Gold to $1,000?

This week’s Barron’s includes an interview with John Hathaway, a manager who thinks gold can go to $1,000 an ounce:

Haven’t some gold stocks been hurt by strength in local currencies?
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.
Yet Central Banks have been selling gold.
Central-bank selling fills the gap between supply and demand. They have been selling at steady pace. What they have is an arrangement so their selling is orderly and doesn’t spook the market. Under that arrangement, there is a quota system of 500 metric tons a year for five years. The selling is transparent, the market knows it is there, and if the program wasn’t in place, gold could easily be $200 or $300 higher. We are in the second year of that five-year agreement, and it is hard to imagine where all that gold is going to come from.
Who’s buying?
They sell it into the market. We keep some of our gold in Switzerland, and I went to the facility where we keep it and basically it was a large refining company. They were melting down bars from the Swiss Central Bank, and at the other end of the production line there were semi-finished gold watch cases and jewelry for China, the Persian Gulf and India. That’s where it is going. Central bankers are selling their best asset into the markets and it is going into non-monetary forms, and they will never get it back. They are just bureaucrats and not even held accountable for what they do on a financial basis. It has been such a bad trade for the last five years, you would think that at some point they would begin to say maybe we should hang on to what we have. But again, their general agenda is not to have gold as a monetary asset or at least not talk about it if they have it, because what is still true is that a rising price of gold is not a favorable reflection on public financial policies, monetary and fiscal.
What’s the impact of gold exchange-traded funds on the market?
It is potentially huge. Right now there’s about $3.5 billion in gold ETFs, which isn’t bad considering the first one came out a little over a year ago. As we discussed, gold shares can be risky, yet gold is not necessarily an investment for those who are risk-seeking or risk-tolerant. Gold is essentially financial insurance. It is noncorrelated. It has hundreds of years of history of being noncorrelated with financial assets, which means that when financial assets are doing well gold doesn’t do well. From 1980 to 2000, that was the case, but in the 1970s and 1930s, gold did very well. What the ETF does is open the door for people who should have exposure to gold. It makes it easy for a college endowment that would never typically open up a commodities account or open up an arrangement with a bullion dealer to own gold. The ETF paves the way for an entirely different class of investors to come into gold, not gun slingers looking for huge returns but people who just want to protect capital, which gold does very well. Eventually, this will do a tremendous amount for the gold price. The more money that comes into the ETFs, the more it is going to create momentum for the underlying commodity. Barclays is trying to bring out a silver ETF, and the Silver Users Association, which includes companies such as Kodak and Dow Chemical, are opposed to it because of concern it is going to take the price up.
What risks are working in gold’s favor?
There is a lot of financial risk in the system. The level of household debt, the housing bubble, the amount of U.S. Treasuries held by foreign central banks, the valuation of the stock market, the overvaluation of the bond market, are all legitimate reasons to be concerned, not that I wish for worst-case outcomes. Secular credit expansions, which is what we had from 1982 through 2000, are often accompanied by an ever-decreasing perception of risk. Frankly, we’ve been in a bear market since 2000, and people still don’t realize it. Yet bear markets have a life of their own, and they really don’t end until a certain psychology takes hold and people just hate financial assets.

All gold rallies start differently, but they all end the same way.

Posted by on November 19th, 2005 at 4:18 pm


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