Jon Nadler Gets In-Depth on Gold
By Karl Heilman
27 Nov 2006 at 06:12 PM EST
St. LOUIS (ResourceInvestor.com) – As gold traded up to a 10 week high on Nymex today, Jon Nadler, of Kitco spoke in depth with Resource Investor regarding gold’s direction, a weak dollar, China and much, much more.
RESOURCE INVESTOR: Gold hit a high of $641 today, while the dollar hit a 20 month low against the euro, any thoughts on were this is heading?
JON NADLER: Indeed, the overall trend appears to remain in favor of further dollar erosion and gains in gold prices. Of course, none of this will take place in an uninterrupted fashion (straight up/down on the charts) but the trend has been in place for quite some time and does not seem to have acquired fresh fundamentals that would change our mind as to its overall nature. Deficits and imbalances persist, they do not appear to have immediate solutions, and thus when one couples them with the gold market’s own positive fundamentals (tenuous production numbers, decent demand from key jewelry and investment sectors) – the outlook remains optimistic – if a bit cautious, still.
RESOURCE INVESTOR: Gold has been staying quite steady above $600 – will it stay steady, flop, or spike?
JON NADLER: The inside channel is now $600 to $630 with scaled up targets at 642 (achieved today) then $680 (which if achieved could take us back to as high as $730 to repeat May’s highs) Under $600 we have $580 and $540 and finally the old $480 ( a 50% retracement of the overall $250-$730 move of five years). We feel the trend is now moving to the steady/higher range after the iffy situation we experienced in August/September.
RESOURCE INVESTOR: Bernanke is set to speak on the U.S. economic outlook tomorrow; do you have any inkling on what may be said?
JON NADLER: Probably more of the same jawboning, in terms of “our resolve to fight inflation, keep economic growth in ‘drive’ and no real need to raise rate unless necessary.” The more relevant Bernanke quote should be the one he and Paulson may or may not make while in China on their “strategy visit” Look for market fireworks in connection with that, more than in the short-term.
RESOURCE INVESTOR: Where do you see gold by the end of the year when taking the dollar’s weakness into account? Any projections on where it will be in mid 2007?
JON NADLER: Our year-end target is still moderate, with an average $630 price as the 2006 target (though it still implies we could get to $690 next month) and $665 as the average for 2007. Then, a scale-back of averages from a projected $725 to $700 for 2008, and from $767 to $751 for 2009. But for 2010, we (as Credit Suisse) keep the forecast at $800 average.
RESOURCE INVESTOR: China has been hinting at diversifying the country’s $1 trillion in foreign exchange reserves by increasing their gold reserves which now only stand at 600 tonnes. Any thoughts on what this will mean for the gold market should China decide to seek an increase in gold reserves?
JON NADLER: Actually, Chinese officials have been actively talking down the idea of buying gold to add to reserves. For one thing, the simple act of buying a sufficient supply of gold for such a strategy could drive up the price substantially, so that is a potential negative for the central bank. Even the gold tonnage could be secured without disrupting the gold price, the Chinese would place themselves into a situation that is largely the same as that which they are in now, in with regard to their U.S. Dollar reserves. They would become unable to sell any significant amounts of their pile of gold without setting off a major plunge in gold prices, thus turning the whole exercise of adding gold to reserves into a potentially disastrous venture.
What if, (just for instance) by the time the Chinese had finished accumulating another 2 or 3 thousand tonnes of gold, the bull market for the gold might just be over? In reality, the Chinese central bank, which has to plan for the really long term, would be really be ill advised to shift its reserves out of dollars and into gold in any significant way. We spoke to a couple of central bankers face to face at the beginning of this month and (unless they were playing Chinese poker) they asserted to us that they were not contemplating adding a large sum of gold to reserves, and that if they were going to add any at all, they would do so in a manner not readily noticeable in the marketplace.
There is still good news for gold investors in all of this, as any diversification by them into other currencies, (the euro for instance), would further undermine the value of the dollar and that, more than anything else, would have positive implications for the gold price. Also, if the Chinese central bank just stays put and remains at the currently low allocation level for gold, it is pretty clear that such a strategy would still imply having to buy more gold over the next three to five years, as everyone expects that despite their imminent diversification moves their U.S. dollar reserves are still bound to increase one way or another. Thus, here is a case where the status quo is still good news. But we are not... banking on gold’s salvation to be coming from illusory purchases by Asian central banks (just as we were not too concerned with the weak Western banks letting go of gold over the past years).
RESOURCE INVESTOR: How do you see silver’s performance over the next couple of months? Thoughts on platinum or other precious metals?
JON NADLER: Less thoughts here, as we mainly follow gold. We feel that gold’s monetary attributes will (or already have in some degree) return to the forefront. When gold de-couples from industrial metals (silver, copper, platinum, etc.) then the other metals may be more susceptible to a slow down in the U.S. or global economy than would gold. We remain of the opinion that a China slow-down and/or a fund bailout from hot base metals markets may indeed impact silver (and gold a bit as well) more than would be warranted under normal circumstances. But, let’s face it, the rallies in those metals were mainly fund-driven and there was nothing ‘normal’ about a price spike taking place at the same exact time as inventories of most of these metals were also surging….
RESOURCE INVESTOR: What is the best method in which someone can invest in gold? Mining stocks? ETFs? Bullion?
JON NADLER: We remain convinced that fully-owned and fully-paid physical bullion in the guise of custodial accounts remains the most cost-effective, long-term safe in terms of storage, and most liquid means of direct ownership. Thus, we continue to recommend only products that give value for money, safety, and utmost liquidity to our clients. Namely, Kitco Pool Accounts, Perth Mints Certificates, and GoldMoney Goldgrams.
Minted Coins are bars are fine if one expects to need to barter in the streets (we do not) or travel cross-borders with their wealth upon them. Numismatic coins make zero sense as they have inherent high premiums and low liquidity (and are actually not confiscation-proof, even though we do not expect any confiscatory moves to take place in the future). Mining shares may be fine for those who understand currency, management, and stock market risk – but at the end of the day, they really are a promise of performance by a team of corporate players. Gold itself is never a promise, nor can anyone default upon it.
ETFs may be a good vehicle for funds and pension schemes but make less sense for individuals who do not wish to have their gold balances melt away on a continuing basis (due to management fees) or who do not wish to be lumped with equities in terms of market trading. At the end of the day, even an ETF is a promise – one made by a Trustee. Not so, gold.
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