John Hathaway: Precious Metals Investing Remains Compelling

In his latest quarterly report, John Hathaway from the Tocqueville gold fund explains the rationale for investing in the precious metals. In his opinion, the precious metals sector remains compelling for two fundamental reasons:

  1. “Global fiscal and monetary policies have been directly and indirectly subsidizing asset values, which make financial assets especially vulnerable to permanent impairment when supports inevitably end.”
  2. “Continuous and unconstrained monetary emissions are fraught with unintended consequences, which have historically included debasement of paper currencies via inflation or devaluation and sovereign debt crises. These risks can imperil all financial assets both in terms of their market prices and solvency.”

Hathaway writes it is astonishing how the Federal Reserve with its monetary policy continue to get credibility and trust by the markets. Several Fed officials have recently told there is no consensus on slowing the rate of asset purchases and reducing the size of the Fed balance sheet.

“It is our view that the Fed will be unable to taper because economic activity will remain lethargic indefinitely.  We also believe that the robust level of activity required to execute the Fed’s fabled “exit strategy” will remain elusive because the Fed’s strategy of asset purchases suppresses interest rates. Artificial interest rates impede productive economic activity by distorting price signals and misdirecting capital flows. The longer current Fed policies remain in force, the greater the potential disruption to financial markets when it changes, most likely due to events yet unforeseen. Still, conventional economic commentary remains confident of Fed competence to unwind its balance sheet. When this confidence dissipates, as we expect, investment demand for gold will resurface in the most forceful manner.”

The outlook remains compelling for several other reasons:

  • The mining industry cannot continue to justify new mine construction as the gold price is currently lower than gold production. Mine supply should decline in these circumstances.
  • Demand for gold investments free of counterparty risk will be driven by the spread of banking and securities industry regulation.
  • A loss of credibility in intermediaries such as Comex and LBMA is realistically to be expected. The paper market in gold is deep and liquid, says Hathaway, subject to manipulation by speculative capital.
  • Asian demand for physical gold continues in complete contrast to liquidation by Western investors over the past two years. Shanghai premiums vs. London spot were up to 7% this year.
  • Sentiment remains at very low levels. The following chart shows a muted level of interest by speculative longs on the Comex.
    Gold_Net_Commercial_Position_3Q13

Expectactions: The gold market should be preparing a major advance. That type of market reversals, however, require a tolerance for the pain that it takes to be invested at the low. Money on the sideline will be paralyzed and unable to act until metals and share prices have advanced strongly.

The gold market Q3 2013 in 53 charts

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