Gold price weakness has been paradoxically accompanied by rising physical demand, Tocqueville fund manager John Hathaway told Mines & Money London this morning. “The paper tail is wagging the physical dog in the gold market,” he said in a keynote speech on the conference’s final day.
Central bank buying and gold repatriation outside the US most notably by Germany, Hathaway said, has pulled the physical foundation out from under a highly leveraged and unstable credit structure. Citing figures used by the Reserve Bank of India, he said physical backing in the gold market is collateralised up to 90 times over.
“When we saw Germany repatriate its gold, my reaction was, great, you’re going to see a shortage of physical gold. But when collateral comes out of the system the scramble for physical means there’s a de-leveraging taking place like a credit contraction that has nothing to do with the macro outlook for gold.”
“The banks that lend against the underlying collateral extend less and less credit, so the scramble for physical, which in the long run I think is very bullish, is the biggest reason for the disappointment in the gold price.”
Hathaway’s interpretation of gold’s decline, with prices nearing $1,200 per ounce as he spoke on Wednesday morning, paints an exceptionally bullish long term picture. An era or indefinite money printing has created “a rage for tangibles”, he said, with individuals dashing out of visible or digitized wealth into everything from Bitcoins to antique cars held in warehouses in Belgium and Luxembourg.
The same physical demand that has caused an apparent unwinding of trades in the paper market will therefore drive a “new leg in a secular bull market for gold”, with an eventual “implosion of credit structures” in the gold futures markets of London and New York.
Quoting former US Senator and outspoken Fed assailant Ron Paul, Hathaway said that if there was any gold in Fort Knox then it was “encumbered by so many lending agreements to banks and their clients that having it there physically is meaningless.”
The launch of the gold ETF in 2004 he added had undercut valuations in the gold mining sector by offering generalist portfolio managers a “user-friendly” means of gaining bullion exposure, “without having to do the homework on gold miners.”
With the world’s largest producers trading at decade lows, Hathaway believes there is “a huge amount of money to be made” in gold mining majors for “risk tolerant” investors. Tocqueville’s assets are 95 per cent invested in producers. “It’s hard to say this with a straight face after the last two years, but mining companies have the potential to generate real wealth creation.”
“If sentiment were enough to go on, we should be at a very safe inflection point. I cannot remember bearishness anything like this, except when we started our gold fund in 1998 when gold was treated as a joke. It reminds me of the dotcom boom in reverse.” The short gold trade he added was “one of the most worn-out, over-exploited trading ideas that I can think of.”
On the prospect of tapering, Hathaway sounded a somewhat sceptical note. “Tapering makes me want to throw up,” he said, “when I see people talking on CNBC as if its actually going to happen. It’s never going to happen. I think central banks will remain bloated.”