Tuesday, November 3, 2009

Nadler: Gold Bull Market Is An llusion

We reported in October that Paul Van Eeden maintains that gold is overpriced by about $200. Mr. Van Eeden, someone whose opinion is highly respected, calculates the price of gold based on hard data, including gold production and inflation numbers (both currency and gold inflation).

Joining him is Jon Nadler, metals market analyst and PR head of Kitco. In an interview to hardassetinvestor, Mr. Nadler says that the gold bull market is an illusion that fundamentals cannot support for long.

We know that the price of gold has risen only because of the drop of the U.S. dollar. In fact, the price of gold has not risen in other currencies, not by a long shot. We track the price of gold in other currencies here. Please do take a look at that site, it is quite en eye opener, specially for US-based investors. Take a look at these charts:

Mr. Nadler says exactly this, that gold's price having gone up is a function of the drop of the USD. He says there are four factors that would truly define a gold bull market:

1. Demand outstripping supply.
2. A falling stock market.
3. Inflation
4. An increase in the price of gold across all major currencies—no exceptions.

Certainly in a normal market we would expect the price of a commodity to reflect its supply-demand relationship. Gold is a complicated beast however, when you have big banks like JPM being huhely short i gold, and entities like GLD suspect on not having the gold they claim to have, and until recently, even big miners with huge hedges on gold (Barrick). Anyway, his point - on paper - is correct.

For number 2, recently the markets have gone up, and so has gold. Perhaps he means a longer timeframe. Higher interest rates should make a stock market fall, and should make gold fall, but high inflation should make gold rise. Higher inflation triggers higher interest rates. For number 3, there is no inflation right now and none is foreseen in the near future, so he is also correct on paper.

Clearly number 4 is not happenning as per what we said above.

Mr. Nadler, howover, says that these 4 factors are not even remotely satisfied today. He says there is lots of gold production coming online in the next few years and a lot of scrap supply. As for demand, he says India turned into a net exporter in the first half of 2009. Today however, India announced it is buying half of the IMF gold sales.

He concludes that gold will start dropping when the USD starts recovering, which is when the Fed starts tightening. Well, this may still take a while, although a symbolic 0.25% raise is quite possible.

You can read the full interview here.

For a bit of a counterpoint, please see Mish's Global Economic Analysis. I do not think Mish is correct in all his points eitger. He seems to have the meaning of negative correration wrong. He shows a chart of gold rising in AUD (Australian dollar) but with no time axis. Bizarre, very odd. Clearly gold has not gone up this year vs. the AUD. You can prove anything with the right stats.

Bottom line: investors should not believe in anything regarding fantastic gold prices, or further crashes of the US dollar. These gold and oil markets are extremely manipulated. In addition, the total global gold market is really small, relatively speaking, at around $1.3T (remember how much money has been printed lately (low Ts), and how much there is out there in derivatives ($500T)?). This is why I like straddles so much. Gold, and miners, and oil, can go up or down, regardless of direction and the investor still profits.

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Keith said...

"He shows a chart of gold rising in AUD (Australian dollar) but with no time axis. Bizarre, very odd."
Er, have another look. I see a time axis quite clearly. All the charts share same axis at the bottom. Looks like gold is in a bull market for these four currencies for the last four years. You can indeed prove anything with statistics. For the rest you need only take Nadler's word at face value. Apparently.

The Shocked Investor said...

Hello Keith.

Indeed, I now see a time axis, I was not the only one who did not see it. The point is that gold has gone down YTD in AUD, BRZ, NYZ, and who knows where else. Analysts and statisticians should not take just partial data and make claims. We see that everyday with TV talking heads.

Of course it is easier to prove analysis are wrong than they are right. Nadler is certainly not proving anything either. Also, none of them take into that gold is far from a record price on an inflation-adjusted basis. And correlation is another matter.

Thank you for pointing out the issue.

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