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John Hathaway: Things Look Very Bullish For Gold Mining Stocks

 -- Published: Friday, 14 December 2018 | Print  | Disqus 

Declining supply, rising demand & positive cash flows

Since gold topped out in 2011, the precious metals mining sector has been where investor capital goes to die.

Mining stocks have performed miserably over the past seven years, missing out completely on the central bank-created liquidity-fest that has raised nearly every other equity sector to record highs.

But the long winter of abuse is over, claims highly-respected mining analyst John Hathaway, co-manager of the Toqueville Gold Fund. To John's veteran eye, the conditions in this beleaguered industry have improved substantially. Mining supply is tightening while demand is rising, and the surviving companies have achieved positive cash flows at today's depressed prices. 

Claiming that we are now past "peak gold", Hathaway expects gold prices to move higher vigorously, propelling the shares of mining companies multiples higher from where they are today:

The industry hasnít been able to issue equity to any substantial degree for five or six years. And, so theyíve gone more and more to streaming royalties, that sort of thing. But the industry is capital constrained and they always seem to be able to get capital, but what we see is a shrinking industry, shrinking gold production on a global basis and a wave of mergers and acquisitions. Weíve seen quite a few recently, the combination of Barrick and Randgold would be the first. We recently saw Pan American Silver take over Tahoe, and that wasn't as big a deal, but certainly it was significant. And then there have a been a lot of little private deals you donít hear about.

The industry is running out of reserves. The reserve to production ratio is the lowest it has been in 30 years. Weíve seen peak gold. And we expect that the supply of newly-mined gold will continue to decline for several more years. If you were to say to me, ďGold is going to trade tomorrow at $2,000,Ē I wouldnít change that forecast, because it takes so many years to build a gold mine. Itís a lot different than shale oil, where you get small increments from a lot of different producers. Not to mention host countries -- even Mexico recently, which used to be thought of as a good mining province, good mining country -- are becoming tougher and tougher on the capital they want to enter their countries and build mines. So, the hurdle rate, the investment return is going higher and higher.

So, to try to tie that together, you have a very bullish supply and demand outlook. Declining production, declining supply, and steadily rising demand --  simply coming from a rising middle class in parts of the world that most of us donít even go to. I'm not talking about the kinds of things that happen in the thought process of western capital markets. Weíre just talking about more babies, more families, more marriages, growing population. Where do you, where do you, how, if you live in India or Sri Lanka or Indonesia or Egypt and you want to salt something away, you donít do it in local currency. You do it probably in some form of physical gold. So that's in the DNA of the emerging markets of the world. And, thatís not going to change. So you definitely have very bullish supply and demand situation.

And  the financial condition of the mining companies is quite decent. I would say many of them are generating cashflow, even free cashflow at these low levels. What they canít do, and which is probably a very bullish thing for supply and demand, is issue a lot of equity, because nobody, nobody will buy it or itís too expensive. So, I think we have a window here where the supply and demand imbalance coming from the mining industry itself is exceptionally bullish. And, believe me, I think when this cycle advances, that's going to be a one of the major reasons why people jump back in.

Click the play button below to listen to Chris' interview with John Hathaway (45m:41s).


Chris: Welcome, everyone, to this Peak Prosperity podcast. I am your host, Chris Martenson and it is November 29, 2018. Now, as we close out 2018 and ponder whatís likely to happen as the worldís central banks finally transition away from QE and toward QT, or quantitative tightening at the same time that the U.S. government is embarking on an enormous, seemingly endless program of deficit spending measuring over a trillion dollars per year, as far as the eye can see. The question emerges, where do you place your money? Now, our view at Peak Prosperity is that you should have cash reserves ready to deploy towards investments that make sense when better prices arise, tangible investments in real estate, gold, silver, energy, things like that.

However, itís been a long, frustrating period of time for commodities investors, especially those like myself holding precious metals. Is it time to get more exposure to precious metals? Have the mining equities finally hit bottom? To discuss all things gold and precious metals mining with us today is John Hathaway, Chairman of the Tocqueville Management Corporation. John has many years of experience in the precious metal space and is the general partner of Tocqueville Management, L.P., which he joined in 1997. He co-manages the Tocqueville Gold Fund which trades under the ticker symbol 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 well fund and various separate accounts for family offices and government entities. Now, prior to joining Tocqueville, Mr. Hathaway cofounded and managed Hudson Capital Advisors, followed by seven years with Oakhill Advisors as the Chief Investment Officer. Mr. Hathaway began his investment career way, all, 1970 as a research analyst with Spencer Trask and Company. Heís got tons of experience. Graduated from Harvard College, heís got an MBA from University of Virginia Business School, and he hold the CFA designation, which I want to get to. He writes extensively and prolifically on the various subjects that pertain to precious metals.

So, John, I am very happy to have you with us today.

John: Thanks a lot, Chris.

Chris: John, from the outside, many might call me a precious metals bug or a gold bug for short, but if you looked closer, what youíd actually discover about me is that I suffer from a profound lack of imagination and faith. You know, but now between those two deficits, I cannot see how its possible for a central bank to print up a lasting prosperity, and I cannot trust that this time they will get right the magic formula for creating something out of nothing. So, I trust real things that take real energy and effort to create, which have a long historical record maybe of being an agreed-upon store of wealth. Does all that make me a pessimist or a gold bug in your mind?

John: Well, first of all, I donít think youíre an insect and I, this whole idea that a gold bug is some kind of an insect is just a misconception and very unfair. I mean, I think folks like you and I who look at the facts are making an analysis of the value of money versus the value of paper, fiat currency. And, you know, thatís a very hard-headed, no-nonsense type of analysis, and itís hard when you do that to come out with a conclusion that gold will lose value over time against paper, which as you just mentioned, is, is created out of nothing. Itís, these days, itís created with a computer at a keystroke somewhere down in the basements of the treasury in Washington, D.C.

The problem that you and I have and others like us is timing. The long-term trend is clear. The outcome is clear. But, and we have our moments of glory and we had a period from 2000 through 2011, where the cycle was very positive and the news headlines just got better and better. And, gold was, went from being pretty much completely disregarded to being front-page news and highly popular. And, weíve seen this in the past. I mean, you have these long cycles, but they are long cycles and theyíre very difficult to time.

What I would say is that weíve been through a very dark period starting, I suppose, you know, right after the peak in August of 2011, when gold topped out, as most of your listeners will know, at around 1900. And, weíve been in a fairly steady decline, and now weíre trying to find bottom in the 1200s, which I think we are. I look at a lot of technical stuff and I donít really want to spend time on it, but I would say, based on my years of experience in all different markets, that you know, weíre just grinding back and forth wearing people out, particular folks like you and me and maybe your listeners, who are getting just tired of waiting.

But then I take a look at the fundamentals, and the fundamentals really are multiple different streams of information. To me, the overriding and most important thing to look at is the fiscal situation of the U.S., which is, as Paul Volker said recently, ďWeíre in one hell of a mess.Ē Ray Dalio, whoís a very successful investor, believes the dollar will lose 30% of its value in the next two years. And, heís not an extreme, extremist, heís known for being very cagey and very hedged in all of his, his market, in his investing strategies. But here heís coming out and saying, basically, youíre nuts if you donít have at least 5 to 10% of some sort of exposure in precious metals.

And, I could go on and on about luminaries who are saying pretty much what we already believe. Who doesnít believe it are the mainstream investors, who are hoping and praying that this recent market debacle will reverse itself and climb back to new highs and make everything better, just because the Fed maybe has decided to go easier on raising rates. But nothingís going to change, Iím just looking at something from a very good analyst, Torsten Slok, whoís the Deutsche Bank macro guy. And, looking at the U.S. fixed income supply over the next several years, and weíre now looking at U.S. bond issuance of one trillion, rising to 1.5 trillion in 2019 and then going on to two and a half trillion.

Where is the capital going to come from without disrupting financial markets, because of higher interest rates crowding out what-have-you, without more money printing? And, the reason this is happening is because the Fed has decided to go on this QT balance sheet reduction, which theyíre well into. My guess is that somewhere along the way here, and probably next year weíre going to see it, theyíre going to have to, theyíre going to have to pull back. And, I think when that happens, youíll get a huge reaction in all the markets. I think probably stocks will go up, certainly precious metals will do very, very well. But itíll be a different investing world than what weíve been used to for the last few years.

So, I kind of think weíre at the end of the tunnel here, and that we are beginning to grind our way higher. And, what Iím waiting for and I am no smarter than anyone else on this, is a kind of epiphany, a moment of recognition by all the markets, bond markets, equity markets, commodity markets, that things have really changed big time. And, I expect to see gold have moves on the order of 50, $100, maybe hundreds of dollars in a short period of time higher and precious metal mining stocks, which is mainly what we invest in, are bound to do way better than they have been.

So, I didnít mean to be so long-winded, but thatís my kind of soliloquy on where we are now. And, Iíd be happy to go anywhere you want to take this.

Chris: Well, sure. So much to unpack there. Letís go back to something you said right near the beginning, noting that gold topped out in 2011 at around 1900 and you mentioned August. And, thatís interesting to me, because it was just a matter of weeks before that the Fed had announced in 2011 QE3 then at $85 billion a month. You know, as somebody whoís been a long-time Fed tracker, John, I got to tell you I can remember days when one or two or three billion a month wouldíve been, you know, a big number. And, so that was just a huge announcement. I thought for sure gold was going to go off to the races. It and a lot of other commodities came down, came down hard, which was, I donít know how you look at it, I thought that was very coincidentally very good for the central banks. Because, the last thing they needed was food prices going higher. We had Arab Springs on the basis of food price spikes in 2010 and í11. We had gold running away. There were a lot of things that needed to reverse. They announced the most ambitious money printing in all of history and all the commodities take, take a breather there for almost, what are we going on now, you know, eight years.

How do you, how do you interpret that?

John: I think thatís just characteristic of markets, that that sort of thing was priced in when gold hit 1900. Things can be over-discounted, you know, and I mentioned earlier on that this was front-page stuff. I mean, gold was really a very popular investment theme, 2010, 2011, front-page news, headlines in the FT. I can still see them in my, I can still see them in my mindís eye. And, I think that is, weíve kind of got the reverse of that now. And, you look at market positioning, in 2011, money was coming in over the transom for us. We had, our assets kept growing. We invested in, were high, with 20/20 hindsight, of course. And, so I think all the good news for gold for all of these years was priced in.

And, now we are here maybe in a sort of valley of discouragement, despair, what-have-you, and maybe all the bad news is priced in. Because, when you look at market positioning, you look at the tradersí positioning, we have short interest, very high for gold and silver. We have positioning for the dollar, the DXY at record high levels on the expectation that rates will just keep moving higher. And, thatís a pair trade I watch very carefully, so I would say that the headwind for gold in recent years has been the expectation of rising interest rates and the very good returns that investors have come to count on in equities.

This recent downdraft in the stock market to me is very constructive from our point of view. Because, itís the beginning, I think, of what could shake that complacency, especially if we go into a period of a year or two when there just arenít any good returns to be had in equities. Sure, these really smart guys will figure out ways to do it, specialty investing strategies and so forth, but the typical average investor will be lost at sea. And, I think that that is the first thing that has to happen to get renewal of interest in precious metals.

And, the second thing is this, this positioning of bullishness on the U.S. dollar. And, going back to Ray Dalio, to me, all the good news is priced into the dollar. Yeah, our economy is growing faster than Europe or Japan, maybe even China, and our central bank is taking steps to normalize interest rates. Whereas, the other world central banks are stuck in the mud, paralyzed or what-have-you. But all of that is priced in, and you can see it in how the bets are being laid out in terms of the super bullishness on DXY. As that comes, so it canít, itís like gold at 1900 in 2011, so the DXY at 97 or so could be the same thing. And, as the dollar index comes down, dollar strength becomes dollar weakness, that opens the dooróand, letís not forget that a big player in all of this are these machine-trading strategies that basically, essentially are short-goaled and go long the dollar. Itís a big trade, widely copied off-the-shelf stuff, everybody can do it.

That has to break down and in two ways. One is the sort of inverse correlation that weíve seen in the last few years. And, two, just the dollarís strength that is, you know, is a headline-grabbing kind of fact in the markets today, has to change. And, itíll change, I think for the reasons we talked about earlier, and that is the fiscal situation of the U.S. is intractable. Trillion-dollar deficits are becoming normal, and thatís assuming no recession. If we have a recession, believe me, it wonít be a trillion, itíll be a trillion and a half or two trillion. And, the Fed is going to have to print money, itís going to have to renew radical monetary measures that were, I guess, responsible for getting us out of the credit meltdown in 2008. And, I think that backdrop is going to be super bullish for gold and everything related to it.

Chris: So, John, I want to talk then about this, because this seems really important. The whole idea of signal versus noise, obviously, you know, investingís always been a difficult proposition. Itís, it takes a lot of risk. Of late though, itís been my observation when you mention these computer algos, Iím reminded of things that I was reading perhaps in Will Durantís books about how when monetary debasement occurred in Athenian periods or Roman periods that speculation would take over, right, which makes a lot of sense. Itís, if you can make a billion dollars speculating, thatís a lot easier than trying to figure out how to make a million dollarsÖ

John: Sure.

Chris: Ödoing somethingÖ

John: Free money, sure.

Chris: Yeah, free moneyís easy. So, as I look across this landscape, the signal versus noise thing is, Iím really looking at a lot of speculation. So, when we talk about the dollar going up or down, I know that there are a lot of structural shorts on the dollar that have to be unwound, because these computers were levering up, making pair trades, doing carry trades. And, just, just for no other reason, not because people believe in the dollar or donít like the fiscal position of the U.S. government, for no reason other than those positions have to be unwound, my sense is thereís an enormous amount of speculation built on the back of that $15 trillion of stimulus that the worldís central banks threw in there.

How do, how do we begin, how do you go about trying to figure out whereís the signal, whereís the noise in this story?

John: Well, the noise is, are valuations of all financial assets that are at risk, at risky levels. To me, you start with bonds, with a 10-year at, what is it, probably around 3% right now, which is barely above expected inflation. You know, so are you going to lend an entity with a fiscal situation as the U.S. has for 10 years and get barely any compensation for inflation, which is running at a very low rate right now? To me, that, thatís something that is unsustainable.

And, the signal to me would be a rise further in that 10-year number, which is pretty much what everyone looks at. Because, this huge supply of treasury issuance and things I would look at would be the bid-to-cover ratio, which have been very weak. I would also pay close attention to reported inflation numbers, which are, of course, highly massaged by the government. But nevertheless, theyíre starting to perk up, and if you look at whatís happening with labor rights, I mean, itís inconceivable to me that we will have continuing low-reported inflation, even with the flawed numbers that the BLS puts out, when you have unemployment at the levels itís at. And, youíre beginning to see wage increases that are quite strong if youíre looking at how, correctly measured.

So, and that, of course, will lead, I think, to companies trying to protect margins by raising prices. So, I think thatís in process, and here we have Jerry Powell, who seems like a very nice guy and I certainly like him better than Yellen, just because I can understand him.

Chris: I agree.

John: Thinks everythingís just great, said yesterday thereís not, thereís a lot to like in the U.S. economy. So, these guys are already tapping the brakes on this tightening cycle, thinking that things are just fine. And, my guess is whatís going to happen, this is just, and of course, a lot of what we do is just speculation, is that inflation is going to become troublesome. At the same time, markets are forcing these guys to tap the brakes and maybe even start unwinding or resetting this QT that theyíve embarked on. And, itís a perfect storm for gold. I donít, I think weíll see that coming probably next year.

So, you know, not sure whatís signal and whatís noise. I think, noise I think is front-page news, itís, you know, what the Fed is saying. And, then the signal is price behavior. You know, if you look at the price behavior of gold, itís grinding higher. And, Iím knocking on wood as I said it, because Iíve been premature in making that call. But we made a very significant low at the end of 2015, had that huge rally and then basically, weíve gone back to sleep. But I kind of think weíve made a higher low when goldóI canít remember the numbers without, off the top of my head, but I think it was around late August==at a higher level than the end of 2015. I would just have to go back and check my charts. But Iím pretty sure that was a pretty major low at the end of August, again, with a lot of pessimism. And, you know, here we are grinding higher and the dollar is still strong, and maybe thatís the noise.

But to me, the signal is price behavior, so you know, stay tuned, but to me, gold is on a very firm footing in terms of its basing action. Same thing for the shares, they donít have a friend in the world other than maybe you and I and a few others. So, you know, whoís going to sell them now? I kind of think weíre very close, again, touching wood as I say it, and I think everything else you read from the grand pooh-bahs who get on CNBC and Bloomberg and whatever else you might be watching is, can be disregarded. And, my, again, Iím just guessing like anyone else, but I think we, I think the market might be going down, because weíve had a little bit of a rise in interest rates. Profit margins are under pressure, guidance is poor. Nobodyís calling for a recession, but maybe thatís not a bad call, because everybody is still comfortable that, you know, itís not going to be 4% growth, but it might be 2% growth. But the rest of the world, if you look at Europe and you look at Japan, theyíre already in contraction. How can we in the U.S. overcome that? And, of course, China is always a mystery, but they seem to be slowing down.

So, Iím not even going to get into the politics here, but I would not be surprised to see an economic slowdown which would call for deficit spending even greater than what we have. A big decline in tax revenues, particularly from individuals, which are at least a third to maybe 40% of government income, and youíre going to have a blowout. And, donít forget, we have a populous administration who, you know, isnít going to do stuff thatís, you would think would be fiscally responsible. Two years of that as an overlay to what weíre looking at, so I really feel like we are, you know, weíve been through a really difficult period, but I believe that we are coming out of it. And, I would just pay attention to price as the signal and just disregard what youíre hearing from all the soothsayers on TV and front pages of the various financial journals.

Chris: Well, John, I would agree with you that there are obvious signs that a slowdown might be afoot already globally. Weíve seen those signs, as you mentioned, in China and Europe, as well, very ominous things coming out of China, which is opaque, hard to analyze. But, you know, reading the tea leaves we are seeing signs there as well in derivative things like chip exports from South Korea to China, usually very reliable, indicating a large slowdown has happened there as well.

So, when I look at all of that, and hey, how many months are we into this so-called expansion anyway? Itís what, 112 now or something?

John: Right.

Chris: You know, thingsÖ

John: Right.

Chris: Öthings, things go up, things, you know, retreat a little bit. And, right now, I donít see, youíre right, on CNBC, you know, the whole architecture of the financial world is not looking at recession yet. But, of course, weíd have to consider thatís going to happen, and as you mentioned, the recession will happen. What wonít happen is that the fiscal position of the United States is not going to turn very rapidly, because of the structural deficits that are baked into it based on things that have already passed and are already afoot. Thereís not a lot weíre going to do about many of these things, maybe nibble at the edges, you know, starve a few poor kids for effect or something. But, you know, meanwhile, military budget is what it is, you know, entitlements are what they are, and so on and so forth.

So, as we look at that, you know, a lot of people, John, they say, ďHey, you know, inflation is the primary reason to hold gold.Ē I donít agree with that based on my charts, but I do think that periods where we see fiscal excesses by the U.S. government, those do correlate pretty well with rising gold prices. Whatís your few on that? You know, what are you hedging, in your mind, what is gold actually hedging best here? Inflation, government excess or systemic meltdowns like we saw in 2008?

John: Well, it could be all of the above. I mean, itís, what gold represents and what it is, itís a way to diversify any portfolio from risk. It is a highly, it is the most liquid tangible asset that there is. You can trade it seven days a week. The bid asked is very, very narrow always, highly liquid, and itís physical property. And, so it just marches to a different beat.

Now, what affects its so-called price, which is how itís measured by paper money, U.S. dollars principally, are so many different things itís hard to really compress them into one single thought. But I think the idea of monetary disorder, loss of confidence in financial markets, searching for alternative ways to make money or to protect capital, all of these are valid reasons. Inflation certainly would come in there, and I donít think you have to prove a case for gold based on inflation. It may or may not take place. But if we have fiscal disorder, in my mind, that certainly leads to inflation, but maybe not. It could just mean that foreigners, foreign investors will not buy U.S. treasuries. Well, what does that mean? Where does the capital come from to support these trillion, trillion and a half, maybe even two trillion-dollar deficits? They cannot be generated through normal market flows, so somehow that has to be monetized by, you guessed it, by the Fed, you know, going back into QE type of stance.

So, the manifestóand, most importantly, itís, itíll be a disruption of financial markets so that valuations, which are high right now in your standard equity, are going to come down even if earnings are okay. I go back to the Ď70s and I remember that there were plenty of companies that traded at five and six times earnings, and these were blue-chip names, and had yields of 5 or 6%. It was a different world. I donít know if we get to something like that. But we are at the high end of historical valuation and thereís so many things that can make the pendulum swing back the other way. Donít know the reasons that that will happen, but you can almost bet that it will happen and that swing of the pendulum from high valuations of financial assets to lower valuations, or much lower valuations of financial assets is almost always good for gold.

And, you know, the rest of it for us is just, you know, weíre trying to analyze, weíre looking at the obvious stuff. To me, the most obvious trigger is the deficits that weíve been talking about, but it could be something that we donít know about. I mean, frankly, when we started the gold fund in 1998 and it was totally out of favor, the idea of gold was totally out of favor, there was no way you could know that 10 years later the Fed would be doing what it was doing. And, so, you know, market rate anticipates fundamental development, so it could be something that we havenít even talked about or dreamed about. But the thing that is always true, has always been true is that gold has protected capital and there have been times, as was the case from 2000 to 2011 that it, you could actually generate terrific excess returns over just about every other conceivable investment strategy. And, I kind of think weíre headed in that direction again.

Chris: Well, letís turn now, John, to some of that fundamental aspects. I know you do have a CFA, so I assume that means you like numbers to add up, things got to make sense. And, when Iím looking at things like, I donít follow the gold mining space nearly as closely as you. One place I do cover a little bit is the shale oil space and I think thereís some, some analogies there Iíd like to get your point of view on. The cost of capital has been rising, obviously, for everyone, but certainly in the junk capital, sorry, the junk debt space in the shale oil. Theyíre about two percentage points higher this month than last month. Itís been a pretty, pretty steep rise there. So, their cost of capital is going up, but also, they high-grade their operations by focusing really intently on the so-called sweet spots. Thatís what you do in, I guess, when youíre in the, in the mining space. You, when cash flows are pinched, you go after your best reserves first.

So, looking at that, and by the way, very limited success so far in that space, but tell us about those same pressures in the gold mining space. Where are they standing in terms of ability to raise capital and whatís been going on with the actual ore grades that theyíve been going after?

John: Sure. Well, that, you know, thatís kind of the, weíve been talking macros, now we can talk micro. The industry hasnít been able to issue equity to any substantial degree for five or six years. And, so theyíve gone more and more to streaming royalties, that sort of thing. But the industry is capital constrained and they always seem to be able to get capital, but what we see is a shrinking industry, shrinking gold production on a global basis and a wave of mergers and acquisitions. Weíve seen quite a few recently, the combination of Barack and Rangold would be the first. We recently saw Pan American Silver take over Tahoe, and that was not as big a deal, but certainly it was significant. And, then a lot of little ones you donít hear about.

The industry is running out of reserves. The reserve to production ratio is the lowest it has been in 30 years. So, weíve seen peak gold and we expect that decline in the supply of newly-mined gold to continue for several years. If you were to say to me, ďGold is going to trade tomorrow at $2,000,Ē I wouldnít change that forecast, because it takes so many years to build a gold mine. Itís a lot different than shale oil, where you get small increments from a lot of different producers. To make a real dent in a forecast of declining gold, with very low discovering rates, and then not to mention host countries, even Mexico recently, which used to be thought of as a good mining province, good mining country, are becoming tougher and tougher on capital it wants to enter the country and build mines. So, the hurdle rate, the investment return is going higher and higher.

So, to try to tie that together, you have a very bullish supply and demand outlook. Declining production, declining supply, and steadily rising demand just not based on macro considerations, but simply rising middle class in parts of the world that most of us donít even go to. And, weíre not talking about the kinds of things that happen in the thinking, in the thought process of western capital markets. Weíre just talking about more babies, more families, more marriages, growing population. Where do you, where do you, how, if you live in India or Sri Lanka or Indonesia or Egypt and you want to salt something away, you donít do it in local currency. You do it probably in some form of physical gold. So, that, that, that is kind of in the DNA of the emerging markets of the world. And, thatís not going to change, so you definitely have very bullish supply and demand situation.

Again, I think quiteóand, by the way, the financial condition of the mining companies is quite decent. I would say many of them are generating cash flow, even free cash flow at these low levels. What they canít do, and which is probably a very bullish thing for supply and demand, is issue a lot of equity, because nobody, nobody will buy it or itís too expensive. So, I think we have a window here where the supply and demand coming from the mining industry itself is exceptionally bullish. And, believe me, I think when this cycle advances, that is one of the reasons people jump back in.

Chris: So, this idea of peak gold, I remember reading about it first back in 2014. I think it was Chuck Johns of, CEO of Goldcorp at the time, was talking about it. Turned out to be a little bit premature, but where have we, is there an obvious peak in it or are we projecting there will be a peak coming?

John: No, no. I think itís peaked. If you look at the data from the recent quarterly reports, I think weíre down, oh, hundreds of thousands of ounces in terms of sustained production from the major companies. You know, theyíre all basically saying the same thing, which is theyíreóand, Iím talking about the big producersóflat to down for the next, for the foreseeable future. And, thatís why we see M&A starting to, itís going to pick up. So, they canít generate it from their own exploration programs, so theyíre going to go, theyíre going to have to go out and buy smaller companies that have worthwhile, proven projects. But, itís there, you can, you can take a look, you can dissect the quarterly reports that we just came through, so thatíd be the third quarter. And, thereís a definite decline, and these are from the major companies.

And, if you go through kind of the whole soup-to-nuts of large-to-small producers, it is, itís down right across the board. And, itís not going to go back up just because of a little twitch higher in the gold price.

Chris: Well, letís talk about maybe a derivative question of that, the last few conferences Iíve been to where I do talk to pure play silver miners, Iím not really talking to anybody thatís enjoying this, letís call it $14.50 an ounce, roughly, range that weíve been in a for a while. And, so the derivative question is this, John, is there a price below which gold and/or silver miners, first for gold, then for silver, that they really start to get into trouble here? How close are we to the all-in sustaining cash cost across the industry for these, these concerns right now?

John: Okay. I would say on, I mean, the global cash cost figure that we look at, and talking gold now, is somewhere around 900 bucks, you know, give or, Iím just winging this. But itís roughly in that neighborhood, give or take 50 bucks. So, the industry can kind of, sort of lurch along at these prices. What it canít do is build new mines. Because, if you take the cash cost and then you put on top of that overhead, including exploration, depreciation depletion, which is a real cost, headquarters cost, all that sort of thing, youíre up around $1100 or so, thatís the all-in sustaining. But then you have to add on a cost of capital, a return on investment for a new mine, and it just doesnít, it doesnít hold water. So, the way this is going to happen is the industry will slowly die if we just stay at these levels. And, then production will shrink slowly and then itíll shrink more rapidly.

With silver, itís a little more complicated, because so many silver miners depend on byproduct costs, byproduct credits from base metals. Base metals, lead, zinc would be the primary ones, but certainly copper, there are many others that I could name. If those prices are weakening because of a recessionówhich of course we donít have at the very moment, so those prices are okayóyou, youíll have a similar slow decline that I was describing for gold. And, thatís where we are.

So, I would say to justify a three-to-four billion-dollar investment in a new mine today, a brand new mine, and theyíre out there, they just canít get financed, you would have to have belief at the boardroom level to commit that kind of capital that you had sustainable prices around 15 to $1600. And, Iím probably being a little aggressive on that, it might even be higher. So, for now, I think weíre safe that youíre not going to see a gushing new torrent of physical metal depressing gold prices. Itís just the opposite.

Chris: And, John, is there any sense from your end at this point that the vast east-to-west flow, sorry, reverse that, west-to-east flow of gold has picked up, abated, nearing an end, or does there just seem to be endless quantities of gold available to ship to India and China?

John: No, I think that is continuing and I kind of wonder, you know, when that hits, the rubber hits that road. My view is that faults of above-ground gold in London and other financial capitals, and I guess the other big one would be New York, are getting kind of, getting kind of empty. And, you know, there are a lot of things you could look at, but this is a very challenging area to get really good numbers on. You can look at exports from Switzerland to the Far East, you can look at the same thing for London. But Switzerlandís really best, because they have to refine the gold that is held in western vaults to the sizes and the purities that they prefer in Asia, so Switzerlandís a better indicator. And, those numbers, I havenít looked at them recently, but they tend to be, favor the idea that this flow is continuing, western vaults, above-ground gold heading to the east.

So, itís, and then the other side of it is you can look at the Shanghai gold exchange, the numbers there show you a corollary or a corresponding high level of imports. Now, where does that go? I mean, basically, it stays there, it doesnít, doesnít get out. But again, Iím suspicious of those numbers to some extent because, talking about the Chinese numbers, because I think theyíre very understated. I certainly think that the accumulation of gold by the Chinese official sector, and that would go well beyond the PBOC, it would be several state entities that also hold physical metal and donít report, has been going on unabated. And, they just, they donít play fair and they just donít tell us and, you know, if thereís manipulation in the market, of prices, I wouldnít put it past the Chinese to be, have a big hand in that just to get lower prices. Itís a whole different rant that we donít have time for, thankfully.

But what you can see is accumulation of gold by major central banks, and thatís real and that gets reported. And, Russia would be right in front, you know, thatíd be one of the big ones, but many others, Turkey would be another. And, a subject, so, so the west-to-east which you asked about, is continuing, and what we donít have good numbers on is the input there, how, or how sparse are those supplies. It just is, I think there are like 57 or 58 vaults in London. Iíve never seen any numbers that would attempt to give, you know, an inventory that you could rely on. But you can look at the numbers Iíve just talked about and say, ďWell, itís less than it used to be.Ē

So, thatís continuing, and again, I donít want to drone on too long, but the other thing to watch, and itís not going to happen overnight, is the circumvention of the U.S. dollar in major trading relationships, particularly among non-western countries. And, Iran, for example, is selling energy to China, and theyíre not, theyíre taking payment in R&B, which is a Chinese currency. So, theyíre not even using the dollar. So, the dollar is using, losing market share as the trade enabling currency, and you know, thatís part of what Ray Dalio was talking about, you know, less and less use of the dollar. Again, itís, at this stage, you know, Russiaís selling a lot of energy to China for R&B as well. And, I think others are starting to get the idea of doing that.

So, the need to own dollars by many countries for major trading settlements seems to be declining. And, of course, the Chinese want to have a reserve currency. Thereís some issues with that, but theyíre moving in that direction. So, I think another theme that may become more of a front-page item as this gold cycle starts to crank up will be that, just the dollar losing shelf space as the go-to reserve currency.

Chris: Well, all right. If we add all that up, I hear that, you know, Ray Dalioís thinking 5 to 10% of a portfolio ought to be hedged out into gold, given a lot of the macro risks weíve been talking about. And, I would agree with that, I go higher personally, but if weíre looking at one trillion to 1.5 to two trillion dollars on bond issuances by the United States, as things are structured, that doesnít include, Iím guessing, assuming a big fat recession or something worse that could really make those numbers much higher. And, when we put all of this sort of into the mix at this point in time, I guess what weíre seeing here is that the companies themselves that are in gold space, they havenít had the, they havenít hadóI guess a big key difference between them and the shale companies is the shale companies had about a trillion dollars tossed their way, about a third of that in debt and the rest in equity. Itís a big, big number. Gold companies have had to operate lean. Youíre telling me thatÖ

John: Yeah, absolutely. Yeah, they havenít had a flood of capital.

Chris: They havenít had that flood of capital, which gives you discipline. So, so itís been a disciplined space, itís been, you know, living on low levels of oxygen. And, if we put all the other things in the mix, it looks like, you know, this is a reasonable time to suspect that a very out-of-favor, if youíre a contrarian investor, you love stuff that nobodyís talking about, not on the front page, you know, not bitcoin of a year ago kind of news cycle for it. So, I guess if we put all that in there, this would be a good time for people to consider their exposure to gold, gold mining shares, things like that.

John, first, thank you so much for your time today, and second, please tell people how they can follow your writing, your research and learn about the various funds that youíre involved in.

John: Sure. No, thank you, and I appreciate the chance to spout my views.

Chris: Youíre most welcome.

John: Always ready to do that. So, the ticker symbol for the Tocqueville Gold Fund is TGLDX, and weíre on all kinds of platforms, Schwab, Fidelity, you name it. I think Merrill Lynch would be another. As far as, I write a quarterly letter, investor letter, and itís always, you can always find it on our website, which is just, search for Tocqueville and itíll come up. And, occasionally, Iíll write something thatís not on a quarterly cycle, but less and less these days. So, thatís how to do it, and you know, Iím always available. I answer emails, I donít take a lot of phone calls, but I will if it seems appropriate. So, Iím pretty accessible, which I guess is a sign of a market low. If I was super busy and it would be a sign of a market top. So, I think thatís another anecdotal contrarian confirmation, I guess of signal, not noise. So, anyway, again, Iím happy to spend this time with you and maybe look forward to another one.

Chris: All right. Well, thank you so much. Everybody, weíve been talking with John Hathaway, Chairman of the Tocqueville Management Corporation. And, weíve been discussing gold and all things gold-related. John, thank you so much for your time and your views today. Iím sure everybody has learned a lot, myself included.

John: Okay. Pleasure. Thank you.


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