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Gold Rallies, Rallies, and Rallies Some More
(September 28, 2007) Gold prices rose steadily in September, trading above $700 for 16 straight days, and fixing in Friday’s London afternoon market at a new 27-year high of $743, a gain of some 12% for the month.
What can you say about the gold bull market at this point? Another month like this one would put its price well over $800, triple the level that gold traded at as recently as April of 2001. Demand for gold is strong, dollar-hedge alternatives (other currencies) are weak, and world gold production continues to plod along, adding about 1% a year to the total stock of gold, while world fiat money production increases at an unbridled level equalling several percentage points per annum.

John Hathaway, the senior managing director of Tocqueville Asset Management, and a man whose opinions we have quoted here many times over the years, was interviewed this week by Sandra Ward of Barrons. Ms Ward asked him,

“What gets us to the magic number of $1,000 an ounce?”

Hathaway: “I don’t think it will take much. Let’s not forget, in 1980 dollars, gold is less than half of its nominal price today. The disparity between the amount of paper that has been created since 1980 and the amount of gold that has been produced since then is just enormous. The ratio of financial assets to physical gold is at the low end of a historical range. If you were to mark all the gold to market that has ever been mined, which is a very conservative approach, and then take the valuation of all the global stock markets and all the global bond markets, gold represents about 3%, compared with a figure in the mid-20% range n 1980, which was at the top of the bull market in gold, and the beginning of the bull market in financial assets.”

“Gold is a good value, certainly, at these prices, just based on the considerations that we’ve discussed. Even is you don’t think worst- case outcomes are in the cards, gold is still rare and hard to find, and believe me, these companies (gold miners – ed.) are having the toughest times trying to maintain production, much less build it.

Hathaway went on to discuss gold stocks and gold mining today, pointing out the obstacles to new gold production coming on stream in any significant quantity. Gold mining today faces increasing environmental regulations, both in the US and abroad. Gold production costs are rising, mainly due to energy price increases. And large gold mining projects butt heads with political considerations in countries that, as John puts it, “are not all that hospitable to private enterprise.”

Hathaway: “Most noteworthy is Venezuela. Its president, Hugo Chavez, has a certain cultural and ideological view that is gaining influence in other South American countries, such as Bolivia and Ecuador and Peru. The risk premiums are going up for putting a lot of money into places that are otherwise geologically very attractive. Russia has great geology, but it is dicey in terms of its rule of law and sanctity of contracts.

We agree with John Hathaway that the scale of physical gold compared to financial assets is out of line to an absurd degree. The past few weeks have witnessed the re-assertion of gold’s role as the ultimate safe haven asset. When push comes to shove, only gold proves itself so scarce, universally valued, and beyond manipulation. Derivatives are by definition ‘derived,’ and today’s currencies are seemingly created on demand, but gold is an element in limited supply, and no amount of financial alchemy will create more of it.

Our view is that gold is fundamentally undervalued today. Short term, it should always be kept in mind that nothing goes straight up, and price corrections will occur. But this bull market in gold has been a fairly orderly one, and shows no sign of being near its end.

Perhaps most significantly for the future of gold prices, gold is still not being noticed by that group holding the most US dollars – the American public.


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