Tocqueville's Hathaway: "$2000 Gold Price Is Very Close"

Safety of capital is the real reason to Buy Gold, so it's important to consider your storage options...

SENIOR managing director of Tocqueville Asset Management John Hathaway does not particularly trust banks to keep stores of physical gold safe and segregated. With more investors realizing that safety of capital is the real reason to own gold, safe storage is more important than ever. Read more in this interview with The Gold Report. 

The Gold Report: John, you predicted $2000/ounce (oz) Gold Prices. After rising to $1900/oz last fall, the price has hovered at $1500–1600/oz much of 2012. What will cause it to take the next leg up?

John Hathaway: There are several factors that I think will drive gold higher. On the monetary side, central bankers and treasury secretaries are bobbing and weaving, making it up as they go. They lack a comprehensive solution to the sovereign debt crisis in Europe, to the forces that are pulling the Eurozone apart or to the stagnation in the world's key economies. Ultimately, all of this will further debase the value of paper currency. 

More quantitative easing may also be on the table, and I have read a good deal about taking nominal rates to less than zero. That would mean people who have money in savings accounts would be charged a fee for keeping the money, as opposed to earning interest. It would not surprise me to see that evolve as a way to get all of these free reserves in the banking system into the economy. 

TGR: How soon might that happen—in the coming months, by the end of 2012, in 2013?

John Hathaway: It is hard to say, but we are at a pivotal point. The economic reports are very lackluster. The headlines out of Europe continue to be, at best, dismaying. The upcoming US presidential election complicates things. The Federal Reserve probably does not want to do anything that would be construed as tilting the election one way or the other. 

Gold has been correcting for almost a year now. Last August, it reached $1900/oz. It has had every opportunity to sink below the low it made at the end of 2011. Basically, the price has been in sideways movement for the last seven months. 

I see gold coiling, moving into stronger and stronger hands. There are not many sellers left. People who wanted to sell it have and have gone on to other things. I am more and more encouraged that the downside to gold is limited; it is all about the upside. I would say $2000/oz gold is very close.

TGR: Could it go higher than $2000/oz?

John Hathaway: Oh, sure, much higher. 

TGR: When we spoke at the Casey Research Conference, you bemoaned the fact that even gold-producing companies were trading at a discount compared to the commodity price itself. What will change that trend?

John Hathaway: A higher Gold Price. You need a change in the perception of what gold is doing. You only buy a gold stock if you are bullish on Gold Prices. Since there has not been that kind of encouragement from the bullion market, I am not surprised that the stocks are dogging it. You need a lot of patience and tolerance to go through a period like this. 

Everything else you hear about—the arguments about political risk, cost pressures and the competition from the exchange-traded funds—goes away pretty quickly once the perception of the gold market turns and gold starts advancing, as I am certain it will. 

TGR: You also said that physical precious metals have a place in a diversified portfolio. What percentage do you usually recommend? 

John Hathaway: In today's world, I think 5% to 10%. By physical, I do not mean an exchange-traded fund (ETF) or commodity contracts, which are really paper gold, but actual physical gold that you can touch—gold that is outside of the banking system, that you know where it is stored and what your bar numbers are.

TGR: Are more institutional and individual investors including physical metal in their portfolios?

John Hathaway: More and more people are thinking strategically about gold. Owning physical gold should not be viewed as a way to make money. Rather, it is way of saving capital that creates optionality for future spending power and investment resources. 

The impetus to get into gold is not because someone like me says the next step is $2000/oz. The real reason is safety of capital. 

TGR: Do you also see precious metals as a hedge? 

John Hathaway: Absolutely. It is optionality. If you look at what is going on in banking regulations, everything banks are now required to ask for regarding personal finances that are nobody's business, and you couple that with the trend toward negative nominal interest rates, why would you keep all of your money in the banking system? 

TGR: Does it matter what form the physical gold is in—coins, bars, bags?

John Hathaway: You pay a premium to have coins. Whenever I try to buy coins, I feel moderately ripped off because you pay a premium over the bullion content. However, there is a convenience factor to coins.

When buying physical metals, you have to consider your needs. If you intend to take personal possession of your holdings, sovereign coins may be a good option for you. Or 1 oz bullion bars. That's the convenience factor; sovereign coins are more easily verifiable in the retail market.

If your intent is to have a third party store your metals, and you are comfortable with the storage options being offered, it may make more sense to purchase large bars, as your cost per ounce will be lower. It costs less per ounce to cast a 400 oz bar than it does a 1 oz coin.

Either way, you can do better than hoarding coins in your safe deposit box at the bank or in your house.

TGR: If you do not take physical delivery of the coins or bullion, how do investors know that it exists, that it is not being shared or pooled? And does that matter?

John Hathaway: If you have your gold in a bank, you cannot be sure it is not being pooled. Banks say it is safe and segregated, but after the LIBOR scandal and JPMorgan's issues in terms of marking, who can be sure? There is no integrity left in the banking system.

There are other ways to hold gold that would give investors greater peace of mind.

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