In an interview with Louis James, John Hathaway discusses the US's economic outlook and why he's delighted by the current bearish sentiment toward gold.
[To be a successful speculator, one must be willing to go against the mainstream investment trends, as John is. There's no better way to get a primer on contrarian investing than by sitting in on the recently concluded Casey Research Recovery Reality Check Summit – and you can do that by ordering the Summit Audio Collection today. Every presentation, every chart and graph, and every actionable investment tip can be yours, in either the instantly available MP3 files, or in CD format.]
Louis James: Ladies and gentleman, thanks for tuning in. We're at the Casey Research Recovery Reality Check Summit. We're talking with John Hathaway, one of the more successful fund investors – institutional investors – in our precious metals field near and dear to my heart. John, can you give us a quick version of what you talked about here, for those who didn't make it to the conference?
John Hathaway: Sure, yes. I think we're at the end of a correction that resulted from the peak last summer. It was overcooked, kind of hyperventilated hysteria over the debt-ceiling talks, the rating downgrade of the US sovereign debt, and I think basically the stocks and the metal had been working off that boiled down to what we now have is a simmer. I think we are at a position where there's not a lot of downside, and I would not be surprised by revisiting the previous highs of $1,900 and maybe even new highs over $2,000 this year.
What will do that is basically – so much of the narrative has been quantitative easing. When Bernanke announced on the 29th of February that they were done with quantitative easing (and if you believe that I've got a bridge to sell you, but for the time being let's assume that there won't be any), I was very impressed that gold did not go to a new low. It printed somewhere below $1,600 at the end of the year, made a couple-of-day swoon, but it didn't go to a new low. And then when the Fed minutes came out it also did not go to a new low, it kind of reiterated what Bernanke said. So the narrative may be changing. I'm not ruling out quantitative easing as a possibility, but there are things out there that gold might be looking at that the CNBC mentality hasn't figured out.
Remember that gold rose for many years before we even heard of quantitative easing; it was in a steady uptrend. So what could those things be? What would take gold – what would be the new headlines that might take gold to higher highs? To me, the biggest thing is that the Federal Reserve has purchased something like 61% of all new Treasury debt in the last year; and if they aren't going to continue that, then what's going to happen to rates?
Louis: Right.
John: The Chinese – who had been big supporters because they were rigging their currency – have not been generating foreign exchange to anything like the extent they were, so their participation rate in Treasury auctions has gone way down. If you look up the TIC numbers, foreign buying of Treasuries has dropped precipitously, so you have the two biggest pillars of support for keeping rates low in question here, and let's see what happens on June 30th. If you don't have a political buyer, either the Chinese and foreign buyers who are manipulating currency, and the Fed because they said they aren't going to do it, what are rates going to do?
If you are going to get a risk-free return inflation-adjusted today that's not politically motivated, it's got to be somewhere around 4-5% on the short end of the curve. Every hundred basis points adds a huge amount to the budget deficit, so to me we're in a real trap here, where it's going to be a game of chicken as to whether the Fed can really live up to what Bernanke said on the 29th.
Louis: Isn't that really the bottom line? They can't allow that interest rate to rise with the debt outstanding –
John: It seems very difficult. The recovery, the alleged recovery that we had, is very… I'll grant that things are better than they were a year ago or two years ago, but you'd have to call it feeble at best and maybe not sustainable. That's one thing that I think could affect the gold market.
The second thing, and I think it's very important too, is that inflation is rising. Even though the economy is soft, the number I look at – and I know we're going to have John Williams speak at lunch, and we know he has a very good take on it – is the MIT Inflation Index, because that's real-time pricing of billions of products. You can get to that website just by googling "MIT Inflation Project"; and that does not include services. Most of the services I take are inflating at more than 5%; they are closer to 10%. But goods that could be measured in real time are rising at 5%, so that's also going to be a factor. That means if rates stay where they are, the Feds are just going to be that much more behind the curve.
So those are two things; and the third thing is that there's $1.5 trillion of liquidity in the system that should the recovery – and I'm not a macro forecaster, but let's say the recovery does sustain itself – you've got $1.5 trillion of free reserves that could just turn into money supply. Then you really would have a potentially hyperinflationary scenario, and the Fed would be completely powerless to do anything about it. So I think that's bullish for gold – gold is not backward looking, it basically looks forward. I can go on and on. You've got the European unresolved sovereign debt crisis in Europe.
Louis: Let me jump in with a question about this, then. You've stood out really from the crowd in that most people agree on the general prognosis for gold. Most people are sort of near-term bearish, you know, the ones –
John: It makes me so happy.
Louis: [Laughs] But, you know, once a bear sentiment sets in, it seems to almost have its own momentum.
John: Yes.
Louis: You're the only who's saying "I think we're near the bottom." Most people are saying, "Sell in May and go away" –
John: Yes, I heard a couple of things from this session that just made me want to jump up and buy –
Louis: I understand the contrarian reason for that, but can you tell our audience a couple of reasons why you think we might be near the bottom or why you're ready to buy now and not waiting to see how this summer turns out?
John: Sure. Well, first of all, I'm not a trader. I mean, I'm long, and last summer I thought, "Gee, this is really a little spooky, we're not at a sustainable level," but there wasn't a whole lot I could do about it. And here we are and we have some cash, we have some inflows, so we are able to put money to work. And what is it that makes me think we're there? Sentiment numbers are extremely negative, historically, when they've gotten to these levels. By the way, I put out a quarterly newsletter now that has a lot of this data, which can be found on our website.
Louis: Go ahead and give us the website.
John: It's the Tocqueville Asset Management website, and it should be fairly easy to find. So sentiment is at levels that have been associated with big rallies. Traders' commitments, net longs, net spec longs are way, way down there. I look at that a lot just as a way to see where the market is positioned. The guys who can create some volatility are not there, and so if gold starts moving, they won't want to miss it, and so they'll come in. And then, we've looked at some technical stuff. I'm not a technician but most of what I see from a technical perspective is extremely constructive. So I put those things together.
Sentiment is rock bottom. COMEX traders' commitments are very, very constructive, and technical things that we look at are very constructive. So I would say all of those things, plus hearing these guys say that they are not going to step in – that's more anecdotal, but that to me is just very, very positive. So I – frankly I don't stake my reputation the way that Dennis Gartman does on making trading calls, but just as an experienced observer of this market for some number of years now, I think we're ready to make a move higher.
Louis: Okay, well, thank you very much. Word to the wise.
John: Thank you.
Gold has broken few crucial supports. Weekly trendline has also been broken. Some more downside left?
Lots more downside if the price breaks below $1475 and stays there. In the meantime I think there is a possibility of a rise to the 1665 level which would be a return to the uptrend line it broke awhile ago, for the first time in three+ years. The market wants to wash out the die-hard gold bulls in the face of an imminent decline, so its likely to rally for a time.
In the meantime my favorite pink sheet stock (VTSI) just signed a contract with Lockheed to market their products, so I'm watching it take off. Looks like a P&D move except for the fact that Lockheed is for real. Took them a few years to make this happen.
Andy
I think the guy lives in cuckoo land. When all the forces in the market are very bearish. I think it is highly arrogant to call any bottom as the trend has turned down yet again and does not look in any way about to turn around. I love these people who predict markets (usually on cnbc or bloomberg), usually when the market pulls threir pants down, you don't see them for dust! When they finally come out of the proverbial closet, they just make the same old lame excuses as to why their forecast didn't quite come up to expectations blah, blah blah. I agree with Andy that if 1525 doesn't hold, then we could see acceleration to the 1475 area being next valid support level and 50% fib area. The probably 1150 at next major support and the 61.8% fib level.
We cannot call any market until it shows it's hand, then, and only then can we piggy back it for the ride. As the saying goes; 'The market can stay irrational longer than you can stay solvent', opinions in the markets are very dangerous.
As always, read what the charts say, and follow the triangles, everything else is just bull....t!
Respect as always to my fellow traders at Market Club, and may the profits be with you!
Aldo UK
Forget all that logic-calculations and "If and Then" syndrommarket is alwayes going on it's own rhythem, and follows only it's own equations, so it will be a great mistaken to predict gold's bottam-out probability.
Gold will go down further, further and further, this is not my imotions, but i simply explain what Historical Price Patern suggests.
Rasesh Shukla
sir, how can u speak of Gold bearesh trend so confirm to u
My own preference is to average in to any position, however, I would not buy anything but the *real* thing, physical gold (or silver, copper, etc). I also take possession of my precious metals . . . but of course, I am a poor man compared to many who frequent these pages. IF you can afford to purchase huge quantities of the stuff, then don't put it in places where it is likely to be confiscated by banksters (e.g. MF Global and JPM), or desperate/criminal governments. Kind of narrows it down, right? Maybe the pirates had it right . . . get a treasure map and bury it someplace.
I personally have been getting a lot of enjoyment by just getting all the things I think will be useful in the future, e.g., a small farm with an artesian spring next to a river, a small orchard, a big garden, lots of fishing and hunting equipment, lots of books, tools, an old Ford tractor that is built like a tank, a big tank of propane gas with a wall heater that requires no electricity to run, a wood stove, etc etc Now working on getting some solar panels and maybe a small windmill. It actually is fun, healthy, and you don't have to look at the financial section to see if you still have a positive net worth.
Mr. Hathaway couches all his predictions in the caveat that he is not a trader. I guess only 'investors' can afford to be so careless with assets. Calling tops and bottoms is way too risky. Trends are always our friends. Markets always climb more than expected and fall more than expected. To make this call that gold has bottomed is a foolish waste of video and my reading time.
As far as China is concerned, the old fable of the blind men and the elephant must be kept in mind. I remember the 80's, when Japan's MITI was considered the 'genius' behind Japan's manufacturing muscle. Cannot imagine that China's ruling elite which ruthlessly squashes any dissent will be, in the end, any wiser than MITI. (Or, in my opinion, the US Federal Government which seems intent on managing the US economy into oblivion)
Mr. Hathaway is simply defining his positioning as long term. He says it clearly so as not to presume a trader's time frame of actionable entry point. He cites reasonable technical level behaviors, sentiment within the COT and macro fundamentals all of valid consideration for stating an informed when asked.
Gold obviously has technical support in the $1525 range and it's a wholly reasoned to express as a level likely to hold at this juncture. Nothing was implied as absolute.
So if there are foolish words to be wasted reading here, they appear only those that you too willing posted.
I agree that my criticism of Mr. Hathaway is based on my own impetuous reading of his interview. I should have been warned by the headline that it was going to be fatuous. I suppose he should be given a pass because of his evident advanced age and lofty position. However, since I have to risk my own capital, I have to be more circumspect about entry points than Mr. Hathaway who is risking the capital of many others.
I've read somewhere that the moment you start saying something SHOULD be doing this or doing that. Or it WILL DEFINITELY do this or that, then you should start carrying a mirror in your back pocket, and look in it for someone to blame when you were wrong, and not to look at the markets or Ben Bernanke and his inkjets to blame
Andy,
The Shadow Stats site indicates just under 6% for 2012 based on their calculation.
2% is the Goverment number. And no, prices have no fallen for staple items.
Gold will retest 1450 - this is not the bottom!
My crystal ball is as good as his!
I thought it was very interesting that John made reference to the MIT inflation site. I quote from the above:
"But goods that could be measured in real time are rising at 5%, so that’s also going to be a factor."
Sadly, John did not actually go to the MIT site, because if he had he would have discovered that the MIT inflation number for the last 365 days was 2%, a great deal lower than the 5% he claims is prevalent. Furthermore, the rate is on the decline.
Do I smell a whiff of deflation?
Can Gold bottom if deflation is about to take hold? I've noticed prices actually falling when we go shopping, especially compared to last year. Not everything. Gas is certainly getting cheaper.
Maybe John should not reference sites that contradict what he is saying.
My target, should gold drop below $1525 to $1475 or lower is ~$1125. That's what the descending triangle would call for. The big question is whether or not it will break support at $1525.
Andy
OK Andy,
So gold has broken $1,525.00 support.
For example as of noonish 5/23/12;
The paper Ponzi "GLD"= $149.55 -$2.53 (-1.66%) or the supposed equivalent of $1,495.50/troy oz,
The Swiss "physical" ETF "SGOL"=$152.20 -$2.88 (-1.86%) or $1,522.00 / troy oz, and
KITCO.com = GOLD @ 12:40PM EST $1,539.10 bid vs. $1,540.10 ask, off -$29.20, -1.86%, low=$1,532.40/high= $1,565.60
The relevant question you brought up is "Do I smell a whiff of deflation?"
Wish I knew what that odor of fear portends.
Right now the stampede to safety is going for the US $. How long can that last? Any thoughts?