Jon Nadler, senior analyst with Kitco Metals, has watched with amazement as gold climbed to greater heights in the wake of the U.S. debt downgrade on Aug. 5. He remains steadfast in his view that gold should occupy no more than 10 percent of an investment portfolio as insurance, and stressed that history has not been kind to those who allocate a lot more than that to the yellow metal.

He told IndexUniverse.com Managing Editor Olivier Ludwig that the budget deal in Washington this past summer left the economy, for now, with diminished potential for growth, and suggested that any buying on dips among precious metals investors shouldn’t center on gold, but on metals with attractive supply-and-demand dynamics, such rhodium, platinum and palladium.

Ludwig: What’s going on with gold these days?

Nadler: Pretty much all the bets are off and all the forecasts are off and all the expectations are off. It’s basically a new environment. I can’t blame anyone for being either a new convert or for saying, “I see a bubble.”

Ludwig: You’re talking about the market move since the S&P U.S. debt downgrade?

Nadler: Yes, and not just gold—look at stocks; look at oil. Curiously, the dollar has refused to roll over and die. It has, in fact, broken out above its 200-day moving averages and is threatening to pick up more steam.

Ludwig: That’s been a function of Treasurys, no?

Nadler: A safe-haven bet, yes. But the bigger issue here is that, to whatever extent gold was parabolic before, at around $1900, it’s hyper-parabolic. When you’re entering this realm of $50, $60 and $80 intraday moves, then of course the next exponential factor is $200 to $300 moves. And that type of bungee jumping is generally not a nice, smooth-landing type of event.

Ludwig: What is your general view about the dramatic recent pullback in stocks that was apparently triggered by all the goings-on in Washington, D.C.?

Nadler: I’m unhappy about the fact that the budget talks were tied in with the debt ceiling issue. I’m also unhappy about what ended up being actually cobbled together, because it looks to me like basically Obama caved to the Tea Party’s ultimatums. The extent to which it’s feasible that tax hikes come back on the table in the next two or three months is about the only salvation Obama’s got, because otherwise the markets are reading into it lower spending, lower growth and continued unemployment.

Ludwig: What other metals are on your radar?

Nadler: I’m one of a few out there who continues to say that, as far as I’m concerned, the next 35 or 50 percent of return will most likely come from certain metals that are now flying somewhat under the investment radar: rhodium, palladium, platinum—probably in that order. I’m talking about metals that are, in the case of palladium, for instance, in deficit in terms of basic supply vs. demand.

Ludwig: So rhodium, palladium and platinum are metals that have good enough fundamentals such that any sell-off related to gold wouldn’t hurt them as much?

Nadler: Correct. If the economic contraction scenario does not fully materialize, and we proceed on the lines along which we were already going after the much-sooner-than-expected recovery in Japan, and the growth in BRIC-country automotive demand, you should actually be in a very good position to get that next 35 or 50 percent return, if, again, that’s the quest you happen to be on.

Ludwig: So how much gold should investors hold?

Nadler: You’ve heard this one before from me—a core insurance position in bullion is always desirable, at say, a maximum of 10 percent of the overall portfolio. I’m not so sure that you go out and buy fire insurance the day after the house—the financial house—has gone up in flames, or has already burned down. I hear that some advisors have urged clients to place 40 or 50 percent of their life savings into gold. That kind of investment extremism can only end badly.

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