When Hathaway discusses gold, the world listens
By: Dorothy Kosich
Posted: '22-JUN-05 06:38' GMT © Mineweb 1997-2004
SAN FRANCISCO--(Mineweb.com) When Tocqueville Asset Management's John Hathaway speaks, analysts, investment funds and a hefty percentage of the gold mining industry listen.
And, in the renowned gold bull's opinion, the most exciting development to take place in the gold market lately "is the implosion of the euro."
In a luncheon address to the San Francisco Gold Forum Tuesday, Hathway declared that the first half of 2005 has been "noteworthy in that two important capital havens have been soundly discredited: (1) multiple categories of speculate debt investments and (2) the euro. The demise of both is still in progress."
As traders have become overwhelmingly bearish on the euro, Hathaway predicted that " a decent rally is most likely around the corner." He noted that gold has risen 10% against the euro since January 1, currently trading at 360 to an ounce of gold. Nevertheless, Hathaway asserted that it was a stretch to "project a complete demise of the euro."
The advance of the price of gold is an indicator of "progressive credit deflation," Hathway explained to an audience of analysts, institutional investors, and mining executives. "Investors come to gold through a process of elimination," he suggested. "It's an odyssey of disappointment in other investment vehicles. It's part and parcel of a recession in credit."
Hathaway asserts that a credit squeeze is in the offing. "Expanding credit spreads, a declining Barron's confidence index, the flight to quality, the Fed's response of liquidity creation all add up to a credit squeeze," he suggested. When credit is harder to obtain gold does better. Hathaway feels "junk credit will be buried in due course by a global slowdown," insisting that, indeed "the economy is headed toward some kind of slowdown." He also speculated that potential candidates for the next economic bubble to burst include hedge funds, China, and the stock market.
Nevertheless, in Hathaway's opinion, "the mother of all bubbles" is the U.S. Treasury market. "Rising nominal interest rates in U.S. Treasuries will inflict severe collateral damages on subsidiary bubbles, including housing. This won't occur until foreign central banks turn their backs on the dollar."
Since the Federal Reserve has no ability to tolerate a recession, Hathaway predicted "they will do a u-turn. They will declare victory. ...At that point, we will see the gold market kick into another gear."
SUPPLY IS TIGHT
"Even though trading houses in New York and Europe seem to find plenty of paper gold to trade in a knee-jerk fashion according to the news of the day," Hathaway insisted that physical gold supply "is extremely, extremely tight." The shorts on the CFTC indicate 757 tonnes of supply or one third of annual gold production, he said. "It's short because Central Banks have oversold their allotment under the Washington Agreement," he added.
To maintain an allocation of 500 tonnes, Central Bank flow is going to drop by 25% over the next three months, Hathaway projected.
"It is short because production is falling. ... I keep hearing stories about the threats to maintaining production at these levels," he warned. "It is short because gold is flying off the shelves from the refineries to the Middle East." Hathaway estimated that the turnaround time for incoming metal at refineries is about four to five days at the most.
"The last reason it is really tight is that the ETF has been a great success" with a market cap of $3.2 billion or 7.5 million ounces of gold, he suggested. "At $30 billion, the ETF would demand more than 80% of the annual production. It's not going to happen overnight, but it will happen."
The big difference between a gold share and the ETF, according to Hathaway, is that a gold share is limited by the investment banker's fee and printing capacity. "Whereas the ETF is limited to the effect that if you create more shares, you have to actually buy more gold to back it," he added.
Hathaway theorized that there are two segments of gold investors including investors like him who are very bullish on gold and "want to get the most octane possible for our clients." But, he added, there are many potential investors in gold (such as university foundations) who are not so aggressive in their outlook and want gold to protect capital.
Meanwhile, investing in gold shares may present risks such as geopolitical, labor disruptions, cost creep and environmental lawsuits, according to Hathaway. However, the biggest risk of all to gold shares, in his opinion, is share dilution. During the last two years, the share count for the entire mining industry rose 33%.
"Does anybody wonder why shares have been dogs," he asked. Hathaway suggested that a dialog take place between mining companies and shareholders. "But we still love you, we still have gold," Hathaway joked to the mining executives in the audience.
"I do not think gold should be a part of your portfolio at all times," he suggested. "There are times when it makes sense and times when it does not make sense. The only thing you really have to know is the difference between the two."
Hathaway declared that he likes that gold is about 3% from its 17-year high that gold achieved last December. "We certainly have a lot of room for people to eliminate alternatives (the financial paper asset kind) and move into gold and that really is the story," he concluded.
Rogue
