JOHN HATHAWAY: I think we're back on a path towards monetary debasement. And that is what we in the gold world have always expected would take place. And now it's sort of out there for everyone else to see.
Even when I talked to somebody who could allocate to gold, they may do it personally, but they will not do it for their clients because there's career risk. And frankly, it's the third rail of investment ideas.
It's to the point where-- we figured this-- that you can buy a new mine by buying an existing company at a 35% discount to what it would cost, let's pretend you're Newmont or Newcrest or one of them, to start from scratch. I've never seen that in 20 years of doing this.
DAN TAPIERO: Hello, everybody. Dan Tapiero, founder, DTAP Capital and a co-founder of Gold Bullion International. And today, I have the pleasure of interviewing John Hathaway. John, good to see you.
JOHN HATHAWAY: Good to see you, Dan.
DAN TAPIERO: John is a legend in the gold space for you who are not aware or who don't know of him. I would say certainly, one of the two or three most successful, and as I said, certainly well-known gold equity fund managers. And he's been with Tocqueville for a very long time.
JOHN HATHAWAY: 22 years.
DAN TAPIERO: 22 years. Currently the chairman of Tocqueville Management. And he's just done a deal recently with Sprott Gold of Canada. And so I thought we just start off talking a little bit about what he's doing now and what this deal means. I think it'd be interesting for the viewers to hear.
JOHN HATHAWAY: Great. So we're very excited to be joining Sprott. Sprott is I think, becoming the go-to name in precious metals space. They are 100% about promoting what we do. They have closed end bullion funds, they have lending to the junior mining space, they have some ETFs that are basically Canadian-based. And so by joining them, we now have access to their due diligence capabilities, particularly in the smaller cap space. They have numerous relationships throughout the business, which is helpful to us. And last but not least, they have a full time marketing group that I hope will be very successful in raising a lot of money for what we do.
And I think the timing is terrific because I think gold has finally turned the corner. And hopefully, we have the wind at our back instead of in our face as we've had for the last six years. So I'm very excited, as is the rest of the team. We'll be continuing to do what we've always done, which is basically very granular due diligence on specific companies, active management for our mutual fund and our European funds that we subadvise.
DAN TAPIERO: Yeah, that's very exciting. I think it's a fantastic platform. Why don't we just get right into it and start with your view on-- I mean, I think you're right that after six years of slog gold, has broken out of $100 range, and is now at a six year high, touched 1550. But let's talk a little bit about your view of the macro backdrop, because I know that plays into your overall view on gold.
JOHN HATHAWAY: For sure, I think that's sort of the bell ring. And when gold broke out of the six year base, you can trace it back to the change in the mindset of the market, where going into the end of last year, the expectation was that the Fed would continue to be on a path towards tightening, running off their balance sheet, and basically less and less accommodative in terms of providing liquidity.
And then when Powell had that press conference in late January, and after the market had basically completely fallen apart in December, said, well, maybe we won't be running off the balance sheet maybe we'll just stand pat. That was kind of a hint that they were going to change course, which of course they have done and are probably going to go even further. And you can sort of identify the breakout to that and then also I think he said similar things in June.
But clearly, I think the expectation of tightening-- the pretense that they were going to be a responsible central bank is just totally out the window. And they're joining the crowd and creating more and more liquidity. We saw what they recently did in terms of the repo market they're not calling a QE. But I don't know how they get away with that. $60 billion a month is bigger than QE 2, I think.
So I think we're back on a path towards monetary debasement. And that is what we in the gold world have always expected would take place. And now it's sort of out there for everyone else to see.
DAN TAPIERO: That's one thing. What are some of the other things that make you think that the gold price has more legs here?
JOHN HATHAWAY: Well, another thing that I think about a lot is you have something like, $15 to $17 trillion nobody really knows how much of sovereign debt that has a negative yield and to me that is evidence of systemic risk that's huge way bigger in my opinion, than the housing market or the mortgage market, toxic mortgages of '07, '08. When interest rates go up-- and they will go up in my lifetime and yours-- there's going to be a huge amount of capital loss. It'll be held by pension funds it'll be held by institutions that are from a regulatory point of view have to have so-called safe assets. Obviously, I suppose central banks have it as well.
But there will be capital losses that will dwarf what we saw in '08. And I'm not sure the repercussions of that. But I think there will be negative for financial assets in general.
DAN TAPIERO: But you know, gold has been very tied to the real rate. So if you think rates really aren't going up a lot, that's not necessarily positive for gold.
JOHN HATHAWAY: If the real rate goes up, I would agree with that, because higher real rates are poison for gold, but if you go back to the 1970s, we had nominal rates on the short end near 20%. And 30 years were 13 or so. But the real rate was basically neutral to negative. And that's because of inflation. So another thing that nobody expects, and why gold is a very cheap option with asymmetric returns on the return of inflation, which is the only way governments will be able to deal with the unfunded liabilities in pension funds and entitlements, will be to devalue through inflation. And just how that comes into play, we don't know.
DAN TAPIERO: Right.
JOHN HATHAWAY: But to me, if rates were to go to 1% or 2%, two things two things are going to happen. One is highly valued financial assets bonds and equities are going to take it on the chin. And two, that's most likely to happen under conditions of inflation.
DAN TAPIERO: Is that your base case? I mean, we've talked quite a bit about this. Is that it's your base case that we at some point in the next few years have that return of inflation?
JOHN HATHAWAY: I wouldn't say that everything rests on that. But why not take a free option on the possibility, which is where we sort of have to go? Yeah, I don't know if we're going to have the kind of inflation we saw in the '70s. But I think we'll probably have more inflation than we have now. But again, I would not rest everything on that particular point.
DAN TAPIERO: Right. And that's very strongly linked to a view of the dollar. You're probably not thinking that we have inflation rates backing up and the dollar continues to be strong.
JOHN HATHAWAY: No, just the opposite. I would say the dollar, and how you measure it-- the DXY is basically a pair trade with the euro. Could the euro go up against the dollar? I think it can. I can think of reasons why it would. But that's not really fundamental, because when I hear this thing in the financial media that the dollar is the best house in a bad neighborhood, I think to myself, this is ridiculous, because the neighborhood is going down the tubes. And so maybe the dollar is the tallest midget, all these stupid analogies.
But at some point, capital will seek out safety, which is what gold represents. And I have to point out that gold has outperformed every stock market since 2000. I mean, most people don't even think about that.
DAN TAPIERO: And that's been in a relatively benign-- I mean, over a 20 year period, we've had ups and downs.
JOHN HATHAWAY: Right.
DAN TAPIERO: So I mean, I think that's almost separate from what your view or my view or anyone's view is. It just is a fact.
JOHN HATHAWAY: It's a fact.
DAN TAPIERO: In the last 19 years, since 2000.
JOHN HATHAWAY: Gold has outperformed bonds and stocks. Not only the S&P. And gold is at record highs. And yen, I think Canadian dollars, the pound, the euro, and Aussie dollars.
DAN TAPIERO: Yeah.
JOHN HATHAWAY: And just the US dollar, we're still sort of struggling. And it's because the dollar has been relatively strong compared to other currencies.
DAN TAPIERO: Yeah, I want to get back to sort of talking more about some other things that you think are impacting the price. And we talked a little bit about the geopolitics, what's your sense there? What are the drivers there for you?
JOHN HATHAWAY: There's so much to talk about there. You and I talked before this about what's going on in Turkey. And what's happening there is a disaster. And it's basically alienating centrist type Republicans who voted for Trump, holding their nose maybe the last election. And you just wonder if he's going to keep them. And the point of all that-- going from Turkey to Trump and the election cycle-- is the chances that you would get a more radical, very liberal populist left-leaning administration is downright scary in terms of what it could mean for future budget deficits, for tax rates. And if you're, for example, allocating capital for a major corporation, and you're thinking about making major investments somewhere in the world, in the US or elsewhere, and you don't know what the tax rates are going to be, you're not going to do a darn thing until the election is over.
So I think there's a very good chance we could be in recession territory next year. Which would do a couple of things. One thing would be the budget deficit, which just crossed a trillion this year in a time of economic expansion, could easily go to a trillion and a half or $2 trillion. I mean, it's going to be way higher than anyone thinks. So that will do wonders for the credit rating of the US dollar. And that's how you could get a much weaker dollar, which gets back to investors, capital looking for a diversifier, a non-correlated asset that could protect capital during under those circumstances. Which is what I would imagine to be adverse capital markets.
DAN TAPIERO: I mean, it looks to me like Trump has this thing already in the bag. But it sounds like you think that Warren has a decent shot here.
JOHN HATHAWAY: I don't know. I mean, I just don't know. But I think that he is beginning to lose the center that had held together for him in '16. And it may mean that just some of those people will not come out to vote. I don't really know. If it's scary enough on the left, maybe he's he still gets in. But I do think it's more in question today than it might have been three or four months ago.
DAN TAPIERO: Mm-hmm. And what about the China-US--
JOHN HATHAWAY: The China deal?
DAN TAPIERO: Yeah, or no deal, or who knows, exactly.
JOHN HATHAWAY: And that's a joke to me. Because when gold got pounded a couple of weeks ago, because we were going to have this fantastic once in a lifetime tying all the loose ends together deal, that's when gold got smacked. And the thinking was, I'm sure, in terms of the sort of reflex action was, all our problems, all the sort of volatility we've had over the summer in the equity market, the uncertainty about the economy, was all because of tariffs, and because of no deal, and Trump playing tough.
And so what we have is a show of American weakness and the Chinese playing Trump like a fiddle. Because Trump said it's the best deal ever. The Chinese are saying, well, maybe, but we still have to talk. They're talking about staging it. Everything I read about it makes me think that they're really we're not sure if there's a deal. And being in an election year, I think the Chinese have the strongest hand and that's going to come out in many different ways.
So I don't think that the so-called Chinese deal, whatever it is, we don't really know, is the cure all for what was taking place, causing market volatility and downside risk.
DAN TAPIERO: OK, so you you've put together a few of the macro points that I think are driving your view. So what's the forecast on the gold price in your head let's say, 18 months, and let's go five years out?
JOHN HATHAWAY: The way I've heard it put best, and I've learned after all these years never to put a number and a date in the same sentence terms of any kind of price.
DAN TAPIERO: That's OK. Let's just--
JOHN HATHAWAY: I know we're among friends.
DAN TAPIERO: What do you got? Right.
JOHN HATHAWAY: So I thought it was very well put by David Rosenberg of Gluskin Sheff. And David gave an interview with the National Post in Canada. And then he and I sat in the same stage at Beaver Creek and we talked about it further. And what he said, and I think this makes a lot of sense, is that we have a cycle high in bonds in terms of valuation. We have a cycle high in stocks in terms of valuation. And the one major asset class that's been left behind is gold. And the interviewer said, would you be surprised by $3,000 gold?
Now this is a guy who's not a gold guy. He's a rational economist, made his career-- you're shaking your head.
DAN TAPIERO: Somewhat rational. I've read his stuff over the years.
JOHN HATHAWAY: OK, but he's a well-respected guy. He's not in the gold camp. But he said he would not be surprised by $3,000 gold. And I think that his point was that gold needs to make a cycle high-- and pick any number.
DAN TAPIERO: So let's talk about that for a second. Why do you think it hasn't? Why have people been hesitant? it just broke out a few months ago. And it was dead to the world for years. So what's kept them back from buying? And then what's going to get them to allocate?
JOHN HATHAWAY: Great question, and that's what I think about it all the time. So I think the fact that mainstream investing, S&P names, tech, SOXX-- all that has done fine. So why would you venture into something that hasn't performed? And frankly, it's the third rail of investment ideas, because I've heard of your partner getting tossed out of an office because he was going to talk about gold. He said, don't you dare talk about gold to my team. You know, some RIA in Wisconsin or someplace like that.
DAN TAPIERO: Right.
JOHN HATHAWAY: So why is it the third rail? Because it hasn't performed for six years.
DAN TAPIERO: No, it's the number one performer from 2000. People ignore that.
JOHN HATHAWAY: Memories are short. And we understand that. But the other thing is that even when I talked to somebody who could allocate the gold, they may do it personally, but they will not do it for their clients, because there's career risk. If you underperform, if you're a mainstream investor, and you're 20 basis points let's say, behind the S&P, and you had a 5% allocation to GLD or GDX or the kind of thing we do, you could get canned. You certainly would find tremendous disapproval.
DAN TAPIERO: Well, doesn't that mentality have to change?
JOHN HATHAWAY: Well, there was a time, and I remember it, when gold was really doing well and everybody wanted in at the top.
DAN TAPIERO: You mean '10, '11 or do you mean 78--
JOHN HATHAWAY: '10, '11. Well no, I'm old enough, but I wasn't doing gold then. But that just shows you how cycles work, and how psychology changes. So we're kind of just coming out of a six year nuclear winter. And it's hesitation, early stage stuff. Just an interesting little fact is that even though the gold-backed ETFs have gained AUMs this year, GDX has lost like, a billion six, even though it's up 35%.
DAN TAPIERO: GDX is the gold miner ETF. We're get into that in a minute.
OK, again, you say nuclear winter. And I'm still trying to figure out-- so what gets people to have a different mentality? And the way you respond to that was really to refer to the US institutional investor. But we know 70% of global demand for gold is China, India, and the emerging markets. And so maybe the US institutional investor is not changing their view until it's at 2,500 or 2,800.
JOHN HATHAWAY: Probably.
DAN TAPIERO: So isn't the next leg here going to be driven by-- we've seen huge Russian central bank buying. We know the Chinese are buying. Do you have any sense as to what might drive them to take this to the next level?
JOHN HATHAWAY: You're talking about the USRAA?
DAN TAPIERO: No, I'm talking about the foreign demand. They've been steady, but is there something that-- because I don't know that the IRAs is without something more obvious, like OK, MMT is coming in, something really obvious like that, I don't know that they'll switch. And this concept of career risk, I don't really understand that, but I know it exists. I just wonder is there something on globally that you think could get the global buyers. Because we're here in America, and America is still the wealthiest country in the world. But we're not a driver for gold.
JOHN HATHAWAY: Not now.
DAN TAPIERO: Not now.
JOHN HATHAWAY: We will be.
DAN TAPIERO: OK, so you think we will be.
JOHN HATHAWAY: I think the marginal buyer are investment flows in Western capital markets-- Europe, the US, and so forth.
DAN TAPIERO: So why haven't the Europeans with all those negative bonds, all their bonds are yielding negative, you would have thought that they would have taken gold up to 2,000, 2,500.
JOHN HATHAWAY: I think there is-- I know in Germany, where we sub-advise UCITS, there has been physical buying and substantial-- I don't have the number off the top of my head-- but there has been substantial buy in particularly in Germany. But I don't think, and people would disagree with me-- on this point I do not think