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Gold: Listen to This Interested Observer

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Global markets were rattled by China today as the SSE Composite fell 5.3%. The S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) finished down 1.2% and 0.9%, respectively.

Unsurprisingly, then, the CBOE Volatility Index (VIX) (VOLATILITYINDICES: ^VIX  ) , Wall Street's "fear index," rose 6.4% to close above 20 for only the second time this year -- the first time was last Thursday. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Gold: A professional worth listening to
The American author Upton Sinclair wrote that "it is difficult to get a man to understand something, when his salary depends on his not understanding it." This is the reason why no one working at a mortgage lender or an investment bank would identify the massive credit bubble that had developed by the middle of the last decade.

A corollary of that observation is that when someone whose salary depends on not understanding something does understand it, one should take them seriously. Tom Kendall is one such person. As head of precious metals research at Credit Suisse, the prestige and visibility of his position (if not, perhaps, his salary) is partially contingent on an inability to identify the deflating bubble in gold.

Nonetheless, Mr. Kendall, speaking on CNBC, had a warning for gold bulls:

You need to reexamine your expectations for the gold market if you're long-you need to stop thinking in terms of crisis and start thinking about where gold was pre-crisis," Tom Kendall, director and head of precious metals research at Credit Suisse, told CNBC on Monday. And if you go back just three and a half years, before we got into QE2 and unlimited easing, gold was trading $1,100 or $1,150 an ounce.

This is [not] the place where you step in and say 'this is the bottom for gold.' What we've been seeing is a lot of fear removed from the markets over the last two or three years, whether that's fear of inflation, which hasn't appeared from anywhere in the developed world, or fear of the break-up of the euro zone. A lot of those fears have been lessened and that means less reason to hold gold, particularly at a time when real interest rates are rising back into positive [real yields].

Finally, he added that even at $1,300, gold would be expensive relative to its market history and other assets. He is quite correct. The following graph shows that the blue line representing the inflation-adjusted price of gold (in May 2013 dollars) remains far above its average going back to August 1971 of $752 per ounce dollars per ounce (the red line):

Kendall is no greenhorn in this market -- he's been following precious metals for more than two decades, and he holds a degree in geology. What a welcome change from the overexposed Peter Schiff, the broken clock who predicted last Friday (also on CNBC) that we're "going to see a vicious rally in gold."

One wonders if there are ever any circumstances under which Schiff would see the price of gold declining, but that would probably be a waste of time. Instead, I'd advise shareholders of the SPDR Gold Shares (NYSEMKT: GLD  ) to listen to an expert who is able to his change his mind when the facts change.

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  • Report this Comment On July 07, 2013, at 3:13 AM, RedScourge wrote:

    It is important to understand the full extent of the reasons for why something is a certain price before projecting what its price will be. If the past was indicative of the future, it would be a sure thing to simply look at old stock charts and you'd always be able to outperform the market average. However, this sort of thinking has never yielded anyone impressive results.

    Gold price has largely been able to be determined by a handful of things lately, such supply, demand, rate of production vs consumption, velocity, economic uncertainty, etc. Short term sentiment drives gold prices, but long term phenomenon drive short term sentiment.

    Right now, the causes of the economic uncertainty which led to short term sentiment to drive up gold have not gone anywhere, the can has simply been kicked down the road. Someone who focuses on short term sentiment is likely to always be behind the curve, but someone who thinks in terms of decade time frames and who watches for events which precede the short term changes will not always, but often enough, be ahead of it.

    Behind Peter Schiff's seemingly blind faith in gold is backed by something real. I admit, many gold bugs are behind gold for the wrong reasons, but that does not preclude them from having come to the correct conclusion, whether by sheer chance or not.

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Related Tickers

9/30/2016 5:01 PM
^DJI $18308.15 Up +164.70 +0.91%
^GSPC $2168.27 Up +17.14 +0.80%
S&P 500 INDEX CAPS Rating: No stars
^VIX $13.29 Down -0.73 -5.21%
Volatility S&P 500 CAPS Rating: No stars
GLD $125.64 Down -0.43 -0.34%
SPDR Gold Trust CAPS Rating: **