Tocqueville Gold Fund manager John Hathaway shares his views on the long term outlook for gold as an investment:
tocquevillefunds.com
I especially like his comments on the gold market in a rising interest rate environment:
While a rise in interest rates might be presumed in the popular media to be theoretically bad for gold, it is more important to ask and answer several related questions before jumping to any particular conclusion. First, is the prospective rise in interest rates the beginning or the end of a process? Second, are the increases in nominal interest rates identical to real interest rates? Third, and most important, will the interest rate increases be favorable or adverse for the returns on financial assets?
The next interest rate increase will, it can be stated with confidence, begin rather than complete a process. How far must the Fed raise interest rates before monetary policy can be considered neutral rather than aggressively accommodative? Assuming, for the moment, that measured price inflation is running at 1.7% (latest 12 months), most would put a “neutral” Fed Funds rate at +/- 4%. Should measured inflation begin to rise, as it did most emphatically in the most recent Consumer Price Index (CPI) report and as it is doing on an anecdotal basis almost everywhere, to what level would short-term rates have to rise in order to be considered restrictive? Almost certainly, that number would be substantially above 4%. It does not seem far-fetched to suggest, considering the level of existing and prospective budget deficits, the unprecedented build up of debt, the open-ended nature of American military commitments, and the disinclination among political leaders to restructure Medicare and Social Security entitlements, that the year 2004 bears a strong resemblance to 1968. In that year, the DJII peaked at 1,000, a level it would not exceed until 1982. The Fed Funds rate was 5.66% in 1968 and rose to 16.39% in 1981. Returns on financial assets were poor during those 14 years. Gold and gold shares, on the other hand, turned in stellar performance. |
