Jon Nadler: Split Camps on a Dual Asset
Source: Brian Sylvester of
Jon Nadler has never been without gold. In fact, it actually
helped saved his life. But that doesn't mean the senior analyst
for Kitco Metals wants to see gold's sky-high price edge even
higher. In this exclusive interview with
The Gold Report,
Jon explains why gold is an insurance policy that investors
should never want to cash in on.
The Gold Report:
Jon, many people classify you as a gold bear. What do you think
of that characterization?
It's a function of the camps that have been delineated so firmly
in this market over the last two to three years. There seems to
be very little give or tolerance on either side for the other's
opinion. We have staunch bulls and firm bears and, thus, the
in-betweens you'll never meet.
Actually, I tend to believe I come into the market picture
from a different angle. My good friend, Michael Checkan, over at
Asset Strategies International in Maryland, has always quoted my
motto as being: "If you buy gold for the right reasons, there
really isn't such a thing as the wrong time or wrong price." Gold
is really a dual asset-it is a commodity, but it is also money.
It does certain things for a portfolio that are very positive.
Mainly, it reduces overall volatility, slightly enhances returns
and, if the barn burns, it's your lifesaver. It's an insurance
policy that an investor can cash in on when needed.
However, I caution-and this is where some people, I think,
experience a disconnect-you don't ever want to cash in on your
life insurance policy. If you have the misfortune to do so, it
implies that the rest of your portfolio is a smoldering pile of
I do know some investors who prefer to have 90% of their
assets in gold. Obviously, that's skewed to the extreme and it
invites nothing but volatility and potential heartache. The
average investor with a portfolio of assets deemed safe, sound
and sanely diversified should earmark an approximate 10%
allocation to gold. If that were the case, then why would
investors hope for that 10% slice of pie to be running off to the
moon knowing full well the other 90% of their wealth is
imploding? That's the typical disconnect that investors make.
If I say that gold is overpriced, in terms of fundamentals
relative to yardsticks like fair value, production costs or any
number of other gauges, then we (the ultra-bulls and me) have a
discord and we get into arguments about where gold might or ought
to go. All sorts of predictions come into question. This is a
typical situation, one wherein average investors want to be told
what to do. They tend to follow the guru of the moment without
regard to what their predictions really entail. That's really a
problem because a $3,000, $5,000 or $6,000 gold price implies
certain terrible things might be going on, and that's not
necessarily a situation investors
Isn't there a happy medium?
I think there certainly is. The best way to approach the idea of
gold ownership is to ignore price and price performance (unless,
of course, you're a trading-minded investor and you have
discretionary funds you can afford to gamble). However, if the
name of the game for one is performance, then I can certainly
name three or four other metals that have far outperformed gold
in both the short and medium terms. That's what I think should be
taken off the table. It's the price-performance obsession at any
cost and some sort of rigid, formulaic approach that says: "Oh,
rise to its inflation-adjusted levels because, you know,
assets eventually do so." I've seen no economics or market
textbook that asserts such a statement represents a valid
equation to follow. Just because oil did it (briefly, I might
add) doesn't mean that gold will necessarily do it, as well. If
you ask people who bought their gold at the 1980's peak of $850,
they obviously are $1,000 short of having broken even on the
principal investment. That's not a secret. So, they really have
to root for gold to rise to at least $2,300 per ounce.
How many people actually listened to my pleas in the early
part of this decade when I said that gold was below production
cost, there would be a 'reversion to the mean' and that gold
could perform better than it had up to that point? How many folks
ran out and bought gold at $250, $300 or even at $400? Not a
whole lot of them. Retail investors tend to be habitually late,
impressionable trend followers. They want to go with a proven
winner. It creates manias when investors are enamored with
something that's consistently making headlines; but that, in and
of itself, usually does not guarantee continuing performance.
Just think dot-coms and Florida condos, for example.
Where do you see investment and demand in all of this? In 2008,
$117 trillion was in financial assets, about $40 trillion was in
managed assets like hedge funds and mutual funds and managed
commodities accounted for $300 billion-a minuscule percentage. If
investors put even a modest 5% of their portfolios into gold, it
would bring that figure up to $1.2 trillion. We're nowhere near
inflation-adjusted, all-time highs for gold. There seems to be
some space there where those two items meet.
Yes, but there are also a lot of arguments out there that we
would quickly run out of gold if every Chinese and Indian person
bought an ounce of gold. We cannot convenience every asset
manager, pension fund and individual investor to give a favorable
nod to gold-not even at the 3%-5% level in a portfolio; that's
become clear over 35 years of market history.
Why, after roughly 35 years of legalized ownership and trading
opportunities in the U.S., 5% of the investing public even
considers gold remains somewhat of a mystery to gold advocates.
It bears out the argument that you're not going to get a whole
lot more than that minority segment of the population interested
in this asset for various reasons-not the least of which is that
the U.S. hasn't undergone the experience of other traditional
gold-friendly countries. Those countries have had huge
dislocations, wars, regimes failing, currencies demising and so
The investment cycle in the U.S. seems to be driven by
real-interest-rate environments and the market flavor of the day.
Unfortunately, this is where I see a lot of problems in the gold
market. Hedge fund/exchange traded fund (
) demand that came about in the wake of the Fed's incessant
rate-cut campaign has really been the true and almost sole
driving force in this gold market cycle. Just today, I received
an update from Goldman Sachs that forecasts a peak in gold at
$1,750 by the end of 2012. That's when it sees the reversal of
the ultra-cheap U.S. dollar environment and the end of real
negative interest rates. Goldman characterizes gold as "a
compelling trade but not a long-term investment."
That has to bother a pension fund trying to decide where to
put its money. I spoke to a pension fund in New York just three
weeks ago. Its representative said the fund had a 9% allocation
in gold. I said, "Well, that's terrific." The fellow responded,
"Yes, but we sure as heck hope that gold doesn't 'perform'
because just think of the other 91% of our portfolio at that
Investors have this idea that gold is a perfect inflation
hedge-far from it! It has, at best, a 10% positive correlation to
inflation over the long term, which means it does not tend to
preserve capital in the long run in a 4%- to 5%- type of
inflation scenario. Gold does very well as an inflation hedge if
you live in Zimbabwe, of course, or if you expect the Weimar
Republic's levels of hyperinflation to come to U.S. shores.
Looking back to 1980 bears something else out, as well. The
correlation for gold as a dollar hedge, as an "anti-dollar play,"
if you will, is -0.27. That means investors are likely to lose
money at least two-thirds of the time if they buy gold just as an
So, what is it that gold
for a portfolio? Many institutional investors, the World Gold
Council and academic studies say that a minimum 6% allocation in
gold will tend to slightly enhance returns without adding
unwelcome levels of volatility and that it will also slightly
decrease the overall level of risk without sacrificing returns.
For your investment soup, gold is a sort of MSG (monosodium
glutamate)-a perfect ingredient. Still, it's not being treated in
that fashion by everyone. There are strictly performance-oriented
hedge funds out there that want to squeeze the last buck out of a
'hot' trade. For those funds, gold's diversification attributes
and long-term insurance benefits are absolutely meaningless. They
will push the sell button when their particular price target is
reached. Individual investors tend to be far more loyal to gold
and see it as a long-haul asset.
I think very few people argue that gold is for everyone.
It certainly isn't the case anymore. I say this because we've
seen what happened in the summer where certain gold-selling
companies were being dragged in front of Congressional
investigators. We hear stories about the elderly lady who's
income oriented, has very little lifesavings and is being urged
to put the majority of what she has into gold because, you know,
"the end is near."
What about the monetary base in the U.S., which has grown from $1
billion in September 2008 to $2 trillion now? That certainly
seems like it would be in favor of gold in the long term.
Certain metrics,M2 andMZM , are contracting and falling to the
floor, so it is apparent there is no 'naked' round-the-clock type
of money printing going on. What has been printed has been
successfully sold off as debt. How will the Fed's exit strategy
be achieved? It will be achieved in the same fashion as the
previous 11 contractions were dealt with after World War II.
Liquidity was injected into the U.S. economy up to a point, and
then extraction followed. The effects of inflation at a much
higher-than-desirable level were sanitized. On we go with another
You did an interview with
Hard Assets Investor
in May when gold was about $1,250 where you said you believed
gold was retreating. Now gold has surpassed $1,400. Were you
speaking to a longer timeframe?
In May, we did have a retreat to about $1,150. It should have
gone below $1,150, but it didn't because the bids hedge funds
kept piling on remained in the driver's seat of the market. I ask
anyone to show me the lines around the corner at the coin shop
where people are panicking and lining up 1980s-style because they
see manifest inflation. Gold is "not in a bull market" is what I
remarked not long ago. For that, I received a lot of "incoming"
(criticism). However, look at the metrics that make for a true
gold bull market. First and foremost, the supply/demand basis of
the market is absolutely out of kilter. That's been corroborated
by all of the statistical houses-GFMS, CPM Group, VM Group,
etc.-that track gold's tonnage flows in the market. They've
concluded-not just me-that the market has become a complete
"junkie" to this [mostly fund-driven] "investment" niche.
The tonnage flows included the huge influx of scrap gold into the
market. There are indications that scrap is going to be reduced
Scrap supplies rose 27% last year to a historic high. They were
68% higher than scrap supplies in 2007. I don't see it abating
until prices come down and/or stabilize at a lower level, say
somewhere around $900-$1,100.
Is there an indication that gold is going back to its traditional
status as a backer of currency versus its more modern use as
I wish that were the case. At some point, gold was 60% of global
reserves. The central banks' selling campaigns of previous
decades have marginalized it to about 10% of global reserves.
Even if we get back to 20%, gold is not making a return as a
alternative currency or the sole basis for some new
Why is that?
We can't have current global GDP growth levels with the
relatively infinitesimal amounts of gold that are available. We
would simply have to cease growing and go back to the 17th
century, economically speaking. I don't think we're near the day
where gold makes that type of comeback on the international
You mentioned earlier that you could list some other metals that
have vastly outperformed gold. Could you give us a brief overview
Well, for example, these days, investors are quite excited about
silver because it has outperformed gold in the last few weeks. I,
on the other hand, have been looking very closely at platinum,
palladium and rhodium, all of which show very decent
fundamentals, unlike the situation we find in gold and silver at
Performance? Well, in 2009, gold returned about 25%. Silver
returned about 53% last year. Platinum and palladium, on the
other hand, returned 212% and 230%, respectively.
Silver has recently performed very well, but the risk profile
for that metal remains at the very top of the heap of a bunch of
portfolio assets-gold, platinum, the S&P 500, the
trade-weighted dollar, etc. It carries fully double the risk
entailed in investing in gold.
Demand for platinum, palladium and rhodium has been growing
thanks to the industrialization and growth of Brazil, Russia,
India and China (BRIC). The one standout feature has been that
everybody wants to have wheels in China and India. Of course, you
cannot build 'wheels' these days without making the tailpipes
emit cleaner content. The minute you commit to that mandated
environmental standard for auto emissions, you
to employ these metals. All three of them are absolutely vital in
producing a car that meets today's stringent emissions rules.
The noble metals market is also awaiting the return of robust
sales in the Western European and North American car markets,
which have been in a sort of nuclear winter for the last two
years. We have had to use cash-for-clunkers gimmicks in order to
keep the sales from going away completely. The carmakers might be
turning the corner next year, however; that's when we would
expect even better performance to come from the noble metals
magazine recently featured a story about how BRIC has become
BIIC. Russia was taken out of the mix and Indonesia added because
corruption in Russia inhibits investment there.
Russia is a double-edged situation because some palladium market
followers have almost declared that state stockpile sales are
finished. Other people have disputed that whole scenario. It's
hard to get accurate information out of the country. One thing I
would look for is continued demand for vehicles in
Russia-everybody wants a car. As long as Russia doesn't implode
economically, I think its car demand will be ok.
I expect China to really ratchet up interest rates to try to
cool inflation and growth, as well as avoid a real estate
implosion. However, any tempering of the 'hotness' in China could
mean lower sales of everything. So, we have to continue to count
on the traditional automobile markets in Europe and America. I
think they're making a comeback, and I think we're looking at a
much better situation going into next year. The U.S. is a lot
more accepting of diesel-powered vehicles, which are one of the
major consumers of platinum group metals.
On a personal level, what percentage of your portfolio contains
Not that long ago, I was on a panel with certain notables in the
gold business and the MC asked all of us point-blank: "Gentlemen,
what do you have in gold? You're telling your followers to own
lots of gold." I think all of those present, besides me, admitted
to gold ownership levels of far less than 10%. Most were
clustered around 5%, at best. I think the audience found it quite
surprising, as some folks are practically advocating putting your
lifesavings into gold and running for the hills. Their own
exposure to the physical side of the precious metal was pitifully
small. Maybe they dabble in junior mining shares and consider
that exposure to gold. Maybe they play gold futures or options, I
don't know. They didn't explain. However, I am sure we would all
like our gold gurus to put their money where their mouth is. I've
never shied away from saying that gold was my entire asset basket
when I fled communism back when I was 18 years old, which is
certainly corroborated in the introductory chapter of
The Golden Rule: Safe Strategies of Sage Investors,
a book published last summer by Jim Gibbons. I wrote the intro
chapter for Jim's book, which describes my story and how gold
really did save my life many years ago.
How did it save your life?
Gold was the only asset that I could effectively flee with, in a
physical sense. It was my nest egg that I started a new life with
in North America. We sewed it into our clothing when we left. It
was given to me by my grandfather, who was a gold miner. So, I've
never really been without gold.
And now you hold about 10% of your portfolio in physical
Correct. I did reduce it previously from 15% as the metal rose
beyond $1,100. I don't plan to dispose of more than that because
I don't need to. I'm hoping not to make stupid decisions in other
assets, which would precipitate a need to sell gold to mitigate
such losses. If it comes to any other forms of exposure to the
sector, I'm very conservative. I don't play or trade metals for
fun and profit. When it comes to mining shares, for example, if I
were to own any, I would stick strictly to the two or three
majors everyone knows. Why? I always want to go with proven
entities and those that I can research easily. I don't have a
profile where I like to put my assets at risk.
My gold holdings are not stashed in a coffee can, either-not
these days. I'm very comfortable having my gold stored by
reputable, specialized custodians and having it spread out in a
variety of worldwide locations. This is not because I'm expecting
any North American crisis or imminent government confiscation but
simply because I like the idea of asset diversification, as well
as geographic diversification. That's why I also hold a number of
foreign currencies in my modest little basket. Some currencies
that I think are well managed are the Swiss franc, Australian
dollar, New Zealand dollar, Swedish crown and Norwegian crown. Of
course, none of that means I have any nightmares about being
mainly in Canadian and U.S. dollars as the base.
What's some parting advice for investors?
Gold is essential as an insurance policy on an investor's
financial life. If investors have none, they should start
accumulating it 1% at a time until they build up to my preferred
threshold of 10%. But investors should not be without gold
because, at the end of the day, this is the sole liability-free
asset that can be owned outright. As Karl Malden used to say:
"Don't leave home without it." I would update that motto to say:
home without it, but keep hoping for the best. Ignore the gold
price, but focus on your percentage of ownership thereof."
We'll hope for the best. Thanks so much for your time, Jon.
Jon Nadler's 33-year career has focused exclusively on the
precious metals market and its related investment products.
After graduating from UCLA Business School's management
program, Nadler established and managed several precious metals
operations at major U.S.-based financial institutions, such as
Deak-Perera, Republic National Bank and Bank of America. He
currently is a metals market analyst forKitco Metals Inc . He
has long-standing ties in the global precious metals community
and has consulted on marketing and product-development issues
for government mints, precious metals retailers and trade and
membership organizations, such as the World Gold Council.
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