John Hathaway Recommends Buying Gold Like It’s 1999 Again

In this interview by The Gold Report, portfolio managers Johny Hathaway and his partner Doug Groh share their view on the precious metals market. They also explain how they are investing in the metals right now.

John Hathaway explains how the gold futures chart is showing that we are in the process of a reverse head-and-shoulders pattern, a sign of a bottom and exhaustion of downward momentum. This bottom will be confirmed when gold trades above $1,400/ounce. It’s shaping up to be a bottom, although it could be tested over the summer. Chart courtesy: International Strategy & Investment Group LLC.


Are statistics on money flows telling you that investors are starting to get interested again?

Hathaway: Yes. If we look at the SPDR Gold Shares Exchange-Traded Fund (GLD:NYSE), which is one proxy for money flows into the gold space, the outflows that have been predominant over the last couple of years have pretty much run their course. Now, we’re starting to see assets build in the SPDR Gold Shares ETF. At Tocqueville, our fund has seen steady inflows all year, in some cases, very substantial inflows. I don’t know if what we’re seeing is comparable to other managers in the precious metals space, but our experience this year has been positive . Chart courtesy: MeridianMacro




Conflicts in the Ukraine, Iraq and Gaza have bumped gold prices lately. Can these events act as long-term fundamental supports or do they represent short-term volatility that will fade fast?

Hathaway: Anything geopolitical always has a knee-jerk impact. I would never recommend gold based on today’s headlines, yesterday’s headlines or speculation about future headlines. Having said that, geopolitical issues away from the headlines influence the demand for gold. Europeans are probably more conscious of gold today than they might have been six months ago. People want to get their wealth in a safe place. That will reinforce demand for gold as time goes by.

What were gold’s fundamentals in 1999?

Hathaway: Fifteen years ago, we were at the end of a 20-year bear market, so the psychology was very negative. Gold was never mentioned in polite discussions. We’re not that different today from where we were then. Considering the drop from a high of $1,900/oz to slightly less than $1,200/oz, that’s a pretty big decline in the space of two and a half years. That makes the setup similar to what we experienced in 1999. Back then, the markets were flush with optimism, and I would say that’s the case today. I think there are many parallels.

One unique thing that is happening right now is that the mining share valuations seem to be leading commodity prices. How comes?

Hathaway: It’s not an ironclad relationship, but when the shares outperform the metal, which they’ve done this year and by a fairly substantial amount, that’s generally a favorable setup for a better phase in the gold market. In 2011, the opposite occurred. Gold reached a new high and was in the headlines in every newspaper on the planet, yet the shares were conspicuous by their underperformance. That was a sign that the shares were not confirming the new highs in gold, and we’ve seen the result. A lack of confirmation between the shares and the metal prices can sometimes indicate the future direction of the gold price, or vice versa, of the share prices.

QE never did seem to weigh down the dollar. Are investors on the sidelines waiting for the impact of liquidity to buy gold?

Hathaway: I think the rationale for owning gold is as strong as ever. Radical monetary policy probably won’t end well and any thinking person should be concerned about it. That’s why we believe you need to have some exposure to gold. Markets today are over-exuberant: pumped up equity valuations, nonexistent spreads between quality and junk, record issuance of low-grade paper, all of these things are typically indicative of an endgame in financial assets. Gold is not at that party. It’s conspicuous by its absence. In our view, it’s pretty hard to say that anything represents value these days except precious metals. Gold is wealth insurance.

When we started the Tocqueville Gold Fund (TGLDX) in 1998, we all said, “If this works, we’ll be glad we did and if it doesn’t work, everything else we’re doing will be successful, rewarding and profitable.” As it turned out, gold was a terrific thing to be in from 1998 through 2011. And we believe it will be again.

What words of wisdom do you have for investors who may have been in the gold space over the last three years or are just thinking about getting back into it?

Groh: We believe that investors should consider gold and gold exposure as an alternative asset class and as part of an overall portfolio. While there are attractive values in the gold space, investors should think about having broad exposure to the gold sector, whether it’s through bullion, mining companies in different stages of development, or producers. Each avenue carries different opportunities and risks. That is why a group of precious metals stocks mixed with an exchange-traded fund or a gold mutual fund like the Tocqueville Gold Fund can serve an investor better than having just one name.

Additionally, I would recommend that investors average their investment over time instead of buying all at once. The gold price is volatile and it’s very difficult to get the low points. Averaging over time when the price dips can help financially and mentally even out the ups and downs.

Finally, consider gold as a very long-term investment, not just a two- or three-year investment. We believe it should be a permanent part of an overall portfolio as a non-correlated asset. It doesn’t really have counterparty risk and it trades to a different type of profile than other financial instruments. That’s why we recommend having a portion of a portfolio allocated to gold and gold mining equities.

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