Fed Is Living In A Dream World; Look To Buy Gold On Dips - Tocqueville
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John Hathaway, senior portfolio manager at Tocqueville Asset Management
(Kitco News) - Investors should have used gold’s month-long pullback, culminating in a four-month low as a buying opportunity, according to one major precious metals portfolio manager.
John Hathaway, senior portfolio manager at Tocqueville Asset Management, was fairly critical of positive sentiment surrounding further U.S. economic growth, which has led to complacency in financial markets, resulting overvalued equity valuations.
“We believe that the Fed’s view of economic activity is not rooted in reality and that its stubborn pursuit of interest-rate hikes is likely to precipitate a bear market in equities and bonds,” said Hathaway in his recently published second quarter gold strategy investor letter.
“We believe that a hard look at the facts suggests that a return to the normality of the past is unattainable, and that the captains of economic policy are living in a dream world,” he said. “In light of these considerations, investor disinterest in gold and the implied expression of trust in the sustainability of current economic arrangements bewilders us, especially when even small exposure to the metal would be the financial-asset analog of fire insurance on one’s home.”
Hathaway’s comments come as gold has managed to bounce off its recent lows, reclaiming an important psychological level at $1,220 an ounce. Hathaway added that he remains optimistic on gold and the precious metals mining sector as he expects the U.S. economy will be able to sustain its momentum as the Federal Reserve continues to tighten monetary policy.
“Rising interest rates and market stability have rarely, if ever, coexisted, even if those increases are generally anticipated,” he said.
In his second-half outlook, Hathaway said that he expects as the Federal Reserve continues to tighten market volatility will increase, putting pressure on equity markets and ultimately forcing the central bank back to the sidelines on monetary policy.
“Financial-market complacency seems (inexplicably, to us) to be based on confidence in a continuing economic expansion and a smooth transition (meaning pain-free in terms of market damage) to normalization of monetary policy and interest rates. We believe that these two expectations are incompatible and unattainable simultaneously,” he said. “An unexpected U-turn in monetary policy would almost certainly cause precious metals prices to surge.”
Turning to the mining sector, Hathaway said that the firm’s investment strategy is to focus on mid- to small-cap companies with superior assets and sound managed.
“Because the gold-mining industry has struggled to maintain reserve life, we anticipate a wave of acquisition and consolidation activity over the next three to five years from which many of our holdings will benefit,” he said.
Tocqueville Asset Management's Gold Fund manages$1.3 billion in assets.