Jon Nadler dragged out for bearish propaganda on gold - 2010-09-27

If you want to throw up, listen to the latest interview with gold 'permabear' Jon Nadler.

http://media.kitco.com/weeklyreport/JNadler-Sept-23-2010.mp3

I do recall that he was looking for $740 gold in 2009-2010, wasn't he?

Anyway, he says gold is coming into mania / bubble territory. Get this. He says gold may overshoot in and top in the next 9 months. That is his 'sell by' date on the gold market.

He then says he won't give a price and timing at the same time but he then goes on to say that gold may 'overshoot' to 1320 to 1380. He just can't resist it.

Furthermore he says that it's leveraged speculation with hedge funds that is driving gold at the moment. Maybe he is right; I don't know. Others say it's physical demand but they are goldbugs like James Turk, it has to be admitted.

Jon Nadler then discusses the 1980 $850 top in gold with the presenter and says that inflation and general conditions were much worse in 1980 than now and therefore the spike in the gold price was more justified in 1980 than it is now.

He warned that investors could soon see a top (within 9 months) and then suggests that a 8% annual drop for 10 years could then occur. Well, I got my Windows calculator out and calculated 0.92 to the power of 10, which is 0.4344, so gold could drop to 43.44% of its top value. Taking his top figure of $1380, 0.4344x1380= $599.45.

So be careful folks! Nadler is warning that gold could grind down all the way to $599 when this bull market is over, starting in the middle of next year.

He does say that dollar cost averaging is a good idea and that people should have 6-10% of their liquid assets in gold but one wonders, what is the point if his forecasts are correct. Why not just hold US dollars under the matress?

I love it that he has denied that gold is even in a bull market and then goes on to say that it is now in a mania or bubble! That is so intellectually inconsistent. Nothing can be in a bubble without being in a bull market first, surely! Think of stocks in the 1920s, gold, silver and oil in the 1970s, stocks in 1982-1999, technology in the 1990s, real estate from the 1990s to 2007 and so on and so forth (as Dr. Marc Faber loves to say).

However, Kitco's resident expert on gold says that gold is the one asset that can be in a mania without even being in a bull market!

Come off it, Jon.

Of course, it is possible that gold is becoming very overbought as the COT reports show record open interest and close to record commercial net short positions. However, in 2009, record COT levels were reached in the rise past $1000 and the market went to $1224 before really correcting. If we do get a major spike up in 2010-2011 there could easily be a major correction. This could happen especially if we get a reversal of government policy if the Democrats are thrashed in the US elections this year and a stop to the bailouts, i.e. as Bob Hoye says, if we get an outbreak in sound money. Alternatively, a renewal of the banking crisis and some deflation with heavy deleveraging could also have a similar effect, with a rise in the USD and a market-driven outbreak of sound money. Interestingly, the dollar might be at a low after its recent fall to 79-80 on the US Dollar Index and some expect a turnaround any moment now.

I see some risk of a spike and a mini-mania this time around, followed by a substantial correction. I would not dare to guess what the spike price would be. All I know is that $1299 this weekend was about 26% above the $1030 spike in March 2008, which was 2.5 years ago. Less than 30% up in 2.5 years doesn't sound like a bubble to me, not yet.

I am just listening to Bob Campbell on http://www.howestreet.com/  and he says that interest rates are likely to remain very low and gold and bonds have been attractive at these times,. As Bob Hoye said on Howestreet, Treasuries in the senior currency and also gold are the two liquid assets in a post-bubble credit contraction. Nadler never mentions any of these factors. I think he is short on history and economics.

Jon Nadler droans on about Indian jewellery demand as he often does, saying the falloff is a bearish factor. What it surely really means is that investment demand is pricing out jewellery demand. This has happened before, several times. So what?

However, I do like to listen to him to get an idea of the bearish case. Hearing his interviews helps to get some balance. If I can't pick holes in all his arguments, I start to worry about the gold bull market. And I am a bit worried at the moment, but not very much, yet.

Update to Jim Sinclair type gold estimate vs US debt - 2010-09-15

This follows on from my two posts in 2008 (that long ago?!) estimating the fair price of gold needed to balance external US debt liabilities. At that time the gold price needed was about $8300 per ounce.

$8387.96 Gold & US Balance sheet #2! 2008-07-18

Estimate gold market @ $8355+! 2008-07-18

Now it has changed. The US debt has increased a lot since then!

These $8300 figures were taken from estimates of US debt held by foreign entities and dividing that by the US gold reserves.

This time I have used the following two sources of data:

The  text file on the St. Louis Fed website, giving foreign holdings of US debt. It's called:

'Federal Debt Held by Foreign & International Investors'
which now totals $3,884,000,000,000 (3.884 trillion, up a long way from the figure I used for 2007/08 which was $2.190 trillion

and the evergreen Wikipedia:
 
http://en.wikipedia.org/wiki/Official_gold_reserves
which gives 8133.5 tonnes for the USA (unchanged since 2008)
 
The gold price to cover this debt is:
 
3,884,000,000,000/8,133.5/32150=$14853.22 per ounce of gold.
 
Incidentally, 32150 is the number of Troy ounces in 1 tonne.

The actual gold price for 15 September 2010 is $1267.70 after a high near $1275 yesterday, so it's currently 8.53% of fair external debt budget balancing value, i.e. 91.47% undervalued.

Gold is more undervalued on this metric than it was in July 2008, when it was over 10% (11.3%) of fair value, i.e. 88.7% undervalued, despite its rise from $948.80 to $1267.70 in the last two years.

That's 'only' a 33.6% rise in $ gold price over 26 months. Not exactly a bubble is it?