Source: JT Long of The Gold Report
The overall markets are exuberant. Valuations rise regardless of value created. And gold is conspicuously not at the party. All of this sounds very familiar to John Hathaway and Doug Groh, portfolio managers of the Tocqueville Gold Fund. It is like 1999 all over again. In this interview with The Gold Report, the pair of fund managers discuss the impending upside they see near on the horizon and why a diversified portfolio can minimize risk and maximize profit.
The Gold Report: In a 4th of July investor letter, you wrote that the precious metals complex, both mining shares and bullion, appear to be in the process of completing a major bottom, and you’re more comfortable with the proposition that the downside potential has been fully exhausted. What are the signs that it’s really turning this time?
John Hathaway: The gold futures chart is showing that we are in the process of a reverse head-and-shoulders pattern, which is a sign that a bottom has been completed. It means that downward momentum has been exhausted. This bottom will be confirmed when gold trades above $1,400/ounce ($1,400/oz), which is a stretch from where we are. At least we can say fairly credibly that it’s shaping up to be a bottom, but we may test it over the summer.
TGR: Headlines about conflicts in the Ukraine, Iraq and Gaza have bumped gold prices visibly lately. Can these events act as long-term fundamental supports or do they represent short-term volatility that will fade just as quickly as the headlines?
JH: 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.
TGR: You have compared gold’s fundamentals today to the situation in 1999. What were the fundamentals 15 years ago?
JH: 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.
TGR: One unique thing that is happening right now is that the mining share valuations seem to be leading the commodity prices. What’s causing that?
JH: 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.
TGR: One thing that you and I have talked about before is the impact of quantitative easing (QE) on the dollar and the gold price. QE never did seem to weigh down the dollar. Are investors on the sidelines waiting for the impact of liquidity to buy gold?
JH: 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.
TGR: Last year was a challenging year for gold mining companies. How are you adjusting based on those challenges?
DG: We’re emphasizing those companies that are well managed with good assets and quality balance sheets. Explorers are not as attractive today as they were a few years ago. Right now, we’re focused on companies in the mid-cap sector of the gold industry.
TGR: Are there more mergers and acquisitions (M&A) coming?
DG: M&A of varying sizes has been going on for some time. Many were just not quite as significant in terms of market cap. I think we will see more deals, whether it’s actual corporate takeouts, joint ventures or property sales.
The decline in the gold price these last three years has been destructive for mining companies. It has caused them to rethink their business models and their capital spending plans. It’s become more difficult for companies to raise capital to move forward. That is why consolidation is underway. That is the nature of the industry. A lot of explorers and developers are good at doing just that. Meanwhile mining companies need to replace the reserves they’re producing. They may be good at operating a mine but not quite as agile at doing exploration, making discoveries and developing ore deposits. So we should see more M&A.
TGR: When you are considering adding a company to the portfolio, do you place a value on the chances of it being an acquisition target?
DG: Yes, in a form and fashion. Ultimately we are looking at the assets of a company and the merits of those assets to expand and to attract other investors into the company’s register. The potential to get bigger is always of interest to us. If something is getting bigger, it will attract capital, whether it’s investors or corporate entities.
TGR: Company guidance is for 20 million ounces (20 Moz) of silver per year. Is that realistic?
DG: Yes, and I expect beyond that. It is a high-grade deposit with a geometric shape, in terms of its width, that enables bulk-style mining methods, and thus relatively low costs per unit of production. Once it gets momentum, we should see some robust output. Tahoe has been a good performer, and we expect it will continue to be a good performer.
TGR: 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?
DG: 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 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.
TGR: Thank you, John and Doug.
DG: Thank you.
JH: My pleasure.
John Hathaway, senior managing director of Tocqueville Asset Management, manages all gold equity products and strategies at Tocqueville Asset Management. He holds a bachelor’s degree from Harvard University, a Master of Business Administration from the University of Virginia and is a Chartered Financial Analyst. He began his career in 1970 as an equity analyst with Spencer Trask & Co. In 1976, he joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, Hathaway founded Hudson Capital Advisors and in 1988, he became chief investment officer of Oak Hall Advisors.
Douglas B. Groh is a portfolio manager and senior research analyst at Tocqueville Asset Management and has 30 years of investment experience. Before joining Tocqueville in 2003, he was director of investment research at Grove Capital. While an analyst for JP Morgan and Merrill Lynch, he was recognized by Institutional Investor and The Wall Street Journal. He holds a Master of Arts in energy and mineral resources from the University of Texas at Austin and a Bachelor of Science in geology/geophysics from the University of Wisconsin—Madison.
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