- The past year marked the fourth in the secular bull market
in gold, which commenced August 1999. The milestone passed with little
fanfare as the recovery in global equity markets transfixed investors.
The persistent decline in the US dollar also received little attention,
as did the growing US Federal budget and trade balance deficits. The crossing
of the $400/oz. price threshold by the metal in December merited no special
news coverage. Gold is in the early stages of a stealth bull market. Stealth
augurs well for potential longevity and magnitude.
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- There are two reasons to invest in gold. First, there
is the simple and obvious prospect that it may rise in price and thereby
create positive returns for those of us who hold it or gold mining shares.
The second reason is not quite so obvious, but it is more powerful. It
is the fact that gold's behavior is uncorrelated to other financial assets
including bonds, stocks and currencies. When expected returns on financial
assets are low, money flows in the direction of gold. It is also true that
gold, being uncorrelated as opposed to inversely correlated, can rise while
financial asset prices are also rising. It is these characteristics that
qualify gold as a form of financial insurance.
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- One might speculate that with lofty valuations, investors
ought to worry that future returns on financial assets might be sub par.
However, that does not appear to be the case. Even though the S&P is
trading at more than 30x trailing 12-month earnings, ten-year bonds at
4.2%, and Federal Funds at 1.00%, investor expectations remain high.
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- Beneath the complacent surface of the financial markets
at year-end, those investors who are thinking beyond the next six months
are detecting reasons for concern. Awareness is spreading that the Fed's
excursion into extreme liquidity has been little more than a band-aid to
deal with the aftermath of the bubble. The Fed has purchased near term
euphoria with a flood of debt issuance and unsustainably low interest rates.
Those who can see through the fog are beginning to exit the dollar and
look to safe havens such as the Euro, gold or tangible assets. Despite
record low inflation readings, the future purchasing power of the dollar
has never been in greater jeopardy. The Fed's barrage of liquidity is nothing
less than an attack on savings. For those who wish to preserve the value
of their liquid assets over the next decade or more, and do not wish to
speculate in overvalued financial assets, recourse to gold is inescapable.
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- Gold at $400 is one of the few remaining bargains in
a financial world that is a minefield of risk. Investors owe thanks to
the central banks. Their repeated sales of the metal have kept a lid on
the price. Without such sales, the price would already be several hundred
dollars higher. Those with vast pools of wealth to protect, including institutional
and private investors, can only hope that these outdated bureaucracies,
managed by financially ignorant civil servants, continue their divestment
process to facilitate acquisition of meaningful gold positions at attractive
prices.
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- An important milestone for the gold market was the 2003
launch of gold exchange traded funds (ETF's). These instruments link physical
gold to the financial markets for the first time in history. Two versions
trade in Australia while launch of an ETF on the London stock exchange
took place on December 9th. We expect more to follow. Gold ETF's will,
over time, actuate a flow of capital into physical metal. They will legitimize
and demystify gold and thereby broaden its acceptance as a risk management
tool for conservative investors. (For background, please see our website
article-The Gold Equity Share: An Idea Whose Time Has Come.)
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- Despite gold's 20.8% rise in 2003, and more than 60%
rise since 1999, professional sentiment is negative. The Hulbert Digest
of gold timing newsletters recorded extremely low sentiment readings at
the end of December. According to Hulbert, "You will rarely see a
more perfect textbook illustration of a bull market climbing a wall of
worry" Consider also the January 6th comments of a well-known market
strategist: "Gold is 'blowing off' on the upside right here, just
as the U.S. Dollar is 'blowing out' to the downside. I'm expecting a reversal
imminently..." In December, Barron's carried an article titled "Gold's
Bugs: If you're a fan of the precious metal, buy it, not the stocks."
Bull markets are born in skepticism and die in euphoria. Based on this
current survey of sentiment, the gold bull market is alive and well.
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- Along the same line, we were most encouraged by the January
4th comments of Federal Reserve Governor, Ben Bernanke stating that "gold
prices respond to geopolitical tensions; these tensions have certainly
heightened since 2001 and, in my view, can account for the bulk of the
recent increase in the real price of gold." These comments were included
in a lengthy defense of the Fed's very accommodative monetary stance. The
speech by this highly influential Fed governor suggests that the Fed is
unconcerned about the rise in the gold price and rules out the possibility
that it is discounting a renewal of inflation, a dollar crisis, or the
bursting of the most recent equity market bubble that the Fed has engineered.
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- Pullbacks and corrections are a fact of life for any
bull market and in this respect, gold is not exempt. We will take advantage
of such opportunities to add to positions. While we will attempt to defend
against them, we do not want to find ourselves in the position of the sold-out
bull who, having grasped the opportunity, missed out because of hyperactive
trading strategies and other sins of micromanagement.
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- Since the gold bull market commenced in August, 1999,
gold has increased 66%, while the euro has increased 19% against the US
dollar. However, over the past year, they have increased by roughly the
same amount, leading many to think that gold is just another play on the
weak dollar. Once the weak dollar creates sufficient stress among our trading
partners in Europe and Asia, central bankers will figure out ways to reverse
the trend, at least temporarily. Investors will then begin to realize there
is little to differentiate among paper currencies, and that gold represents
the only real alternative to the dollar based system of international credit.
At this stage, we expect gold's rate of appreciation against all paper
currencies to accelerate.
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- The bull market in gold is well underway. While it will
suffer periodic setbacks, it will not reach its completion until world
governments restore integrity to financial instruments beginning with paper
money. There is little to suggest that such a moment is within view.
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- John Hathaway
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- January 8, 2004
- © Tocqueville Asset Management L.P.
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- The views expressed by the portfolio manager in this
article are current as of the date of this article, and are subject to
change at any time based on market and other considerations.
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- The Gold Fund is subject to special risks associated
with investing in gold and other precious metals, including: the price
of gold/precious metals may be subject to wide fluctuation; the market
for gold/precious metals is relatively limited; the sources of gold/precious
metals are concentrated in countries that have the potential for instability;
and the market for gold/precious metals is unregulated. In addition, there
are special risks associated with investing in foreign securities, including:
the value of foreign currencies may decline relative to the US dollar;
a foreign government may expropriate the Fund's assets; and political,
social or economic instability in a foreign county in which the Fund invests
may cause the value of the Fund's investments to decline. You should consider
the investment objectives, risks, charges and expenses of the Fund before
investing. The prospectus contains this and other information about the
Fund and you should read it carefully before investing.
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- This commentary is not an advertisement or solicitation
to subscribe to The Tocqueville Gold Fund, which may only be made by prospectus.
This material must be preceded or accompanied by the Fund's prospectus.
For more complete information, please order a free prospectus by calling
1-800-697-3863, or visit <http://www.tocquevillefunds.com>www.tocquevillefunds.com.
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- http://www.gold-eagle.com/editorials_04/hathaway011204.html
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