Hathaway – The Lengthy 10 Month Correction In Gold Is Over
July 6, 2012
Four-decade veteran John Hathaway gave King World News exclusive distribution rights to the following piece. The prolific manager of the Tocqueville Gold Fund had extremely important news for holders of gold and silver around the world: “The good news is that the lengthy ten month correction in the metal and the shares appears to have reached a conclusion.” This is a fantastic piece by the man who leads the five-star MorningStar rated fund.
By John Hathaway, Tocqueville Asset Management L.P.
July 6 (King World News)
During the second quarter, the gold price declined 4.3% from $1,668 to $1,597. On a year to date basis, gold has appreciated 2.2%. Gold mining shares as measured by the XAU Index (PHLX Gold/Silver Sector Index) declined 9.7% in the second quarter and 11.9% on a year to date basis. That is the bad news. The good news is that the lengthy ten month correction in the metal and the shares appears to have reached a conclusion. On Friday June 29th, gold rose $45/oz. and the XAU jumped 3.4%. While it might be premature to declare an end to the correction based on the action of one day, we believe that the weight of all evidence as discussed in the following paragraphs provides a substantial basis to suggest the stage has been set for a resumption of gold’s multi year advance.
The immediate catalyst for Friday’s rally was the conclusion of the summit of European leaders which signaled that Germany had relaxed its rigid stance against direct lending by the European Central Bank to recapitalize the European banking system. As noted by David Zervos of Jeffries in his 6/29/12 commentary, “The ESM, with access to the ECB balance sheet for leverage, is now a fiscal backstop (with a printing press) for the resolution of bad European banks…This is a huge step in the right direction for the global reflation trade.” In short, when push comes to shove, political leadership in all Western democracies lean towards inflationary policies and back away from fiscal austerity.
Gold and precious metals mining shares are in strong hands. As we have noted elsewhere (Gold, Gold Mining Shares, and QE), gold has held above its December 29, 2011 low of $1523/oz. despite several attempts to break below that level. In all cases, sharp but brief declines in the gold price during the first half of this year were closely linked to statements by the Fed that no further quantitative easing would take place past the scheduled expiration of Operation Twist on June 30, 2012. Despite those previous denials, the FOMC statement of June – indicated that (surprise!) Operation Twist will be extended through the end of 2012. It appears that cessation of QE turns out to be far more difficult than previously imagined by Fed policy makers. The exit strategy from unprecedented financial liquidity is at best an academic exercise for the PhD’s at the Fed. In the real world, chaos theory suggests that scale and risk are positively correlated. What works on the lab bench doesn’t necessarily translate to large systemic issues. The credibility of the Fed, in our opinion, has sunk to all- time lows and currency debasement is in full bloom on both sides of the Atlantic.