Gold mining-fund manager says stick to your guns, and hold onto your miners...
JOHN HATHAWAY is senior portfolio manager of Tocqueville Asset Management.
Now managing all gold equity products and strategies at Tocqueville, he began his career in 1970 as an equity analyst with Spencer Trask & Co. In 1976, he joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, he founded Hudson Capital Advisors and in 1988, he became chief investment officer of Oak Hall Advisors.
Here, in this interview with The Gold Report, Hathaway explains why he recommends you have wealth insurance in the form of gold and – he believes – gold mining stocks.
The Gold Report: John, you have studied the fundamentals of gold through history. What is behind the current market prices, and what will it take to move prices higher again?
John Hathaway: Adversity in the financial markets is the trigger that will force the general investment world to become interested in gold again. That is a nice way of saying it will take a bear market to push investors to gold. Monetary policy has forced investors into riskier assets – including junk bonds and overvalued Nasdaq stocks. When the tables turn and people start experiencing losses, there will be finger pointing, starting with the Federal Reserve's nominal interest rates. That whole spectacle could balloon and cause conventional investors to throw up their hands and run for liquidity.
TGR: We've talked to some people, including Brien Lundin, who think that a Federal Reserve interest rate increase will be good for gold because it will remove the question mark that's been overhanging the gold price since it is pretty much already priced in. Do you agree?
John Hathaway: I agree that it has been baked in for years, but I think the bigger story is going to be loss of confidence in the Fed and a general downturn in financial markets, which is long overdue. That is when investors will look at safe places to go. Gold has always acted as wealth insurance. Whenever we have had extreme financial events throughout history, gold has always been the last man standing. Gold's purchasing power lasted through the crisis in 2008 and every crisis before that. It's impeccably liquid. You can buy or sell it on a very thin bid/asked spread 24 hours a day. There's almost no other market you can say that about.
TGR: Why did you recently compare today's gold market to the London Gold Pool of the 1960s when eight central banks worked together to try to maintain a gold price of $35 per ounce before the scheme collapsed?
John Hathaway: It has been in the interest of public policy and the financial establishment to operate in an environment of zero or nearly zero interest rates, interbank lending rates and Libor. That is not unlike the manipulation that occurred in the 1960s. Gold rocketing to new highs would upset that whole scenario designed to force capital out on the risk spectrum.
An indication of this artificial market is the fact that the synthetic market for gold – the Comex, options, over-the-counter and LBMA – is traded hundreds of times more than the actual metal. Investors actually short gold by posting margin on the Comex. That eventually drives the price of gold down without any physical gold changing hands. It manipulates the psychological market environment and then the high-frequency and algorithmic traders push the price smashing to the extreme and it all happens with no gold actually being sold.
TGR: What's the role of China in this retro-market scenario?
John Hathaway: It is playing a cat-and-mouse game. A huge amount of gold is heading from Western financial centers to the East as demonstrated by the withdrawals from the Shanghai Gold Exchange on top of the usual strong flows into India and Turkey. Physical gold's shift to China is a big part of this story as Asians buy on weakness.
However, the synthetic instruments – call options, short interest on Comex and over-the-counter deals – could be the precursor to a scramble to get physical. That would be enhanced by a loss of confidence in counterparties by a bear market in stocks. You have already seen sovereigns' call for physical gold to be repaid. Germany was the highest profile, but many other countries have asked for earmarked gold in London and New York to be repatriated. That's a sign of a loss of confidence. That could affect the price in a very big way. And the Chinese will have it.
TGR: I'm looking at your portfolio and you have quite a few royalties. What is the benefit of holding royalties in the market scenario you have described?
John Hathaway: It's a good business model. It's a way to get participation in many more mines through one equity than you could get owning a large-cap company. That's because the royalty business model makes investments in numerous different mines. It's basically a financing tool for companies that need to get capital to complete a project. Because we have been through such a nuclear winter for financing large and small companies, the royalties have very powerful deal flow, and they're able to set very attractive terms. Investors have gone through a difficult period in the gold equities market, but it has been advantageous for the royalty companies. That's why we have such a strong representation in those names.
TGR: You seem to be largely in the mid-cap and small-cap mining companies. How do you manage the risk with the possible upside leverage?
John Hathaway: With the mid and smaller caps, there's more value creation for mine building and discovery of new reserves. It moves the needle more than you could get in a large-cap company. Those are very identifiable events. That is where our research can really pay off, more so than with big-cap companies where you have so many more moving parts and significant developments are often obscured in the mix of assets around the world. More important, with the larger-cap companies, a discovery isn't going to change the outlook. It's just what they have to do to sustain the model. But with the mid- and small-cap companies, a big discovery is value creating. When it gets recognized, I think you get much more of a return than you would in a large-cap name.
TGR: Any other parting words of wisdom for veteran investors trying to retain their wealth as they prepare for 2016?
John Hathaway: I think we are nearing the end of the pain. Stick to your guns if you own gold mining stocks, certainly if you own physical gold, and think about adding more. I think the financial markets are turning. We may be at the dawn of a recognition that Fed policy and central bank policy worldwide is hollow, ineffectual and maybe worse. It could lead us into greater problems than we saw in 2008. So be prepared.
TGR: Thank you for the advice.