John Hathaway: $1.3B Fund Manager: Silver Is A Barometer For Resource Interest And Its Registering ZERO

Palisade Radio May 9, 2016

Tocqueville Gold Fund manager, John Hathaway is convinced the gold bottom is behind us simply because of the lack of people involved in the sector outside the core long term investors.

Silver is an excellent indicator of investor sentiment and its slow rise relative to gold shows the mainstream is still far from being on board. There is still a long way to run with the bull market, at least another 4 years.

The Tocqueville Fund does not take a position at less than $10 million, they have been investing for 20 years and now tend to invest with people they have made money with in the past. They are extremely careful who they invest with.

The main influence on the global markets is deflationary although government policy is inflationary, we are headed for a significant devaluation in paper currency and poor returns in the equity and bond markets.

There are a lot of scams and shady investments in the precious metals markets so professional advice from a fund manager such as Tocqueville, is a much better idea than going it alone.

 

Palisade Radio Host, Collin Kettell: Hello everyone and welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is a very special guest. His name is John Hathaway. And if you do not know him he is the co-portfolio manager for the Tocqueville Gold Fund which manages $1.3 billion at this time. It is up over 50% since the beginning of the year. John, welcome on the program.

Senior Managing Director, Tocqueville Asset Management, John Hathaway: Thank you very much.

CK: Yeah, I guess the first question to ask you, for somebody managing such a significant portfolio in the gold sector we have had a few rough years that are maybe behind us now. So with the move the last three or four months, are you convinced that the bottom is indeed behind us?

JH: Yeah, it feels like it is. I guess what I see is a lot of skepticism. There is very little participation. Our flows have been positive but they have not been robust, and I see that as true right across the precious metals sector. So, what makes me think this is for real is there is really nobody is aboard other than the people than the people who have stayed with us and kind of suffered through the last, very difficult couple of years. So yeah, I think we have seen the turn.

CK: You have been in the space and following the stock market for years and years. You have seen bottoms happen before in the gold sector. It is very important that you point out that a lot of people are not involved. For somebody close to the market, I am seeing private placement financings fill up quicker. There is more demand, but that is from a very select insider group of people. What happens next in this kind of a market to really confirm the next leg up? When do you see more people starting to come in?

JH: My personal opinion is just a guess. I do not think we are going to see a lot of excitement till we get to— well, I think crossing $1300 and staying there would certainly get some interest. But I really think $1400 would definitely trigger more interest. So, we are not there yet. The other thing I look at is silver is a terrific parameter of sentiment and it has lagged gold year to date. I think when I last looked at it gold is up like 22% or 23%. Silver is up 18%. Usually silver— it has always been gold on steroids, and for it to lag like this, to me, is another sign the public just is not there yet. So I kind of feel like it is still early days and I think by the end of the year that will change. But we are not there yet.

CK: Right, and in terms of how you are investing with the funds, can you talk to our audience a bit about what is in the fund currently? Are you investing in any physical bullion and in terms of the stocks are you looking at the majors, the mid-tiers, or the juniors?

JH: Okay, we have a position in physical metal and it is roughly 14% or 15% of total assets right now. It is not the gold ETF; it is physical metals stored outside of the banking system. It is with Brinks, because I do not even trust it with any of the banks. So that is 15% of the fund, let us say. And our positions are publicly available if you will just go to our website, www.tocqueville.com, www.tocquevilleassetmanagement.com. But we have a good representation in some of the major names that most people would recognize, things like Newmont, Goldcorp, Barrick, and so forth. And then we have a lot of the mid-tier names that would not be quite as familiar, names would be things like Torex, Max Silver, Tahoe, just to name a few. And then we have a basket maybe 20 or so positions that are in the smaller cap space. I would say, generally speaking, market caps of under $500M. And as I say, that is a pretty large number of issues. Maybe that might be 10% or 15% of the total assets of the fund. So it is a pretty diverse fund.

CK: John, as you mentioned the holdings are available online. Does the fund participate in financings directly into companies via private placements or are you purely buying things on the public-traded market?

JH: Well, most of what we do is publicly traded. Occasionally, we will get involved in a financing. So yeah, we are not doctrinaire about it. We will get involved in financing when we see that there is a legitimate use for the money. The one thing I cannot stand is bought deals and we generally do not participate in them. But if a company comes to us and says, “Look, we need money to get us from here to there, and would you help us out?” We will definitely participate on things like that.

CK: Can you talk a little bit on the smaller side of the portfolio what you could quantify as a junior or maybe even a micro cap? There are over a thousand of them out there, and obviously your fund is very selective in choosing which ones. The obvious check boxes are management and a good resource. But at this point in the market a lot of those do exist at a deep discount. What exactly are you looking for to put in the Tocqueville Gold Fund?

JH: Well, just for starters it does not make sense for us to have a position of much less than, say, $10M because it just does not move the needle. If we cannot see a way to get, say, that size position we are probably going to stay on the sidelines. Beyond that, management is obviously very important. You have to remember we have been doing this for almost twenty years now so we know pretty much everybody in the space. We know who is good. We know who is bad, and everything in between.
We have had the most success when we have invested with people that we have made money with before, so that is very important. Obviously, we look at the quality of the assets. We have a research team that is as good as anybody in the space in my opinion. We visit mines. We do all of those sorts of thing. We have frequent meetings at their offices in New York, travel to conferences, and so forth. We covered the precious metals space very intensively, and you know I would say 95 out of 100 different stocks are of no interest to us whatsoever, so we are very, very, very picky.

CK: John, it seems that commodities are eternally cyclical. We are hopefully in the beginning phase of an upward move, and as the saying goes getting on the right side of the trade with commodities and when the tides come in all the boats rise. I guess an important point for investors and for yourself managing the money is- have you given any thought to how long this bull market is going to go on and what you are looking for for maybe an exit point to start getting out of some of these positions? Obviously, a point that is far away from right now.

JH: Yeah, I mean these cycles typically go for four to five years. The upcycle starting from 1999 was actually 11 years. The down part of the cycle from 2011 was another 4 ½ years. I would start this cycle with the end of last year so six months into it. I would say at least four more years to go, but that is just kind of a guess because you have to look at what is really going on and what is driving it and see whether those things are totally reflected in the markets.
Right now I would say we are kind of like we were in 1999. We basically had a sold out market. If you think back to then nobody knew back then that there would be a housing crisis or there would be a global credit meltdown or even a bust in the internet, .coms, or zero interest rates, quantitative easing. So I think we are kind of in the same space. I kind of think that there are things that are coming our way and we can all guess at what they might be, but we will not know them until they make headlines maybe two or three years from now. But I can guarantee you that the systemic risk that has been building up as a result of quantitative easing and reckless policies by not just the Fed but all the central banks of the major countries are going to have consequences that are going to be quite significant and I think probably harmful to the average investor who does not have exposure to the gold, the gold mining sector.

CK: There is a lot of debate about what the results will be from Fed policy and all the money that has entered the system. One would say that that is almost certainly going to lead to inflation with all of the problems currently around the world. Others could claim that a deflationary collapse could certainly happen similar to what we saw in 2008, but maybe much worse and quite different. Do you have any expectations on which it will be and do both bode well for gold?

JH: Well, the quick answer is both are favorable for gold. To know what it is going to be is much harder to say. I would say that the prevailing forces are deflationary and that means that with all this money creation the global economy is just limping along and it may well be at the beginning of a significant downturn, which would put huge pressure on credit at the corporate level and at the sovereign debt level. So that is deflationary, but the response of public policy is inflationary. It is money creation. It is more deficits, greater entitlements, and all these sort of things. You have kind of opposing forces.
I do not think you really need to know the answer to decide to have some exposure here because they are both good for gold. Where we are headed is basically a significant devaluation of paper currency whether it is the dollar or the euro or the yen or whatever other currency investors care about. I think it is absolutely certain that a dollar today is going to be worth a lot less in three or four years. That is going to have consequences- it probably means that returns on the equity markets are not going to be very good. It most likely means that returns in the bond market are not going to be very good. But I think it does mean that having some exposure here to gold and gold mining stocks- silver as well, is a terrific strategy to deal with that.

CK: Well you just touched on a dilemma that a lot of investors have and that many things are overpriced around the world: the US equity market, the US bond market, even real estate, and other hard assets like art which have had a lot of money rushing in. One of the only things that has been undervalued up until recently – and probably still is – are gold and silver and the related equities. Question is slightly out of the context of the interview, but for people that are interested in investing in the Tocqueville Gold Fund, where else is safe money to go into at this point? It is hard to find anything outside of the precious metals.

JH: Yeah, I would agree with that. I mean if you are a contrarian you might think about hard assets. Energy certainly has been beaten up- hard rock mining, so base metals. I just would not want to steer anyone there because I do not really feel qualified to say that. But just looking around as a contrarian you would have to say that the things I just mentioned have been beaten up and certainly everything else you mentioned is fully to overvalued.

CK: Okay, I appreciate that. John, I want to ask you and I do not know if you are able to say, but if there are any companies that you are really focused on right now that are your favorite picks or maybe a little more macro types of companies, if you do not want to touch on particular ones. Of course if people are interested in investing as you are they can simply invest in the Tocqueville Gold Fund, but any recommendations would be great.

JH: Yeah, when I get that question I have to say, first of all, compliance will not let me mention specific stocks, and therefore I would say go to our website, and you will see what we have; our biggest positions, what they are. If you want to get into the 13F filings, you can see everything that we actually own. That is the best answer I can give you there. I think that more than ever investors should think about having physical metal. I do not think that ETF makes a lot of sense because you might as well just own a security. You have got so many intermediaries- you have got, in the case of GLD, you have got State Street Bank; you have got HSBC as the custodian. You have got a lot of moving parts and you cannot redeem it for physical metal. I would say to anybody who is thinking about constructing exposure to precious metals, some piece of that should be in physical metal whether it is gold or silver or preferably both.

CK: Great! John, I really liked your comment earlier about using silver as a barometer for retail interest in the space, and the fact that silver has lagged- gold and especially lagged the related equities says that money is not really rushing into the space at this point. That would make me think that you probably would have quite a bit of interest in silver especially if it continues to lag and the associated stocks that have upside and optionality to silver. Is that the case?

JH: Yeah, I will actually say the silver stocks have done better than the silver metal which I think has lagged the stocks. We have plenty of exposure to silver. You can just look through names in our portfolio and see that. They really have had a better run than silver bullion itself. But again, I think it is such early days. I would not agonize too much over what to do here. I would just have quality names, buy the dips- We are in a bull market here, buy the pullbacks. Do not chase things. Stay with quality.

Again, so many people try to do this on their own and they invest on these scams and these sorts of flaky concepts that are promoted again by mainly the Canadian investment banking world. If you do not want to go through that I would say hire an expert, that would be us, or some of the other funds have good managements, too. To me, that is a much better way to go because the research that we do is very intensive. Yeah, we will make mistakes, but I think by and large we are less likely to do that than an individual investor is likely to do. We get the first call. We get the flow of ideas and information. I kind of think unless an investor has some sort of special contact or some special advantage in terms of picking individual stocks they are much better off hiring a fund manager like us.

CK: All right, John, I will not take up any more of your time. I really appreciate you coming on the show today and sharing your ideas and concepts on gold and gold equity space. It is refreshing to see us back into a bull market and everybody making some money again especially the Tocqueville Gold Funds. I believe it is www.tocquevilleassetmanagement.com for our listeners to go to.

JH: Right, yeah, the ticker is TGLDX.

CK: Okay, there you have it, so TGLDX. You can find that it is listed on the NYSE, I believe?

JH: No, it is not NYSE. But if you search for TGLDX you are going to come up Morningstar or Lipper or Yahoo Finance. You are going to get right into the website.

CK: That is right. Okay. All right, John, thank you so much for coming on the show. It has been a pleasure to have you.

JH: Thank you, Collin. Bye.

John Hathaway, CFA, Senior Portfolio Manager, joined Tocqueville in 1997. He co-manages the Tocqueville Gold Fund (TGLDX). In addition, he manages separate accounts with a gold equity mandate including the Falcon Gold Fund, the Falcon Gold UCITS Fund, Tocqueville Gold Amerique (FCP), a sovereign wealth fund, and various separate accounts for family offices and government entities. Prior to joining Tocqueville, Mr. Hathaway co-founded and managed Hudson Capital Advisors followed by seven years with Oak Hall Advisors as the Chief Investment Officer in 1986. In 1976, he joined the investment advisory firm David J. Greene and Company, where he became a Partner. Mr. Hathaway began his investment career in 1970 as a research analyst with Spencer Trask & Co. Mr. Hathaway graduated from Harvard College in 1963 (B.A.) and from the University of Virginia Business School in 1967 (M.B.A). He also holds the CFA designation.

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