Top Gold Investor Makes Great, if Unintentional, Case Against the Metal

A new report by John Hathaway, manager of the Tocqueville Gold Fund, seeks to debunk the idea that gold, priced above $1,100 an ounce, has entered bubble territory. He makes a game try of it, but despite his best efforts he seems to offer more support to gold bears than bulls.

"A Contrarian's Dilemma" points out that central banks have been buying gold and yet it still comprises small fractions of their reserves, also that gold supplies are not growing appreciably, due to the high cost of producing the metal. By contrast, he says, paper money is cheap and easy to make, a fact that economic and political leaders around the world have been taking advantage of as they try to shore up the battered financial system.

Yes, but...

Purchases by central banks are not so encouraging. If they don't have a lot of gold on hand, it's because they sold so much of it in the 1990s, just in time to miss a huge rally.

Sure, their selling pushed the price down, helping to form the bottom, but they could have drip-fed their supply into the market and minimized the impact. It's hard to have faith in the judgment of institutions buying for $1,000 or more the same thing they sold not that long ago for less than $300.

The same goes for mining companies. Hathaway points out that some are reducing or eliminating the hedging programs they used to limit their exposure to price swings. Miners locked in prices of $300 an ounce or so on much of their production before the rally took hold, but they are willing to accept more exposure to the metal at $1,100. He takes one large producer to task more than others. "Barrick Gold, once the preeminent hedger of future output, has finally discovered the attractions of gold," he writes. "In a November 2009 speech, newly installed Barrick CEO Aaron Regent declared that industry production had peaked at the turn of the century and has begun a secular decline. Having discovered a fragment of the bullish case for gold late in the game, the company put its shareholders' money where its management's mouth is by raising $6 billion of new money from investors to neutralize its hedge book. "In so doing, the company wrote the final chapter on the most disastrous attempt at financial engineering in the history of the gold mining industry. In perfecting the art of selling low and buying high, Barrick and other gold mining hedgers destroyed billions of dollars of their shareholders' capital." As for the argument centering on the comparative supplies of gold and paper money and the tendency of politicians to meddle clumsily in economic affairs, gold aficionados trot them out continually. They should because they're right.

The thing is, they were right all through the 1980s and 1990s. All it took was for government leaders to be slightly less inept and intrusive for gold to drop out of sight and stay there. If that happens again - a tall order, maybe, but it's not as if expectations for bold, brilliant leadership are all that high - then gold could be headed for two more decades in the wilderness.

The report offers another excellent talking point for the opposite side of the debate. At a buck a point the Dow Jones industrial average bought 40 ounces of gold a decade ago; these days it buys less than 10 ounces.

Hathaway also recalls the certainty with which investors dismissed gold's prospects; no one wanted it at $250. That's far from the case today, when the public clamors for the stuff at well over four times that amount.

Hathaway is a brilliant portfolio manager. His fund is up about 90 percent this year, compared to about 40 percent for an index of gold stocks and 25 percent for the metal itself.

If you insist on investing in gold at these levels, his fund is an excellent vehicle for it. But gold still seems like more of a sell than a buy at these prices.

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