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John Hathaway: Paper gold -- Utopia for alchemists

By: Chris Powell, Secretary/Treasurer, GATA

 -- Published: Tuesday, 12 January 2016 | Print  | Disqus 

Dear Friend of GATA and Gold:

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:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

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