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Gold: Listen to This Interested Observer

Alex Dumortier, CFA
June 24, 2013

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

Unsurprisingly, then, the CBOE Volatility Index (VIX) (INDEX: ^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