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Insight from a Master

A BIG GOLD interview with John Hathaway, Tocqueville Gold Fund

When John Hathaway spoke at the Casey’s Gold and Resource Summit in October, many of the audience came away feeling like they were listening to Doug Casey, with his contrarian views, bold statements, and laying much of the blame for our current problems at the feet of government. Read what John, a seasoned investment pro and manager of the famously successful $1.4 billion Tocqueville Gold Fund, has to say about gold, precious metals stocks, and the future of the U.S. dollar.

Jeff Clark: John, give us your big-picture perspective on why you’re investing in gold.

John Hathaway: We launched the Tocqueville Gold Fund (TGLDX) in 1998 when it was a very contrarian idea. I always like to say it was the “Rodney Dangerfield” of investments at the time because a lot of people laughed at us and we didn’t get much respect. It was essentially a very contrarian investment theme, and we did it at a time when the markets were going nuts for dot-com stocks, which we thought was absolute lunacy.

Our thesis is basically related to the lack of faith that institutions, investors, and citizens have in paper money. That shift in opinion has come in fits and starts but is the core reason gold has risen to the extent it has. And until you have a significant restoration in terms of confidence in paper money, gold should do very well.

Jeff: Some are calling gold a bubble.

John: Many people – I’d say most people – are not on board. So to me it’s not a bubble. Maybe it’s on its way to being a bubble, but a bubble has to be pervasive and ubiquitous and in every fiber of every investment institution and every investor portfolio, as was dot-com and housing, and we simply have not reached that stage. The best line I’ve heard is, “A lot of people have had a first date with gold, but they still haven’t gotten to first base.”

Jeff: [Laughs] That’s good.

John: The fact is, people talk about it because it’s newsworthy. The price is rising and making news, but so what? That doesn’t make it a bubble. My thesis is that everyone should make a strategic allocation to gold because it’s the counterweight to paper money that continues to lose credibility as a store of value.

Jeff: So the U.S. dollar is going a lot lower, in your view?

John: Yes. You’re beginning to see a lot of bilateral trade deals between China and Latin American countries that have to be settled in renminbi. You’re seeing similar moves on the part of other trading partners completely bypassing the dollar in international trade. You’re seeing growing currency controls, particularly for capital flows – Brazil and Thailand are two countries that come to mind. At this point it’s not chaotic, but these are precursors to what could become chaotic. It seems orderly right now, but it could become more accelerated.

I’m also very skeptical that QE2 is going to do any good. And if the economy is still stagnant a year from now, there’s going to be QE3, QE4, and QE5. I just don’t see how anyone can not have some gold in this environment.

Jeff: We think inflation ultimately wins the battle over deflation. Do you agree?

John: For the most part, yes, but I don’t think you have to know which we’ll get to decide if you should buy gold. If we have a deflationary morass, where we’re stuck in a liquidity trap for the next five years, it will make the government do all kinds of crazy things that will undermine the value of money, which will ultimately turn out to be inflationary. This debate between deflation and inflation is always interesting, but I don’t think it matters if you’re invested in gold. I think in either outcome, gold wins.

Jeff: Are you as bullish on silver?

John: When you’re talking about monetary issues, silver will certainly benefit, particularly in an inflationary sequence. On the other hand, if we have a deflationary sell-off like we had in 2008, silver is going to underperform. So with silver I think you have to be more certain about the outcome. Silver is more dependent on inflation to do well. That’s because silver has industrial uses, which would disappear or be greatly undercut in a deflation.

Jeff: What about the other precious metals, platinum and palladium?

John: Frankly, they’re not a big part of the portfolio right now. But we would consider them if we found good investment vehicles.

Jeff: Speaking of sell-offs, what odds do you put on us having another one like in 2008?

John: The potential is there. I don’t know where it would come from, but one possibility would be another sovereign debt issue in Europe. Another possibility is if the bond market had a serious setback and triggered a run to liquidity, although there aren’t that many places to go anymore. Turmoil in the currency markets is certainly a concern to policymakers. All of those things could bring about another worldwide margin call like we had in 2008.

Jeff: So should we avoid gold stocks right now due to the risks?

John: It depends on your risk profile. If you’re conservative and don’t want to lose any sleep, I think you hold physical gold as a hedge against the rest of your portfolio. But if you’re more of a risk-taker and see the macro-landscape as an opportunity, even though it’s a negative view, you definitely want to have exposure to gold stocks. And if they’re good companies, they should outperform the gold price because they’re generating a lot of earnings and cash flow at these prices. Then there’s M&A [Merger and Acquisition] activity, growth potential, and also dividends. So there are a lot of things that a gold stock can provide that a physical metal cannot, but it depends on the risk profile of the specific investor.

Jeff: It’s interesting you bring up dividends, because gold and silver miners don’t pay very high dividends. Do you think that could change given the high margins the industry is seeing?

John: Good point. The returns on capital as an industry have gone to very good levels, and if they’re sustained, which obviously depends on the gold price continuing to do well, they’re going to have too much cash to reinvest in the business. And the smarter companies will realize they have an opportunity to become core yield stocks that have the same panache as, say, Microsoft, IBM, Exxon Mobil, etc. If they play their cards right, they could become core holdings of bank trust departments and open the door to an entirely new audience of investors. That’s how you’ll get good valuations in the gold stocks.

Jeff: Which brings up the possibility that maybe we won’t eventually sell all our gold stocks, if they start paying high dividends…

John: Right. If the macroclimate is favorable for gold and we don’t blow up into a crisis where it’s the end of the world, but instead get a steady state of rising prices, then gold stocks could take on a completely different identity. They’re viewed now as mostly fringe investments, but there was a time, back in the ’60s and ’70s, when they were viewed as pretty standard stuff for an investment portfolio.

Jeff: How do you go about evaluating a mining stock?

John: We have a group of analysts here in New York who meet with management teams all year round. There isn’t a day that goes by that we don’t have one,  two, three, or more companies coming to see us, and the reason is that the industry is generally capital intensive and needs money. So we’re sort of the go-to “piggy bank.”

In addition to that, our guys know rocks and travel far and wide to look at mine sites all over the world. I think we’ve logged over half a million miles in the last five years going to god-awful places – this is not a Club Med itinerary. So we’re able to develop conviction about owning some of these earlier-stage junior mining companies that aren’t on the radar screen of our competitors. In fact, our average market cap in the Tocqueville Gold Fund is 60% of our peer group, which would indicate a weighting towards earlier-stage companies.

Jeff: So the fund invests quite a bit in juniors.

John: Absolutely. We have to be careful with it, of course, because they’re less liquid and riskier, but the fact that we have this sort of database of information from these meetings gives us a fair amount of success in terms of picking the good ones. Obviously there are plenty we’ve missed that are good, and there are plenty we’ve invested in that turned out not to be so great, so it’s always a bit of a trial-and-error thing. But we have found that when we buy into a company at an early stage that meets its milestones and advances from A to B and then from B to C, they’ll need more money and we’ll continue to finance them along the way. That is the single biggest source of our success.

Our turnover rate is very low – less than 10% – so we basically take a long-term investment view on what we think are the very best emerging mining companies. An example would be Osisko (T.OSK), which we started financing five or six years ago when it was a 50-cent junior, and now it’s a $14 company, which will be producing gold within a year. That’s the ideal progression we like to find.

Jeff: Any companies that look particularly undervalued to you right now?

John: We have a big position in International Tower Hill Mines (THM/T.ITH), which we feel is on the cusp of becoming recognized as one of the next big major mines in North America. I would put Osisko in the same sentence, though it’s obviously much further along than ITH. I wouldn’t necessarily run out and buy these today, but those are big holdings for us and have done very well.

Jeff: Any closing comments for gold investors?

John: Gold may go sideways for a while, which is my wish, but who knows what’s going to happen? Things could blow up, so trying to trade in and out is a huge mistake, in my opinion. To me, the most intelligent view of gold has to be from a strategic point of view. Get over the fact that it’s gone up a lot, then try to be as clever as you can about legging into it. The bottom line is, you’ve got to own gold in this environment.

Jeff: Good advice, John. Thanks for your time.

John: You’re welcome.

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[John Hathaway is only one of many fund managers who are betting on gold and major gold stocks now, and the investing crowd is starting to catch on as well. Get into the best of the best gold and silver producers now – and take advantage of the BIG GOLD Holiday Special. Sign up today for BIG GOLD at $79 per year and receive one year of Casey’s Energy Opportunities FREE. But hurry, this offer ends soon. Details here.]

NEWS: Avion Intersects Additional High Grade Gold Mineralization at Tabakoto Project

New intersections of up to 18.52 g/t Au over 5.6 metres, 34.52g/t Au over 3.7 metres and 13.97 g/t Au over 7.4 metres

Avion Gold Corporation is pleased to announce new drill results for 16 holes that tested the Tabakoto Pit area cross structures and for 6 holes that tested the Dioulafoundou zone. These drill holes combine a mix of in-fill and step-outs on the mineralized zones down plunge and along strike. These results continue to build confidence in Avion’s 2011 mine plan.

Significant intercepts include the following:

  • 10.05 g/t Au over 3.7 metres
  • 56.08 g/t Au over 11.4 metres (includes 1508.07 g/t Au over 0.4 metres)
  • 7.31 g/t Au over 6.5 metres
  • 5.29 g/t Au over 12.4 metres
  • 11.35 g/t Au over 2.5 metres
  • 6.21 g/t Au over 8.4 metres
  • 9.40 g/t Au over 5.1 metres
  • 18.52 g/t Au over 5.6 metres
  • 9.51 g/t Au over 3.5 metres
  • 34.52 g/t Au over 3.7 metres
  • 13.57 g/t Au over 7.4 metres
  • 10.48 g/t Au over 5.4 metres
  • 6.70 g/t Au over 4.5 metres

Avion has continued with a program designed to increase the confidence levels in the modeled gold zones and to extend the known Tabakoto pit and Dioulafoundou zones down plunge and, to a lesser extent, along strike. Avion continues to intersect additional zones of gold mineralization that are not part of the modeled zones in the upcoming resource update. These new intercepts will be modeled and added to the overall resources when sufficient information has been acquired. A summary of the drill results are presented in a table at the end of this news release. Select drill results for the Tabakoto area are presented in Figure 2 and for the Dioulafoundou Deposit in Figure 3.

John Begeman, Avion’s President and CEO, stated: “Avion’s underground development is progressing toward the high grade zones under the Tabakoto Pit with an excess of 400 metres of development completed to date. We are eagerly looking forward to our first look at these zones at depth and the first development ore from these zones is expected in late Q1, 2011. “

In 2010 Avion has completed over 436 core and reverse circulation drill holes totaling approximately 56,000 metres of drilling, at the Tabakoto property. This work has focused predominantly on the Dioulafoundou, Tabakoto, Djambaye II and Ségala areas. In total, in all properties, Avion has completed approximately 68,500 metres of drilling in 504 holes. Drilling is currently being carried out with one drill each on the Tabakoto (Mali) and Houndé (Burkina Faso) properties. Drilling will cease in mid-December to allow time to review results and plan for the 2011 drill program with a planned re-start in February.

Avion continues to work toward a year-end resource update with the majority of the deposit modeling completed. This resource update will include most mineralized zones on the Tabakoto Project which includes the Tabakoto, Segala and Great Quest properties. It is anticipated that the overall mineral resources will reduce somewhat from the historic estimates but will demonstrate higher grades in-line with plans to develop the Segala and Tabakoto deposits from underground.

Avion’s procedures for handling core have been presented in previous news releases (See Avion News Release dated May 13, 2010). Assays presented in the attached table have been capped at 32 g/t at Tabakoto and to 50 g/t Au at Dioulafoundou.

Don Dudek, P.Geo., the Senior Vice President, Exploration of the Company and a qualified person under National Instrument 43-101, has reviewed the scientific and technical information in this press release. 

About Avion Gold Corporation

Avion is a Canadian-based gold mining company focused in West Africa that holds 80% of the Tabakoto and Ségala gold projects in Mali. Gold production commenced at these projects in 2009 with just over 51,000 ounces produced. 2010 production is estimated at 85,000 ounces of gold. Production sustainability is supported and enhanced by an aggressive 2010 drill program over an approximately 600 km2 exploration package that both surrounds and is near to the Company’s existing mine infrastructure. Additionally, the 1,670 km2 Houndé exploration property in Burkina Faso is returning promising results from an ongoing exploration program. These properties are the subject of an approximate US$ 12 million dollar, approximate 70,000 metre, drill-focused, exploration program in 2010, which management expects, based on results to date, to add new resources and future opportunities for Avion. Avion continues to progress towards its medium term goal of 200,000 ounces of gold per year and a longer term goal of organic growth through development of its exploration properties. The Company is developing an underground mine at the Tabakoto deposit, and is preparing to mine underground at the Ségala deposit. Avion has a highly skilled management team, with a focus on growth and consolidation within West Africa.

Full release

Market Alarm as US Fails to Control Biggest Debt in History

By Liam Halligan, 11 December

US Treasuries last week suffered their biggest two-day sell-off since the collapse of Lehman Brothers in September 2008. The borrowing costs of the government of the world’s largest economy have now risen by a quarter over the past four weeks.


Market alarm as US fails to control biggest debt in history

Such a sharp rise in US benchmark market interest rates matters a lot – and it matters way beyond America. The US government is now servicing $13.8 trillion (£8.7 trilion) in declared liabilities – making it, by a long way, the world’s largest debtor. Around $414bn of US taxpayers’ money went on sovereign interest payments last year – around 4.5 times the budget of America’s Department of Education.

Debt service costs have reached such astronomical levels even though, over the past year and more, yields have been kept historically and artificially low by “quantitative easing (QE)” – in other words, Federal Reserve Chairman Ben Bernanke’s virtual printing press. Now borrowing costs are 28pc higher than a month ago, with the 10-year Treasury yield reaching 3.33pc last week, an already eye-watering debt service burden can only go up.

Few on this side of the Atlantic should feel smug. The eurozone’s ongoing sovereign debt debacle has pushed up Germany’s borrowing costs by 27pc over the last month – to 3.03pc. The market has judged that if Europe’s Teutonic powerhouse wants the single currency to survive, it will ultimately need to raise wads of cash to absorb the mess caused by other member states’ fiscal incontinence.

While the UK isn’t ensnared in monetary union, gilt yields have also spiralled 18pc since the start of November – to 3.55pc. British Government debt is officially £1.05 trillion. We are fast approaching a debt-to-GDP ratio of 100pc, compared to 30pc just a decade ago. If you add off-balance-sheet liabilities to Government estimates, including the bank bail-outs which disgracefully remain “off the books”, the UK already owes more than an entire year’s national income. In the medium-term, this is surely incompatible with a Triple AAA credit rating.

Even with gilt yields ultra-low, courtesy of British QE, the UK is still spending £42bn a year servicing sovereign debt – up 50pc since 2008. The Coalition is talking tough about reining-in the annual budget deficit, but our burgeoning debt stock means interest payments are anyway set to reach £70bn – twice the defence budget – by 2015. And those numbers rest on low gilt-yield assumptions that will be blown out of the water if this recent bond market implosion is the start of a trend.

Some say that growing signs of a US economic recovery are positive for stocks, which means money is being diverted out of Treasuries, so lowering their price, which pushes up yields. That’s wishful thinking. Sovereign borrowing costs have just surged in the US – and therefore elsewhere – because a politically-wounded President Obama caved-in and extended the Bush-era tax cuts, combining them with a $120bn payroll tax holiday.

Lower taxes, and the certainty of lower taxes, may bolster business investment and growth. That’s the logic employed by those painting last week’s global yield spike in a positive light. Government borrowing costs rose in America and elsewhere, they say, as a re-bounding US economy is now drawing investors’ cash away from sovereign bonds and towards more productive uses.

The reality is, though, that the market is increasingly alarmed at the rate of increase of the US government’s already massive liabilities. America’s government debt is set to expand by a jaw-dropping 42pc over the next few years, reaching $19.6 trillion by 2015 according to Treasury Department estimates presented (amid very little fanfare) to Congress back in June. Since then, government spending has risen even more. So US debt service costs, like those of many other Western nations, are expanding rapidly in terms of both the volumes of sovereign instruments outstanding, and the yields on each bond.

The new worry in the market is that this latest round of tax cuts could add another $1 trillion to the US deficit, on top of the already horrendous numbers produced in June. With opinion now deeply split about the wisdom of yet another round of QE, bond investors are getting increasingly worried that the Fed will turn off the funny-money and the sugar-rush will fade. Meanwhile, the US has very few plans – and none of them remotely credible – to get to grips with the biggest debt in history.

America has lately been very happy for small eurozone members to endure most of the adverse publicity related to the sovereign bond crisis. But, as of last week, the Western government debt debacle has entered the big league. We’re going to hear a lot more about the US government’s borrowing costs over the coming months – and the related “contagion” of other countries’ treasury bills, as America’s funding issues focus attention on the scale and ratcheting interest costs of sovereign debts in other large economies too.

Until now, market attention has oscillated between the eurozone and the States, with one region’s debt instruments benefiting from the woes of the other. Last week marked a turning point. Western sovereign instruments were hammered across the board – with traders making little distinction between the debts of Germany or Japan. There’s a lot more of this to come.

Investors en masse are parking ever more cash in alternative asset classes, such as commodities, other tangible assets and emerging market sovereign debts. The pool of money available to finance Western government borrowing is, in relative and maybe even in absolute terms, starting to shrink. This is extremely worrying – not least because of the industrialised world’s demography. Our ageing population means that higher future borrowing requirements are practically guaranteed, even if our politicians become paragons of fiscal virtue – which, of course, they won’t. As one economist I admire recently quipped: “Expecting today’s Western leaders to run fiscal surpluses is like expecting dogs to stockpile sausages”.

Just a few months ago, it was only newspaper scribblers like me, and other naturally dissenting voices, who dared to be openly critical of grotesquely irresponsibly policies such as QE. Yet increasing numbers of important voices are now saying that, in fact, the Emperor has no clothes. Last week the patience of many bond traders snapped too. That marked a very important moment.

The US will continue to run a budget deficit of in excess of 10pc of GDP for at least another year. This is in marked contrast to most other advanced economies, where the fiscal axe is now being swung, with consolidation now beginning in earnest. The danger is that the bond markets won’t care – and almost all Western sovereign instruments will become burdened with a big risk premium, even the bonds of those countries which have actually bitten the bullet and started to impose serious fiscal reforms. If ministers in Britain and Germany would like to know in advance what this feels like and the domestic political havoc it can cause, they should talk to their Irish counterparts.

Over the coming months, the world’s appetite for dollar assets will be very severely tested – perhaps very close to destruction. America boasts the world’s reserve currency, of course, but its ability to borrow from the rest of the world is not without limit. Last week’s US tax move poses great dangers. There is little point in a fiscal giveaway that’s cancelled out by higher rates. All you end up with is even more sovereign debt. Upgraded growth forecasts don’t cause yield spike like that we saw last week – and its absurd to suggest that they do. There’s a new mood in the bond markets – a mood of zero tolerance.

Source

 

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Fed – Inflation, Inflation, Inflation

By Axel G Merk, 14 December

In August, Federal Reserve (Fed) Chairman Bernanke stated inflation was too low; in October, the Fed’s Minutes lamented that the market appeared not to take Bernanke’s August statements seriously enough. In our assessment, today’s Fed statement of the Fed’s Open Market Committee (FOMC), with an almost verbatim repetition of the previous FOMC statement, screams: “markets: trust us, we mean what we say.”

When former Fed Chairman Volcker raised rates in the 80’s to root out inflation, initially, the markets didn’t take him seriously. But persistence eventually made the market price in lower inflation expectations. Similarly, as the markets appear slow to embrace the Fed’s at higher inflation target. We have little doubt, however, that the Fed will succeed in raising inflation expectations.

Today, there is a key difference to the early 80’s: at that time, both inflation and inflation expectations were high. In the current environment, current inflation may be low, but future inflation expectations are not; until Bernanke’s August speech, future inflation expectations were within historical norms. Since then, however, future inflation expectations have been moving up to levels we believe are not consistent with price stability.

The risk, in our view is, that the Fed will get more than it is bargaining for. Having said that, it’s a problem for tomorrow and the Fed has rarely been accused of being too far-sighted.

This article is written by Axel G Merk of Merk Investments LLC and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Merk Investments, please visit:


ECB Urges Bigger Rescue Fund as Bond Investors Punish Spain

The European Central Bank urged Europe to increase the size and scope of its €750bn financial rescue fund ahead of a crucial leaders’ summit this week as bond investors demanded higher interest rates to hold Spanish debt.


Jean-Claude Trichet, the president of the ECB wants goverments to do more.

“We are calling for maximum flexibility, and I would say maximum capacity, quantitatively and qualitatively” for the European Financial Stability Facility, said Jean-Claude Trichet, the president of the central bank, in Frankfurt.

His comment came as a Spain raised €2.5bn via an issue of 12-month and 18-month bonds but despite strong demand had to pay higher interest rates due to uncertainty over its debts.

Spain sold nearly €2bn in 12-month bills paying an average interest rate of 3.4pc, up from 2.4pc in the last such auction in November. For some €500m in 18-month bills it paid a 3.7pc interest rate, up from 2.7pc last month.

Borrowing costs in weaker eurozone countries including Ireland and Portugal have been rising since the Greek debt crisis in May and on Tuesday yields on 10-year bonds in these countries continued to rise.

Last week the ECB bought the most sovereign debt since June as it attempt to calm market fears but there are doubts about how far it can go with this tactic.

Markets are looking for a more united approach to Europe’s debt crisis but have been put off by division among nations over how to move forward.

On Thursday and Friday, EU leaders are expected to approve a permanent eurozone crisis fund that Economics Affairs Commissioner Olli Rehn said will provide a “systemic” response to the eurozone debt and deficit crisis.

The ECB said in a statement: “We are not completely satisfied with the proposals put forward by the (EU) Commission and the European Council Task Force that should aim at strengthening the system of economic governance in Europe.”

Governments have stopped short of more automatic penalties that the ECB had demanded, Mr Trichet said, adding: “These proposals in our view do not yet represent the quantum leap in economic governance that is needed to be fully commensurate with the monetary union we have created.”

He wants sanctions to be applied in a “quasi-automatic” way and include fines and “possible limitations of voting rights for member states in persistence violation”.

“Effective monitoring required adherence by members to the policy framework, it requires peer pressure and consequences to deal with deviant behaviour, and it requires reliable statistics,” the ECB statement said.

Greece, for example, joined the eurozone with bogus figures, and growth data since 2004 are still not considered final by the EU’s Eurostat statistics service.

Meanwhile, the ECB president reiterated its opposition to a common eurozone bond as proposed by Luxembourg Prime Minister Jean-Claude Juncker – a proposal that has been rejected by Germany.

The euro rose to $1.3475, benefiting from a falling dollar ahead of a Federal Reserve rate decision later after Moody’s warning that US tax-break proposals could damage the American economy.

Source

 

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