More Market Turmoil As Fed Experiment Ends Badly Will Drive Gold Higher - Tocqueville
In the third quarter, investors got a glimpse of the market turmoil that is needed to sustain higher gold prices and according to one gold fund manager shifting investor sentiment will continue to support gold in the near-term. In a third-quarter gold investment strategy letter, published Monday, John Hathaway, senior portfolio manager at Tocqueville Asset Management noted that investor sentiment is slowly shifting, but “more damage to confidence must occur in our opinion for precious metals to shift into high gear.”
Hathaway added that they are optimistic on gold as the Federal Reserve fails in its bid to normalize interest rates.
“Our thinking is that unprecedented and radical monetary policy will end badly,” he said. “The most obvious way for monetary policy to end badly is for investors of all stripes to suffer a prolonged bout of financial market adversity. Losses in risky assets will dissipate investor confidence, undermine economic activity, and leave the Fed with little choice other than to step on the accelerator for more easy money. It is in the midst of this sequence that we expect investors to rediscover gold in a big way.”
In this scenario, Hathaway said that the biggest winner will be speculative gold investors in the paper or “synthetic” gold market. Investors who are waiting for the right signals or for equity markets to slip into a bear market could end up missing the boat on the start of the next bull market for the yellow metal.
“In our view, the artificial intelligence of computer generated synthetic gold traders will sniff out a directional change in the market long before the fundamentals can be articulated. As in all markets, price precedes headlines. We judge the pile on effect from the synthetic gold market to be equally potent in either direction, and we therefore expect the extreme, intense lows that we are currently experiencing to be followed by new all-time highs,” he wrote in his letter.
While a “bad” end to the Federal Reserve’s unprecedented monetary policy will be a significant factor in gold, Hathaway also noted that dwindling supplies will add to higher prices in the long-term. He noted that the rate of new gold discoveries is at multi-year lows and that mine life reserves stand at 13 years, a 30-year low.
“In our opinion, the most dynamic way for investors to position for these changes is through a diversified holding of well selected gold mining equities, which stand to benefit in a dramatic way from a better gold price environment and improved investor sentiment,” said Hathaway.
“In our view, gold is exceptionally cheap at the moment because the radical monetary policies practiced by the world’s leading central banks have led to an egregious mispricing of risk by investors at large,” he added. “Once investors discover that there is a bite to the “risk” in risk assets, gold could be the big winner.”
By Neils Christensen |
