HardAssetsInvestor

Written by Lara Crigger  |

July 01, 2010

From The Vault: Jon Nadler On Gold's Current Highs Not Sustainable

Details

Back by popular demand, the Kitco metals market analyst explains what's really driving the gold market, and why, based on fundamentals, gold should be closer to $800/oz than $8,000.

Even though gold has backed off a bit in recent days, it's still hovering around historic highs, closing at $1,224.10/oz on May 17, 2010. And given the recent euro crisis, interest in the yellow metal—from both individual and institutional investors—is at a fever pitch.

But don't get swept up in the hype, says Jon Nadler, metals market analyst and PR head for Kitco Metals, Inc. The precious metals expert says gold's real fundamentals support a much lower price, one we'll soon return to once the euro crisis is over.

With over 30 years' experience in precious metals markets and investment, 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 Nadler, including why everyone needs a 10 percent gold allocation, what a demise of the euro would really mean for the economy and why he sees gold closer to $800 than $8,000.

Crigger: So why do you think gold's back up near its historic highs? Is it just the euro crisis, or is something else fundamental going on here?

Nadler: Volatility and nervousness are both on the rise. We did see a fresh high last week at about $1,250, so it's backed off of that. But let's not ignore the rest of the metals complex here. Silver's off $.50 [as of May 17, 2010], platinum's off more than $60-$65 and palladium's down $20. The dollar continues to be quite strong, and oil's down almost another $2. So there's definitely a lot of turmoil in the markets, which is primarily related to the euro situation. But I think the focus here is once again misplaced.

Last fall, I cautioned about the non-imminent demise of the U.S. dollar, which everyone was promising us. Back when gold went to $1,226 in early December, we were guaranteed that this is a currency in its final stages of demising, and that it would be done away with as the reserve currency of the world, and this was the reason that gold would actually land on the moon. Obviously, none of that happened. And not only that, but the dollar has risen very substantially since then. It remains the benchmark for settlement of global trade, and is still represents more than 60 percent of global reserves. It's not demising. It's not about to go away.

Crigger: Of course, now we're starting to hear the same sort of talk around the euro.

Nadler: Right. The same talk that was directed at the U.S. dollar is now (curiously) being repeated, just that now, such talk is aimed at the euro and by the same people who said the dollar would fall off the proverbial cliff. They're saying: "It's OK that the dollar's rising; we'll take that. It'll die later."

So what are these people really telling us? Are they really proposing that all of these currencies are really dying in concert, and that we're going back to gold as the only viable currency? I'd love nothing more than for that peg to be re-established, but sadly, since 1968, that's been a process largely undone. As much as we love gold, the reality is that it's been marginalized in the global system. It only represents 0.6 percent of total private global wealth. So, it will not, and it can not, be the total panacea to cure what currently ails the world.

So the present driver of gold prices is this European debt crisis. There may not be as much concern about it spreading as there had been in the past two or three weeks, but rather, concerns remain about the efficacy of the rescue package that has now been put into motion, about possible future defaults, and, of course, about whether the euro will demise and be replaced with national currencies again. So over the past week or so, I think it has come down to a battle of the wills: the speculative funds versus the financial officials in Europe. It's a game of chicken. One side is calling the other's bluff.