John Hathaway, Senior Managing Director, Tocqueville Asset Management

Interviewed by Managing Director David Galland

David Galland, Managing Director

David Galland and gold fund manager John Hathaway discuss the disparity between gold stocks and bullion, as well as the general economic picture in the short term.

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David Galland: We're here in Phoenix and just having a quick chat with John Hathaway, one of the top-performing gold fund managers in the world. Let's just have a little, quick conversation about gold stocks. And, so I guess the first question – I've written some thoughts down here – is gold stocks really sort of underperformed bullion over the last little while or a few years.

John Hathaway: A couple of years.

DAVID: Why was that?

John: I think it's the worries about a bear market and the fact that gold stocks are stocks and tend to perform with stocks and not bullion. They are riskier because they have business risk. The gold ETF has made gold very accessible, so the need to own – so the gold mining stocks don't have a monopoly on people who are concerned about monetary debasement and I think that's been a big factor.

David: The spread between cash cost and the price of gold these days – watching how far gold has run – has got to be advantageous to the balance sheets of these gold companies.

John: I mean the spread… I think the global cash cost number is something like $800 and take $1600. That's an $800 spread. That's unprecedented.

David: And so at some point that would suggest that investments in the larger gold stocks are a pretty good idea.

John: I think now, I think that these companies will be gushing cash flow and they're going to bump their dividends and report record earnings and I just think they're going to be too profitable to be missed out on by not just people who are interested in gold but the generalist investor.

David: Now, here's a question though. Your fund has outperformed all of the relevant indexes by a fairly wide margin, yet you're not really a trader, so how did you do it? What was your – is it stock selection? What's the secret sauce here?

John: The secret sauce? Well, we have a big investment in research. We have a good team of four analysts plus me. We travel all over the world to look at gold mining assets in remote locations, whether it's the Arctic Circle or western Africa. I mean, we've been pretty much everywhere and that kind of gives us a pretty good lay of the land as far as the assets go, and… I think the big thing is that we're willing to invest in companies at an earlier stage of their evolution than most because we do have this kind of nitty-gritty feel for assets at their earlier stages, and so we will get involved with an Osisko, for example, when it was a $0.50 stock; it's now $14, and we've financed them all along the way and I think that makes a big difference.

David: Which is a good lead-in to the next question, which is the producers have – it's a business where you deplete your reserves on a daily basis if you are doing things right. How are they going to replace their reserves and does that point to an opportunity? Do you guys spend a lot of time looking at the companies that are most likely to get acquired?

John: Certainly, most years we'll have a couple of takeovers and hopefully they're big positions in the portfolio and that certainly is a big factor in our performance, but the other thing is, you know, we're very patient. We'll look at a company that may have made a misstep, but if we think the asset is any good and if we think management is contrite or maybe new management comes in, the gold isn't going to go anywhere. I mean it's there; and so if they get things right, you are going to eventually see value created.

David: So what keeps you up at night? I mean you're primarily – well you're not primarily, you're heavily involved in this sector. You’ve been involved with it for some time now.

John: Since '98.

David: '98, which is…

John: A long time.

David: We were jumping up and down…it's been a hell of a bull market and – I mean, I can remember back in 2004 interviewing company executives, and even the guys in the business didn't think this could last. I can't see, we can't see at Casey Research anything on the immediate horizon that’s going to derail gold and silver, hard assets in general, but there must be something. Do you stop and think once in a while like what's going to – where's the torpedo going to come from, like Volcker's raising interest rates?

John: It would be something like that. You need to have political sea change. You need to have resolved political will and not contentious, opposing views like we have now. So now we have people who want to continue this welfare society that we have and don't want to cut back on that kind of spending, and then we have the fiscal hard-liners and the clash is unbelievable. So it's very different than 1980, but I would say what you need is sort of unified political sea change where everybody got behind a real leader – which we don't have either – who would tell the truth and say, you know, "We're going to have a bunch of tough years to get this thing sorted out."

David: I think Adam Fergusson makes the point very well in his book that there is never a good time to tackle a problem like we have now, and in fact this would be the worst time to tackle this problem – to go for austerity than for the sort of things that you would need to do to get the country back on a fiscal, some sort of stability on a fiscal or a monetary standpoint. It's never a good time, and so the politicians – I think you called it, what was it, a welfare –

John: Welfare democracy.

David: Welfare democracy is a great line.

John: But we are.

David: And so do you think there's any chance that we are going to see something like that coalesce in the next five years?

John: It's hard to see, but it's conceivable, but I think first we have to have more of a financial crisis. We have to have a repeat – which we may be in the midst of right now – I mean, what's going on in Europe seems to have no end to it, and one thing I didn't mention in my talk is Paul Tudor Jones – who is a terrific money manager and a great guy – said that he thinks that there's a good chance that the US is going to have a sovereign debt crisis similar to Europe.

David: One would assume, I mean –

John: Then I think that's right, but I think that out of that you would get some of the willingness to go through a tough period and just everybody buy into some kind of solution but it really takes leadership.

David: So we have had a recent correction… and does it feel to you that we're bottoming out here a little bit and that things might bounce along?

John: I'm not in the business of making those calls. I don't like to, but I feel like this is a pretty good wipeout and certainly you've dampened a lot of the enthusiasm that was on the front pages only six weeks ago, so that's usually a good start.

David: So you're a gold stock fund manager.

John: Correct.

David: And so it would be expected you'd be talking your own book. So the question is what percentage of your portfolio do you have in gold, precious metals, silver, stocks – just generally speaking?

John: Well it's over 50%, but I don't recommend that. I feel like I know what I'm doing, so that's what I'm going to do.

David: At least you have got your money where your mouth is.

John: My money is where my mouth is.

David: That's very important. Well, that's all I've got.

John: Thanks, David.

David: Thank you very much.


Nov 02, 2011