come from, if not de-hedging?

Crigger: So let's look at demand. Is it strong enough to support current prices? After all, we've seen much lower demand from India this festival season, jewelry demand worldwide, and so on.

Nadler: It's been a total disaster, effectively. World gold fabrication through midyear has fallen to a 21-year low; it's down 20 percent year-on-year. Jewelry fabrication, which is usually 60-70 percent of the gold market demand, fell to its lowest level in 20 years. Industrial fabrication was down 26 percent.

Then we add the remarkable story of India, which did something unheard of: In the first quarter, they turned into a net gold exporter. That's like Saudi Arabia taking in sand! This is the first time since 1980 that this has happened.

We normally count on India to take somewhere between 500-900 tons per year into their country, in good times and bad. But 2009 is shaping up to be probably the lowest level of imports in 12 years; that is, since it actually became legit to import gold.

Crigger: Will the increased demand from China offset that lower demand worldwide?

Nadler: There is this wishful thinking out there that somehow China will become the end-all, be-all of the gold market; that they're ready to load up on thousands of tons for reserves, and they're telling everyone to buy an ounce of gold, all one billion of their citizens. It's nonsensical.

China has become first in production terms—they're now producing 300 tons of gold—but they're absorbing most of it internally. If they're going to buy reserves, they'll do it at the same pace they've done up to now, and they'll buy it domestically. They have no interest in dumping dollars for it, because obviously that would hurt their dollar holdings to a much greater degree. As far as the population being urged to buy gold, sure-the World Gold Council is telling every working-class person to buy gold. But look around at how many people can actually afford it, and it's a lot smaller than one billion.

Some people say it doesn't matter, that we should ignore it because investment demand will carry the day. Investment could carry the day, were it not coming from a specific species of investor: the hedge funds, replicator funds, whatever you want to call them. The latest gains beyond $845/oz, or certainly beyond $915/oz, to where we are today—it's pure froth from these types of funds. It basically amounts to hoarding by the futures market, by people with no loyalty to the metal or the market. They have a price objective, that's it. But when people start asking, "Where's the fundamentals to support all this?", the correction can be painful and very ugly.