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Gold's Physical Market To Overwhelm Feeble Paper, Wait & See - Tocqueville's Hathaway

(Kitco News) - It is only a matter of time before gold’s physical fundamentals overwhelm the paper market, according to a fund manager of one of the world’s biggest gold funds.

John Hathaway, fund manager of The Tocqueville Gold Fund

John Hathaway, fund manager of Tocqueville Gold Fund

In his fourth-quarter report, published earlier this month, John Hathaway, fund manager of Tocqueville’s $1.4 billion Gold Fund, said that he remains positive on gold in the long term because of supply and demand fundamentals.

“Global mine output has plateaued; it now seems likely to decline through 2020 and perhaps into the middle of the next decade… Discoveries of new ore bodies are at a 25-year low, while the time required to bring new ore bodies into production continues to lengthen, and now stands at nearly 20 years,” he said in his report.

Hathaway also highlighted two factors that will continue to boost demand in an environment of dwindling supply: the new Shariah gold standard and the fact that gold is now a settlement currency among oil-producing nations and China.

He explained that the new Shariah gold standard could lead to the creation of gold-backed exchange-traded products that would be marketed specifically to a quarter of the world’s population;  “a market that has not been penetrated,” he added.

“While estimates of the potential market size vary wildly, and this development is in its early days, it seems to us that it is a major positive for future physical gold consumption,” he said.

However, it is really another factor that has more potential for the gold physical gold market, Hathaway noted.

“We believe that the expansion of gold’s utility as a settlement currency will accelerate the demise of paper-centric traditional institutions such as COMEX and LBMA, and greatly diminish the influence of speculative paper flows in the process of price discovery,” he said.

However, while these factors are ultimately bullish for gold, the market could continue to be at the mercy of the paper market.

“There is a shortage of physical metal at current prices that promises to deepen, masked only by the supply of synthetic gold not backed by physical. Given full transparency, the shortage would argue for a much higher gold price based on price discovery unimpeded by synthetic-gold trading,” he said.

“With the passage of time, the disparity between real (physical) and imaginary (speculative) fundamentals continues to widen. The longer it persists, the greater the likelihood that it will be resolved in epic fashion. In the end, we fully expect physical gold to trump its feeble paper facsimile.”

 

By Neils Christensen of Kitco News; nchristensen@kitco.com

 

 

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