Saturday, October 25, 2008

Some Very Smart Thinking on Gold

Why have we had so many posts on gold? Two answers:

1) Everything is connected. It's one piece of the interest rates, currencies, equities, commodities, real estate blah blah blah, puzzle. Keeping an eye on these various moving parts can help you spot anomalies that seem almost harmonic as they flow across asset classes; one seemingly uncorrelated datapoint can act as an early warning for action in other areas of the economy and markets.

2) You can make money off it.

Here's a smart guy giving first-class insight into one thread of the tapestry.
From HardAssetsInvestor:

Jon Nadler, senior analyst for Kitco Bullion Dealers (Montreal), is known for a fresh, clear-eyed perspective on the gold markets ... one that neither tilts too far into the gold bugs camp nor ignores the positive attributes of gold as a store of value.

He spoke recently with the editors of about recent trading in gold and the outlook for gold, silver, platinum and palladium. (HAI): A lot of people are confused by the gold market right now. On the one hand, we have conditions that should be ideal for gold: the Federal Reserve printing money, tremendous turmoil in the market, etc. But gold is trading down sharply, and there is talk of deflationary forces in the market. What's going on?

Jon Nadler, senior analyst, Kitco Bullion Dealers - Montreal (Nadler): I think the first thing you have to do to answer that question is step back a bit and look at it from a broader perspective. There is hardly any historical precedent to evaluate gold's presumptive behavior in a deflationary cycle. The only example we have is 1929-1933, and we didn't have a floating gold price back then; it was fixed.

Gold did fall less than other assets back then, as the quest for cash became a question of survival. But it wasn't extraordinary.

From that perspective, I think that it's a decent possibility that gold will act as a reverse hedge here. It might fall, down to $600/ounce or even $500/ounce, but at the end of the day, it will likely fall less than other assets....MORE