In the sea of powerful emotional currents that often characterizes the gold market, Jon Nadler, the senior analyst at Kitco Metals, is an island of tranquility and reason. He told IndexUniverse.com’s Managing Editor Olivier Ludwig that the price of gold is increasingly being supported by investment demand as opposed to credible safe-haven concerns or real demand for jewelry. That’s not to say he doesn’t take economic headwinds that the world economy faces seriously. But he’s an old hand with about 40 years of experience who has seen gold manias come and go. And through it all is a message some money managers, if not gold bugs, can appreciate: Whatever the circumstances, investors need to allocate about 10 percent of their portfolios to the yellow metal.

Ludwig: Can you comment on gold as it relates to resurging concern about deflation?

Nadler: As far as deflation goes, we need to have more evidence that what happened in Europe was perhaps just a hiccup in the recovery process rather than a complete fall into a contractive phase. Things like the velocity of money are really decreasing and there are other indicators showing us that this thing is pointing downward. And people like Jeremy Grantham have tilted into the deflation camp.

If this deflation does materialize, we have to wonder if this will result in a new wave of asset liquidations to raise cash. And will that impact gold less than it did two years ago, which was pretty much $1,030 down to $680? If it doesn’t impact gold as much, to what extent will it? The thinking at the moment is at least in the $880-$890 area, not just because of asset liquidations, but also because of fundamentals.

Ludwig: Regarding fundamentals, do you see seasonality, in the form of holiday demand, picking up and supporting gold prices?

Nadler: I think we’ve had a few years where we could argue that seasonality played a role, but there were so many other factors going on in the same time frame that it’s not as much seasonality that matters right now, but rather, which component of the typical demand side is really dormant and why? India demand, for example, has been pretty bad this year.

North American and European jewelry manufacturers, generally speaking, are not in the game from the June through August period. They are out on vacation. That part of the seasonality is still with us. But I don’t see it really reviving because we have structural problems of the type where luxury goods are still not moving, there’s slack in the economy, there’s uncertainty with regards to job maintenance. Just being employed and saving money seem to be the newfound fondness for Americans as opposed to spending like crazy. So, to that extent, I’m not too optimistic about demand fundamentals.

So we have to look for buoyancy out of India, Vietnam, Thailand, China—the Middle East, to any extent we can get demand out of it—namely Turkey and Dubai. It’s been tricky.

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