Hathaway Interviewed by Barron’s about the Gold Price
By Sandra Ward
Interview with John Hathaway
Portfolio Manager, Tocqueville Gold Fund
Q: What's behind the move higher?
A: There is so much paper around, there are so many financial assets, and it only takes a small diversion from financial assets into gold to push the price higher.
Q: But what would lead to that diversion?
A: People are buying tangible assets, and gold is tangible and probably one of the most liquid and, in some ways, the least risky of all the tangible assets.
Q: There doesn't seem to be a lot of it around.
A: There is not a lot of it around. If you took one-tenth of one percent of global financial assets and stuck them in gold, you would wind up with a couple of years of mine supply. It is a trade you can't do. But it still gets back to the question as to why people would get more interested in gold, and it's not all based on bearishness. India is getting more prosperous, and Indians like gold. China is getting more prosperous, and the Chinese like gold. More disposable income in Asia definitely helps gold.
Q: Yet there are bearish factors behind the bull case for gold.
A: There is an ongoing currency debasing. Look at all the people who were bearish on the dollar a couple of years ago -- they've been been slammed because they put their money into the euro. They should have put it in gold. Warren Buffett just took a loss on part of his position in the euro. He was famous for being bearish on the dollar. How did he activate that? He took a 22 billion euro position because the euro was liquid and gold isn't.
Q: Are you surprised at the behavior of the euro?
A: Not really. It is a piece of garbage, really. There is no national treasury that stands behind it, but a committee of bureaucrats. Then there's the politics and social issues in Europe. There's a big difference in the growth rate between the U.S. and Europe, and there's a big differential in interest rates between the U.S. and Europe. Gold is going to rise against the dollar and the euro and the yen, which it has been doing for quite a while, but it has been doing it quietly, so most people aren't even aware of it.
Q: There are still a lot of skeptics on gold.
A: It's been five years since it's been in a bull market.
Q: Before that it had been in a bear market for about 20.
A: These days, the generations are much shorter. Residual skepticism is all over the place, and it is terrific because it gives the bull case longevity. If everybody were on board the way they are with energy, I would have to think of a new investment theme to work on.
Q: You have written about gold benefiting from a bubble in the U.S. Treasuries market.
A: The bubble is a reflection of the lack of investment alternatives. It is also a reflection of the perceptions of risk and the notion that Treasuries are a safe haven so they should be priced in a different way. There is so much money sloshing around the system, to the extent it is risk-averse it goes into Treasuries. On the other hand, you have negative real rates throughout the yield curve. Latest 12-month inflation is running about 4.7%. An investor has to go out almost 30 years on the yield curve just to get even. There is so much paper around and returns on assets are so hard to come by that it is driving money in this direction, and that's created the bubble. But these conditions are very favorable for gold.
Q: So what will focus people's attention on gold?
A: Hitting $500. That will fixate attention. This has been a stealth bull market. Only years after a bottom has been made do people realize it.
Q: Hasn't there been a disconnect between the price of gold and gold shares?
A: Day by day, tick by tick, they don't do the same thing. But if you go back to 1999, which was the bottom of the bear market in gold, gold has gone from $250 an ounce to nearly double that. And the XAU, a benchmark for gold shares that most people use, has gone from the low 40s to around 115. For the last year or so, the shares have underperformed the metal to some extent, but over a period of time and on a historical basis, the shares give you more octane then the metal itself.
Q: Why are the shares underperforming?
A: Costs are up so much, particularly for open-pit mines, which use a lot of energy pushing dirt around and hauling it. The cost of building a new mine is up a good 30% over what it was five years ago. So the economics of the industry, even though the price of the commodity is up quite a bit, are essentially just as crappy as they were when gold was at its lows.
Q: Will consolidation in the industry help that?
A: Not really. They might help a particular company's business, but it is not going to change the economics. What would change the economics would be a $200-$300 price increase so that gold would then outperform commodities. Gold has underperformed other commodities by about 50% for quite a few years. That tells you oil, copper and a lot of these inputs that gold producers need to get gold out of the ground have outpaced the price of gold. That is a fairly straightforward explanation of why margins have been poor. But there is another factor, and that is it is so easy for a gold company to get money. They have abused their ability to access what has been very low-cost capital by over-issuing shares. The stocks might be 20% higher if so many didn't declare open season on investors by issuing so much new stock.
Q: Do you take an activist role in that sense?
A: I'm very vocal about how investor-unfriendly the success of share issuance is. I'm particularly upset with the Canadian investment banks that do these deals.
Q: What's their defense?
A: The other side of it is that small companies, particularly the ones that are true exploration companies, are analogous to biotech stocks. They have properties that have potential value, but it takes a lot of money for drilling and exploration and metallurgical testing and feasibility before you actually generate revenues. Basically, they have to pass the hat all the time. Issuing shares is a quick and dirty way to get money, and for smaller companies, it's OK. But I object to any company that has a listing here in the U.S. on the New York Exchange or American Stock Exchange doing "bought" deals [in such a deal, a new-share issue is bought entirely by one underwriter to resell to investors].
Q: Is there any evidence that raising money has boosted production?
A: No. We just had a company in yesterday that is a particularly good example of this practice, and if you look at benchmarks like resources per share or ounces of production per share, they have been flat at this company for the last four years. So getting back to your question on why the shares have been sluggish in an environment in which the gold price is going up, it's because costs are way up and these companies issue stock without discipline.
Q: Haven't some gold stocks been hurt by strength in local currencies?
A: Certainly the South Africans were hurt because the rand went from something like 13 to the dollar to six to the dollar over a period of a year and a half or two years. That's like cutting the gold price in half. Even though the dollar price of gold has gone up, the rand price of gold is just now getting back to where it was a few years ago. To a lesser extent, strength in the Australian dollar and the Canadian dollar until recently squeezed margins for operations in those countries. But you get around that problem if gold is rising in all those currencies, which it is doing. But we have reached a point where gold isn't really linked to foreign-exchange rates because a lot of people are concerned about paper currencies in general.
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