|also from the current Barron's....|
NOVEMBER 21, 2005
Interview with John Hathaway
Portfolio Manager, Tocqueville Gold Fund
By SANDRA WARD
IF IT'S GOLD YOU'RE AFTER, Hathaway, who runs about $550 million in the Tocqueville Gold Fund and another $400 million in separate client accounts, is the man for you. Year in and year out, Hathaway has delivered glittering returns, outperforming the benchmark Philadelphia Exchange Gold and Silver Index at every step. This year his fund ( ticker: TGLDX ) is up 15.3%, compared with a gain of 14.84% in the index, even though the performance of gold stocks has lagged behind the appreciation of the metal. Focusing on what he considers to be undervalued gems with good growth potential has paid handsome dividends for Hathaway and his investors. If, as he believes, the price of the precious metal is heading toward four-digit territory, expect that streak to continue.
Barron's: Gold seems to be trying to make another run here. What's your outlook for the price?
Hathaway: In the very near term, I have no idea. But it is still a bull-market trend, and there are a lot of reasons for that, and we will see higher prices. People shouldn't be surprised to see gold trade in the four digits.
What's behind the move higher?
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.
But what would lead to that diversion?
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.
There doesn't seem to be a lot of it around.
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.
Yet there are bearish factors behind the bull case for gold.
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 position because the euro was liquid and gold isn't.
Are you surprised at the behavior of the euro?
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.
For Tocqueville Gold Fund's John Hathaway, gold shares "give you more octane than the metal itself."
There are still a lot of skeptics on gold.
It's been five years since it's been in a bull market.
Before that it had been in a bear market for about 20.
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.
You have written about gold benefiting from a bubble in the U.S. Treasuries market.
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.
So what will focus people's attention on gold?
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.
Hasn't there been a disconnect between the price of gold and gold shares?
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.
Why are the shares underperforming?
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.
Will consolidation in the industry help that?
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.
Do you take an activist role in that sense?
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.