Right Advice But Wrong Price

March 6, 2011

There are many of us who have periodically aimed our pens at Jon Nadler of Kitco for his prognostications and thoughts on the value and role of gold. He has perennially predicted a downward sliding gold price and has consistently ruled out the possibility of gold playing a serious role in anchoring the world's monetary system to something other than fiat fantasies.

To this end there has been an unending parade of bankers, economists and analysts whom he has quoted ad nauseam to support his position. To date his "experts" have been badly discredited by subsequent price movements, yet he refuses to change his mantra despite gold continuing its upward march.

Mr Nadler has however consistently put forth another proposition which is at odds with the usual content of his commentaries. Consider the following:

"We advocate 10%, regardless of price. That should be a core holding for anyone, of any orientation, whether they believe in inflation, deflation or an unforeseen crisis of any kind. It's an "all-eventuality" type of holding."

Jon Nadler - May 20, 2010

"A core 10% gold holding is very much advisable for most investors with assets worth protecting."

Jon Nadler - February 18, 2011

Now let's weave the following two pieces of information into his advice to hold 10% of assets in gold.

  • There are approximately 160,000 tonnes of above ground gold in the hands of central banks, individuals and institutions in various forms.
  • The total of the world's financial assets comes to around $140 trillion according to McKinsey & Co.

If gold holdings were to make up 10% of financial assets they would have to be worth somewhere in the vicinity of $14 trillion or $87.5 million per tonne which in turn equates to $2,721 per oz of gold.

This price of $2,721 is based on financial assets alone, so if one was to make a calculation based on incorporating land and buildings into the equation, the value of gold could reach $5,000 and beyond.

These are of course back of the envelope calculations which simply serve to make a point rather than to provide an exact figure. Furthermore, much of the above ground gold is held as jewellery which has been paid for at multiples of the spot price to reflect manufacturing expenses and overheads, profit and taxes. Should gold jewellery be removed from the above calculation, the price of gold would be further boosted.

In fact should jewellery buyers decide to spend their dollars on bullion rather than jewellery, the price of gold will literally explode. This is because, at least in western markets, a $1000 piece of gold jewellery contains at best $500 worth of gold.

In view of the above, Mr Nadler has to reconcile his numerous apocalyptic scenarios for the price of gold, to its actual performance. Let us consider pronouncements he made in May 2010:

"Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000 an ounce, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals."

and

"Further, what am I to make of Societe Generale, which also said in April of this year (2010) that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures."

To achieve a 10% allocation to gold with a price of $880 per oz, one would have to source almost another 340,000 tonnes of gold. This is too much magic, even for Mr Bernanke.

The only other way this allocation could be achieved with an $880 per oz price would be for the value of other financial assets to plummet. Even if this were to happen the relative value of gold would still shoot up.

So the bottom line is that Jon Nadler has been demonstrably and catastrophically WRONG WRONG WRONG in his predictions about the price of gold, but would have made a lot of money for anyone who bothered to take his advice to hold 10% of their assets in the form of gold.

Either way, Mr Nadler is a winner. If price drops he will say, "I told you so" and if price goes into orbit, he will say, "you should have taken my advice." You are indeed a clever man Mr Nadler and I salute you. A real Dr Jekyll and Mr Hyde.

To the rest of my readers I say this:

The world's financial assets may well be $140 trillion but the unfunded liabilities of governments the world over for pensions and medical care are at least twice this figure. Were the net present values of such obligations incorporated into the balance sheets of governments it would be clear that the world both now and into the future is bankrupt and beyond repair. This shortfall is slowly making itself felt but should the general populace fully understand the speed and magnitude of the approaching tsunami, there will be a wild scramble to exchange fiat currencies for real money and productive assets.

Past history has shown paper money to be of questionable value and in this period of history, derivatives, sub-prime loans, MERS and the resistance of the Federal Reserve to open its books and its vaults have further damaged the credibility of all paper, all institutions and the systems whereby these pieces of paper are recorded, valued and regulated.

For as long as the urge to print, borrow, make promises, conduct wars and spend beyond income, continues unabated, the value of paper currencies and precious metals will diverge until the former disappears forever. Moreover, whether you choose M1, M2 or M3 it is clear that these measures have left the gravitational field of real money and cease to reflect or be attached to reality.

Got gold? Got silver? Or are you still reading Mr Nadler's commentaries?

Sydney Australia

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.

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