CNBC-Street Signs

An Interview with John Hathaway of the Tocqueville Gold Fund

9/29/99 3:05 PM
Host: Ron Insana

Ron Insana: A two day rally in gold sent prices soaring above $300 an ounce to reach the highest level in over a year. Today, however, gold prices are pulling back sharply, down seven-and-a-half dollars to $302.50 per ounce.

Our next guest manages a gold fund with close to $20 million in assets. Year-to-date the fund is up a remarkable 37% but, of course, many gold funds have suffered in previous years. John Hathaway is senior portfolio manager of the Tocqueville Gold Fund. He joins us live from midtown Manhattan. John, good to see you. Thanks for being with us today.

John Hathaway: Nice to see you.

Insana: Can you shed any light on the rumors in the gold market over the last couple of days? Is somebody getting hurt out there because of this rather large run-up we\'ve seen in the space of only 48-hours?

Hathaway: Yes, but it's very hard to be specific about who would be getting hit. The fact that lease rates--the cost of borrowing gold--have soared to almost record levels means that…

Insana: About ten percent, right?

Hathaway: They were above eleven percent this morning; they're probably back around seven or eight percent now. That indicates extreme tightness in the physical market.

Insana: Let me ask you also about something that one trader brought up to me this morning, the notion that maybe some of the big gold producers had, a couple of months ago, bought put options on gold, betting that the price would go down. Those dealers who sold them the puts may also be suffering a little bit as gold ran back up recently, right?

Hathaway: Actually, the fact that the gold prices rallied means that the puts would be less valuable. I think the problem is more in the way they financed the puts. They basically sold calls to buy the puts, and I think it's on the call side where you're seeing some pressure to cover.

Insana: That's the mechanical stuff that's going on in the market. What about the fundamentals here? What about the fact that the European Central Banks will limit their gold sales over the next few years? How important a fundamental is this in terms of maybe a secular shift for gold?

Hathaway: It's a huge change. The important thing is not the amount of sales. The important thing is the amount that the ECB is willing to lend into the market. What they've said is that they are going to cap lending at current limits, and that means the liquidity that the short sellers need in order to finance their trade has been capped out.

Insana: And that means what to the price of gold going forward?

Hathaway: It should be very bullish, because the thing that has been pushing the price of gold down has been the ability of hedge funds and producers to sell gold forward or to sell it short, and that's become an artificial depressant on the price.

Insana: In many cases bottoms are made in rather surprising fashion for markets, and come with explosive moves off of the bottom. How do we know that this time the turn in gold is more meaningful than other buy-spikes we've seen on the way from $800 to $250 an ounce?

Hathaway: For one thing, you have never seen a move like this in the last 15-years; so that in and of itself is significant. But I think more importantly, the market was extremely short and the sentiment was very negative--for a period of six weeks the Market Vane barometer was below 20% bullish, which is unprecedented. So we're really in uncharted territory in terms of how depressed the metal and the sentiment got. It seems to me this is an important event that caught the market by surprise, and usually that's a good sign of a turning point.

Insana: Let me ask you a quick question. Again, this is kind of based on rumors that we've heard earlier this morning: Is there any truth, as far as you know, to rumors that some Comex players who were short have simply refused to cover, and are not buying into gold as they might be required to with the backdraft they've...

Hathaway: I really can't comment on that. I really don't know. But I do think a lot of interesting stuff is going to come out in the next 30 to 60 days.

Insana: John, thanks for being with us today.

Hathaway: Thank you.

Insana: John Hathaway is senior portfolio manager of the Tocqueville Gold Fund, joining us live today from midtown Manhattan.