"Gold is not in a Bull Market"

Jon Nadler, Metals Market Analyst at Kitco, was one of my co-speakers in Montreal last weekend. I have known Jon for a few years now. In the midst of the emotionally charged commodities space, I have come to respect Jon's commitment to fact-based analysis. His recent interview on gold is worth a read:
“What we really see is a momentum- and index-fund-driven speculative move that started almost on cue on Sept. 1. They've been piling in, hand over fist, with margin positions and futures positions that have now mushroomed to a level that's unreal—historic highs, on the order of 750 tons of long positions. They outnumbered the shorts 9:1 as of the week before last; it has since narrowed to 7:1 [as of Tuesday, Oct. 27]. Still, that's way distorted.
But I have to say from the get-go, I'm not a gold bear. I know that anybody who doesn't say “$2,000 gold!” is automatically a bear, but I'm just a realist who looks at supply and demand.”
Read the full article: Gold is not in a Bull Market.

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8 Responses to "Gold is not in a Bull Market"

  1. Anonymous says:

    Fan of the blog. Definitely interesting read but perhaps he is missing the #1 reason gold might be in a long-term bull market which is as a hedge against fiat money. One might want to also check out the comments on gold from Richard Russell and Louise Yamada. Just curious, what does your own technical analyst think on this issue?

  2. Anonymous says:

    Yes I am aware that Russell is a huge gold bull. And yes the anit-fiat currency argument is definitely in vogue and no doubt motivating buyers and some holders. But I do not believe that the end of the free world is upon us. And gold prices have now gone a long, long way from 250 to 1100, and present levels read overbought on bullion. In addition the company shares are not following up which is a red flag. We look for demand as the basis for an investable thesis rather than momentum driven speculation which always end in pain eventually. Keep your eye on the U$ as driving the near term action of gold and other risk assets.

  3. Anonymous says:

    Appreciate the response and words of caution. I agree that the end of the free world is NOT upon us, although I'm not sure that necessarily translates one way or another to the gold price the next 6-24 months. I also noted the divergence between the bullion price and gold mining shares which is definitely a warning sign. Gold prices have indeed come a long way. Of course, the S&P 500 came a long way from 1982-1995 and then proceeded to quadruple over the following 4 years. Oil went a long way from 1998-2006 and then proceeded to double once again into the July 2008 high. I think you are right that this is at least partially momentum driven speculation that will end in pain…EVENTUALLY. I've got stop out levels in place that I will keep moving higher the higher the price goes.

  4. Anonymous says:

    Hi Danielle,
    I love this blog. Unless I misunderstood, you are monitoring the gap between the S&P and the Baltic Dry Index. I just wanted to know if you had any comments concerning the recent decrease in the gap.

  5. Anonymous says:

    Yes there has been a decrease in the gap over the past couple of weeks which might be promising except that we are into the “christmas rush” so to speak, so this could be a short-lived pick up in shipping. I note some troublesome stats on shipping given in The Gartman Letter this morning:
    “We note that several…indeed many…German container ship-owners, controlling more than 30% of the world containership
    fleet, are facing larger and more obvious financial
    strains. These “strains” are severe enough that the
    threat of bankruptcy for many of these shippers looms
    large and ever larger. Indeed these pressures may
    build once the Christmas shipping season is well
    passed and lesser volumes take place in the winter
    and spring.”

  6. Anonymous says:

    Hi Danielle,
    I am a novice in Gold. I read Nadler's comments through your link and sent it off to a friend who is much more knowledgeable in precious metals, only to receive a rebuttal from him and a link to here:
    Apparently, Nadler has been wrongly a gold-bear ever since gold was at $300 … and there is controversy about the company he is associated with, Kitco, and how he might have a hidden agenda in talking down gold.
    Given this backdrop, do you still give full credence to Nadler's comments?

  7. Anonymous says:

    I always prefer factual arguments over name calling and character bashing. The emotional responses against Nadler's interview are typical of those that are passionately long. I would be interested in seeing a point for point reply showing where and why Nadler's facts are inaccurate. So far that has not been offered forth.

  8. Anonymous says:

    Some additional thoughts based on some of the various arguments and I think/hope we are having a worthwhile discussion here whether one is bullish or bearish.
    Regarding Kitco/Nadler, I agree with Danielle that ad hominem attacks on their motives don't support the bull case one bit. That said, if it is indeed true (I have no idea) that Mr. Nadler has been *incorrectly* bearish on gold for several years since it traded at $300 that does call into question his credibility on future forecasts, and the mental paradigm he uses to make those forecasts.
    First, good article on gold today in the ft:
    ”Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity. You will be familiar with fiat currency. Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender. It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.”
    Regarding Nadler’s argument, overall decent IMO, but one can certainly develop counterarguments to some of his points:
    First and foremost, you have to have demand that far outstrips supply.
    Many foreign central banks appear committed to increasing the percentage of their reserves committed to gold. Russell hit on this the other day/
    Secondly, you'd have to have a falling stock market. The old adage is that gold is an inverse asset to currencies, stocks and other assets—so where's the bear market in stocks? Stocks have been up 50 percent-plus this year.
    Nope. Sometimes, relationships change and structural shifts occur. Take oil. For decades, it never traded above $40 and now the past several years it hasn’t traded below $40 once the supply/demand dynamics permanently changed. Historically, oil versus natural gas has traded in a range for the last 20 years. That relationship has been obliterated because supply of oil is dwindling and natural gas is abundant. Gold may not any longer be an inverse asset to stocks, but BOTH stocks and gold may be inverse assets to the unlimited printing of fiat paper.
    Third, you'd have to have an actual, tangible inflation level, and the threat of much higher inflation on the horizon as well.
    Markets look forward. Both Hussman and Buffett see an onslaught of inflation way down the road. Gold may be starting to react to that prospect now.
    And fourth, you'd need an increase in the price of gold across all major currencies—no exceptions. You can't have Aussie dollars and the South African rand going one way, while the euro and U.S. dollar is going the other.
    Perhaps this is one way of “defining a bull market” but it is of no use to me. I am a U.S. citizen. I earn my wages in dollars, spend dollars for goods and services, and invest my savings in dollars. I plan to stay in the U.S. as far as I can see so I only care how many dollars I have at the end of the day. Doesn’t matter to me one bit if gold doesn’t do well in South African rand if it does very well in U.S. dollars.
    Lastly, my experience in the financial markets is that one can often come up with compelling factual arguments for both sides of an issue, and often the chart does not lie so once you’ve evaluated all the fundamental arguments it is useful to look at the chart. Danielle, this is why I had asked what your internal technical analyst thinks (false breakout or beginning of next upleg) and you kind of sidestepped that question. I had said this on another blog regarding the chart on gold:
    Speaking technically, and again I would highly encourage taking the time to listen to the Yamada interview (who called the start of the gold bull back in 2001), we just completed the mother of all consolidations in that giant 18 month sideways trading range from March 2008 through September 2009. Louise has an expression, “the wider the base, the higher in space”. I read people saying gold is already at the end of its bubble move and topping out here at 1100. I can only wonder what chart they are looking at. If this is the bubble top, it is unlike any bubble top I’ve ever seen. Go look at NASDAQ in 99-00, China in 06-07, oil in 07-08, or even gold in 79-80. The gold chart looks like those? We are putting in the final top 10% above an 18 month trading range and that is the bubble top? Markets can do anything, but that seems very remote to me.

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