-- Posted Wednesday, 4 February 2009 | Digg This Article | | Source: GoldSeek.com

The recently launched DSAM Kauthar Gold Fund, seeded with $50 million by the Dubai Multi Commodities Centre invests exclusively in the Tocqueville Gold Focus Fund. John Hathaway is the veteran portfolio manager of the top-performing Tocqueville Gold Focus Fund.

1. Why are gold and silver prices falling although we have a global financial crisis and they ought logically to be going up in value as a safe haven asset? Where are the new gold bugs?

Gold prices rose 5.8% in 2008, the eighth year in a row they have risen in US dollar terms. That means gold outperformed all other asset classes including US treasuries. Many feel that gold should have risen to a far greater extent in light of the financial crisis. However, in a deflationary environment, assets must be sold to meet margin calls and liquidate debt. The fact that gold rose in a deflationary environment, while all other commodities fell, illustrates that gold’s monetary traits outweighed the economically sensitive traits inherent in other hard assets.

The new buyers of gold cut across the spectrum and range from retail investors of modest means to wealthy families and institutions. They have one thing in common: distrust of financial institutions, government policies, and paper money whose value is subject to debasement by government actions.

2. Many investors in the Middle East are experts in gold and have always included precious metals in their portfolios. They hold physical gold and sometimes trade the markets; and they all have an opinion on where the price of gold is heading. You take a different approach to gold, however. You buy the shares of gold mining and production companies, as I understand. How do you earn a better return by investing in gold companies rather than in the metal itself?

Historically, shares of gold mining companies have provided positive returns relative to the gold price. That all changed in 2008 when the gold price rose slightly and the shares fell 27.7% based on the widely used XAU benchmark (Philadelphia Stock Exchange Index of Gold and Silver Stocks). As a result, gold mining shares represent the greatest values relative to the gold price in 25 years. These are the shares I am buying currently for my longer-term investors. As gold prices move higher, I expect the share prices of these companies to outperform gold prices, just as they’ve done historically. If gold shares simply return to their historical relationship to the gold bullion price, there is 40%-60% upside from current levels (the XAU is 102 as of this interview) even if the gold price does nothing at all.

3. Is this why a serious gold investor should have a position in your fund for a portion of his portfolio? But what sort of performance did you achieve in 2008, when it is fair to say precious metal stocks seriously under performed the metals?

We started investing our Shariah compliant portfolio on September 19,2008 and returned to our seed investor, the Dubai Multi Commodities Centre Authority (DMCCA), a positive 4.94% through the balance of 2008. I credit Ahmed bin Sulayem, Executive Chairman of DMCCA, and his colleagues there for their vision as contrarian investors during this very turbulent period in the markets.

This positive performance compares favorably to a negative return for our benchmark, the XAU (Philadelphia Stock Exchange Index of Gold and Silver Shares) during the same period.

Back to your original question: Yes, indeed, our fund belongs in an investor’s portfolio because it complements his overall gold exposure when gold prices are volatile.

4. Why should precious metal stocks perform any better in 2009 than in 2008? Surely the downside risks to stock markets is still very high with profit forecasts almost certainly too high for the global economic slump now in prospect? Gold and silver equities sank with the world stock markets last year: will it be different this time?

The case for improved performance in 2009 is a higher gold price plus the extraordinary value that the gold shares represent at this particular juncture as described my in answer to your earlier question.

When the inflationary policies, both monetary and fiscal, of world governments finally take hold, gold should trade well above $1000 per ounce. When the markets view $1000/ounce as a floor rather than a ceiling, gold shares should enjoy a significant rally.

5. Investors are worried about the outlook for the US dollar given the massive bailout and stimulus programs in progress and the consequent expansion of the global money supply. This looks highly inflationary and gold positive. But what makes you think central banks will not also appreciate this and do something about it before precious metal prices take off?

I doubt there is a central banker alive that has sufficient courage or knowledge of how to remove this monetary punch bowl of epic proportions. After what has happened, it is hard to believe there is anyone left on the planet who believes in the competence of central bankers.

6. You are running a gold fund, but do you agree that silver actually has the better prospects in a financial crisis? It is more volatile than gold but reserves are very much smaller, and the leverage to increased demand that much greater. You could even leverage that leverage with silver equities and lever again with silver exploration stocks?

We own both gold and silver stocks. Silver is regarded as a monetary metal but its industrial uses are more significant than gold. This accounts for its greater volatility. However, we have significant exposure to silver through our precious metals equities.

7. Is there really no real difference between an investment strategy that accommodates Shariah and the conventional strategy for your limited partnership and offshore fund? There have to be some minor differences that have caused you to adjust. What are they?

The differences are minimal. Gold mining companies in general do not employ debt to finance their operations. The business activity of mining gold or silver is straightforward. Their presence in many parts of the developing world is a force for social and economic progress. There is very little in our universe of potential investments that does not qualify due to our Shariah guidelines.

Aside from the fact that we earn no interest on the small cash balances in our Shariah portfolio, everything else - investment strategy, research and stock selection – is identical to our process in managing our conventional portfolios.

8. Most investment managers considering managing Shariah compliant are intimidated by the restrictions they assume will come with managing within Shariah. But you really didn’t find any impediments, I understand, did you? Are precious metals just inherently acceptable to Shariah-compliant investors?

I would not say that gold mining companies are inherently acceptable, but for the reasons stated above, they tend to fall within Shariah boundaries. There will always be exceptions, but that is what the Shariah screening process is for.

9. What is your forecast for the gold and silver price in 2009? How high do you think gold and silver will ultimately go and within what timeframe?

I believe that both gold and silver prices will rise to new highs in the coming year. That would be in excess of $1000/ounce for gold and $20/ounce for silver.

The macro economic forces are lined up for both metals to significantly exceed these targets, but I have been in this business long enough to know never to connect a specific price forecast with a specific date.

My advice to all of your readers is to suggest that in today’s uncharted macroeconomic waters, some exposure to the precious metals sector makes a lot of sense. One does not want to be too clever about timing the entry point exactly.

-- Posted Wednesday, 4 February 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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