"Go 10% Gold, Regardless of Price"

Who cares about price? "Just start Buying Gold," says this long-time dealer's analyst...

EVEN THOUGH GOLD has slipped back in recent days, it's still hovering around historic highs, writes Lara Crigger at Hard Assets Investor.

Given the ongoing Euro crisis, interest in Buying Gold – from both individual and institutional investors – is at a fever pitch. But don't get swept up in the hype, says Jon Nadler, 30-year gold-market veteran and long-time metals market analyst and PR head for Canada's Kitco Metals, Inc, the refinery and precious metals dealership.

Nadler says gold's real fundamentals support a much lower price, one we'll soon return to once the Euro crisis is over. But he also advises putting 10% of your wealth into gold, regardless of price, as insurace. Find out why in this Hard Assets Investor interview...

HAI: 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?

Jon Nadler: Volatility and nervousness are both on the rise. We did see a fresh high last week at about $1250, so it's backed off of that. But let's not ignore the rest of the metals complex here.

Silver's off $0.50 [as of May 17, 2010], platinum's off more than $60-$65, and palladium's down $20 an ounce. The Dollar continues to be quite strong, and oil's down sharply. 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 US Dollar, which everyone was promising us. Back when gold went to $1226 in early December, we were guaranteed that this was a currency in its final stages of demise, and that it would be done away with as the reserve currency of the world. 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% of global reserves. It's not demising. It's not about to go away.

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

Jon Nadler: Right. The same talk that was directed at the US 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 between Gold and money 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% of total private global wealth. So, it will not, and it can not, be the total panacea to cure what currently ails the world.

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.

HAI: So you can't see the Euro being abandoned so easily...

Jon Nadler: At the end of the day, there's a lot of pride, hard work and credibility that went into the EU and the Euro currency. For that to happen, I think you're really asking for such an Armageddon scenario that much worse things would happen first; namely, another contraction of the global economy. Is that really what we want?

There are a lot of side issues here as well. Yes, maybe Greece wasn't ready to get into the EU when it did. Yes, maybe German taxpayers feel that despite the fact that they're generally very frugal and orderly savers, they are being asked to subsidize other "spendthrift" countries. But they're all in the same union now, and there is little choice but to help each other out.

What if the Euro does die? We wouldn't be switching from Euros to "nothing", and we wouldn't be switching from Euros to "Gold Bars" as the new currency, either. We're also not about to give the Dollar global hegemony over the global currency system. Thus, if anything, you could see a rehabilitation of the previous national currencies. At which point, I might add, the German Mark would be quite a solid alternative.

HAI: So is the current push into Buying Gold really sustainable? Or should we expect gold to retrace a bit, once the Euro crisis is resolved?

Jon Nadler: The latter. I project that the crisis clouds will pass, just as the US "perfect storm of 2008" also dissipated, and gold will eventually return to more "realistic" price levels; ones that satisfy jewelers, producers and even individual investors in terms of its presence and purpose in a portfolio.

We're really looking for an eventual evaporation of the fear and greed premium that's permeating the market at this moment, and has been present therein since last fall, but one which has risen given what's happened over the past few weeks.

To me, when you see a 975-tonne long position of speculative money in the Gold Futures and options markets, well, we know it's got to be the hedge and spec funds. It's a fund push, capitalizing on fears that are legitimate, but I don't think you can carry such apprehensions to the dire conclusion that this is some "huge realignment" in the financial order of the world.

To some extent, when you reach a new price high, one that's printed in the headlines in bold font, of course the man in the street's going to think, "This is it; this is the end of the world. I better go run out and buy a lot of gold." But that's exactly the time when they should think of holding off if they didn't buy some in the past. Of course, they should have been Buying Gold in the past. We always tell people to consider gold as a core insurance, to make sure they have some. We also say: "Don't obsess about the price; this isn't about price gains or performance; this is about a percentage allocation of your portfolio." You take that formula home, and you're not going to be bothered by a media blitz that proclaims: "This is it!" because, really, it's never "It" as we have repeatedly learned by now.

HAI: Separating out the hype then, what do you see as a more reasonable direction for where gold will go?

Jon Nadler: Just look at the situation we have now, where the production cost of gold is just under $500 in cash cost terms, and with a 7% mine supply increase year-on-year, as we know from the latest GFMS stats 2009. The scrap supply of gold rose to record levels last year; it jumped 27%, and there's a 21-year low in global jewelry production. India was a net exporter of gold for a full quarter last year, and it imported the lowest gold tonnage in a dozen years in 2009. All of these things eventually do come together, and the only bright spot remaining in the market last year was ETF-driven demand, but Gold Investment demand was characterized as having fallen off sharply in Q1 this year vis-a-vis last year.

I think one of the reasons we didn't get going in earnest to much higher levels during the initial phases of the "Greek drama" was the fact that Gold ETFs were, by and large, dormant from June of last year to very recently. They've only started accumulating again in the past few weeks. That's a curious case. Even the absence of modest buying from that now all-important demand source held a lid on prices.

So what happens if a wave of ETF-based redemptions hits the market, something to the tune of 200 to 300 tonnes out of the 1200-plus tonnes that they have now? I don't know. We've never seen these funds' effect in a sideways or downward phase of the market, so we don't know what would happen. To the Gold Price, of course, it would do significant damage, because there's physical gold behind these funds, and that physical gold would flow into the market in case of redemptions. And this market, at this time, given current fundamentals of supply/demand, is totally ill-prepared to absorb such sizable potential outflows.

The other question it raises is: What if one of these PIIGS countries finds itself in a situation where it has to mobilize its gold? I mean, what was the point of having these gold reserves in the first place? It's about defending a national currency, maintaining public trust and confidence in a currency, and you have gold as an asset of last resort. You mobilize it when it's a rainy day, and it's been pouring rain in Europe lately. So what if Portugal finds it necessary to ask the central bank signatories to allow it to "step in front of them" and use/mobilize some of its reserve tonnage, because it needs the funds? It's a potential issue. It may seem like a rhetorical question, but mobilizing gold to save one's hide is not an unknown phenomenon in the annals of central banking history.

HAI: So what is the "right" price for gold?

Jon Nadler: Of course, now we've heard that such a price should be anywhere between $8000 and even $15000 an ounce, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals. Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years, even with the potential overshoot of up to $1320. Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance – Europe – but not some "new dynamic", such as a return to a gold-based world, that has suddenly become the new paradigm.

You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012." Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.

HAI: You sometimes get some flak for taking a comparatively bearish stance on gold, but you actually advocate investors hold a healthy percentage of their portfolio in the metal. What's the right allocation to gold, and why?

Jon Nadler: Sometimes get flak? Try all the time, and for the wrong reasons. Frankly, it does puzzle me, because when I say – and I always say this – that you probably should have 10% in gold, that's a percentage that's about 50% higher or more than what most financial experts will tell you. Also, we say that if you don't have gold yet, you should go out and just start Buying Gold. You don't care what the price is.

So I'm not telling you: "Now is the time to sell"...unless, of course, you're inclined to take profits on something that you bought for profit. But I am actually much more generous with my recommended gold allocation than mainstream financial advisers out there who say that 6% is probably more than adequate. I just do not sign up for 50% in gold, or 80% in gold, as those who call me "anti-gold" probably do.

We advocate 10%, regardless of price. That should be a core holding for anyone, of any orientation, whether they believe in inflation, deflation or an unforeseen crisis of any kind. It's an "all-eventuality" type of holding. But I will also say this: Don't overload in gold, with the wrong expectation, at the wrong time, because that can come back to bite you badly. Ask the panic buyer of 1980 how he fared for 30 years.

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