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Ignore Gold's Noise; Coming Recession, Weakening U.S. Dollar To Support - Tocqueville

Kitco News

(Kitco News) - Gold and mining shares put in a bottom during August and are on the way up, owing to spiraling U.S. sovereign credit and an imminent recession, according to Tocqueville Asset Management.

“We believe that the gold market bottomed in August, and that exposure to precious metals is a credible strategy to mitigate risk of a dollar collapse,” said John Hathaway, chairman of Tocqueville Management Corp. and fund manager of the Tocqueville Gold Fund.

In a recent report, Hathaway said that the main fundamental factor behind a potential gold rally is the “soon-to-be-obvious deterioration of U.S. sovereign credit.”

In addition to sovereign debt, the U.S. government also faces what Hathaway described as an “out-of-control” fiscal deficit, with the August deficit level the fifth-largest on record.

The Congressional Budget Office has projected the federal debt level to rise above 100% of gross domestic product by 2028.

“We believe that it would be a stretch to contend that comparable GDP growth is likely. We also believe that nominal interest rates are set to rise, and that there is a good chance of a recession by 2023,” the report said.

Importantly, Hathaway noted that should the U.S. debt burden grow substantially, dollar weakness would likely follow, especially if U.S. credit ratings take a hit.

The report added that Ray Dalio, founder of Bridgewater Associates, said in September that there is a risk of a “30% depreciation of the dollar” over the next two years.

“We disagree; we believe that it could happen sooner,” Hathaway said.

“[Dalio’s] reasoning is the same as ours. We agree that a general loss of confidence in the U.S. currency is credible risk,” the report noted.

A weakening dollar is likely to push gold prices to higher levels, owing to the historical negative correlation of the dollar and the yellow metal. Spot gold is down 1.5% as of 11:52 a.m. EDT on Monday, while the U.S. dollar index climbed 0.28%.

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