Octavian Report: What’s your thesis on gold generally and what are your short- and long-term outlooks?
John Hathaway: The thesis is that throughout history gold has outperformed paper currency. You can go back thousands of years and prove that. Paper currency is just an instrument of public policy and is basically backed by political promises, which tend to be such that they’re in excess of what can be supported by the value of the currency in any given moment, and so there’s going to be debasement in some (usually sneaky) form over time.
So one should always have some exposure to gold. It’s the only monetary asset or quasi-monetary asset that doesn’t have counterparty risk, and it has liquidity that you can’t get with Picassos and Rembrandts. If you wanted to dispose of any of these collectible, one-of-a-kind pieces of art or exotic cars and all that kind of thing it would be a huge bid-ask. And you can’t mobilize the wealth that that represents in a short space of time. Gold is the one asset that’s outside of the banking system that’s a form of wealth that can be liquefied immediately, within 24 hours -- no exceptions to that, for whatever reason.
If you have some percentage of your wealth in effect insured by a position in physical metal, you really shouldn’t care about the day-to-day price fluctuations measured by one currency or another. What you know is you have a secure asset so that when some opportunity comes along -- let’s say the S&Ps are trading at three times earnings, for whatever reason -- and you want to back up the truck, gold would be a way to do that, and there’s probably nothing else that you can say that about. That’s the real reason to own gold.
Too many investors think of it as a way to make money. I’m not saying that that’s completely wrong, but it really isn’t the fundamental reason for owning gold. The fundamental reason for owning gold is insuring financial wealth and having buying power for the kinds of events that we saw in 2008, events we may well see again once or twice within our lifetimes.
That’s the big top-down point of view. What makes it particularly relevant in the current context is we’ve seen these radical monetary policies practiced by virtually every Western central bank and now in China and Japan. Nobody knows how they’re going to turn out. You could have justified these policies maybe during the financial crisis of 2008. But the fact is that it’s continued all these additional years: we’re now into the seventh year of zero interest rates and QE. Nobody knows how this is going to turn out. It’s such a departure from conventional historical monetary policies that nobody knows the consequences. I’d say, in this moment, gold is more relevant than it might have ever been in post-war history.
Out of the box in 2008 you had this terrific rally and the markets broadly thought that QE was going to result in high inflation and high interest rates. Gold had a tremendous run from 2008 on. It topped $1,900 an ounce for a few moments in 2011. But since then it’s all been pretty much downhill. Gold is like a stock that went from $8 to $19, and now its back at $12. That’s within the range of a normal correction. But what we’ve had in addition is a four-year siege by the bearish camp, and of course during that period the competition for gold, which is basically financial assets, has done really well. Incrementally, the psychology has reached a point where people say, “Well, we don’t need gold, because look how well stocks and bonds are doing.” Of course, that’s the design of monetary policy -- to force people who would normally invest in safe assets into riskier assets. So far it’s succeeded admirably.
What’s needed to break that psychology is adversity in financial assets. That’s a polite way of saying a bear market, which we’ve had in the past. There’s one waiting somewhere out there -- maybe around the corner, maybe not, but it’s definitely there. I’m just finishing my second-quarter investor letter and I’m comparing what’s going on today to the breakup of the London Gold Pool in the 1960s, when you had governments banding together to keep a lid on the gold price to disguise the underlying erosion of fundamentals for the U.S. dollar. It worked for a while; it basically scared investors out of being in gold. Then it fell apart. Fell apart in bits and pieces in the late 1960s, and then, finally, as we all know, Nixon closed the gold window.
I think we’re in a period like that today. I think when gold got to $1,900 in 2011, there are a couple of things you could have said about it. One is that it may have been overcooked: too many people liked it, it was going too far too fast, all the momentum guys were on board. It deserved to have a correction, like anything that gets ahead of itself. That probably accounts for some percentage of the next four years’ decline. And while I haven’t been of this mind until the last couple of years, I do think that there is an invisible hand working against gold to keep it well-behaved. So that it won’t give the lie to what many very thoughtful people believe are failed public policies, monetary and fiscal.
I’m sure that it was an omission on the part of the powers that be, the Fed, the Treasury, the Larry Summerses of the world, the Bob Rubins, not to have put this into place right away after the windup of the 2008 crisis. When gold behaved as it did, going, I think, from $800 to $1,900, that probably wasn’t well-received in those quarters. And certainly the financial markets were saying: we’re going to have a bad outcome with inflation. Yet inflation in the way we normally think of it hasn’t arisen.
John Hathaway co-manages the Tocqueville Gold Fund and is widely considered to be a leading voice on the subject of gold and precious metals.