In his new investor letter for the Tocqueville funds, gold fund manager
John Hathaway provides a timely overview of the gold "market" and
the gold-mining industry, which is quickly contracting under an avalanche of
paper gold and the burden of its own debts.
Hathaway writes: "Untethered (it would appear) from the laws of
supply and demand, paper gold is a make-believe substance that trades
according to rules written by high-frequency traders, macro hedge funds,
major banking institutions, and central banks. Of course this works only so
long as the buyers remain willing to settle in cash rather than ask for
actual gold. ...
"Through the alchemy of financial engineering, gold has become an index,
a policy lever to transmit information. Digitization of tangible and
financial assets in the form of exchange-traded products, derivatives,
options, and other paper contracts transfigures real assets into
abstractions. As with Fed funds, reverse repo rates, interest on excess
reserves, and LIBOR, the price of gold pings an important signal as to risk,
the cost of capital, the state of the financial markets, and economic
well-being in general.
"A weak dollar gold price signals that all is well with the high-risk
course set by central planners in the Federal Reserve Board’s Eccles
building. The Fed sets Fed funds, reverse repos, and interest on excess
reserves to the levels that the Federal Open Market Committee deems
appropriate. It is hard to imagine that the dollar price of gold has been
overlooked by those who believe that they know how to make all the pieces of
the puzzle fit together. The declining price of gold affirms the collective
beliefs of central planners and mainstream investment managers. For them, a
bullish trend in the dollar gold price would send a disturbing signal that
the greatest high-wire act in financial history is teetering."
Hathaway argues that paper gold is overdue for a short squeeze, that the
above-ground stock of gold is not as liquid and available for quelling prices
as many analysts assume, that metal for immediate delivery in London and New
York is shrinking fast, and that China, India, Russia, and Turkey alone are
buying more gold than is being mined. He quotes GATA consultant Koos Jansen
about China's gold strategy.
Perhaps most telling, Hathaway contends that more of the world's capital
now is invested in derivatives than in the real economy. That is, that all
markets now have been hopelessly distorted if not rigged by what some call
"financialization."
"We believe that when clarity returns, the financial markets of
recent years will be unmasked to have been a comprehensive manipulation made
possible by the alchemy of transforming real assets into hyperactively traded
derivatives, exchange-traded products, and financial benchmarks. The process
was funded by excessive money creation of radical central banking. The
unprecedented growth of systemic liquidity has outpaced the availability of
real assets such as bonds, equities, and commodities to invest in. The
financial industry has responded to the need by creating 'products' that were
several steps removed from the underlying assets and the industry earned
substantial fees in so doing. Being disconnected from reality, these
'products' have been more easily subjected to price manipulation than the
underlying assets, and therefore have served as effective policy levers for
central bankers to distort reality to achieve their objectives."
Hathaway concludes: "We believe that the stage has been set for a
significant repricing of gold in all currencies, including the U.S. dollar.
Ownership of physical gold outside of the financial system seems to make more
sense than ever. Gold-mining equities, which have been severely depressed by
the four-year decline in the gold price, should also participate. We believe
that a trend reversal could prove explosive for the entire precious metals
complex."
Hathaway's letter is titled "Paper Gold: Utopia for Alchemists"
and should be read by all critical investors and citizens and aggressively
suppressed by the mainstream financial news media. It's posted at the
Tocqueville Internet site here:
http://tocqueville.com/insights/paper-gold-utopia-alchemists