GOLD PRICE NEWS - The gold price held its ground, trading at $1,213 per ounce, as stock and commodity markets stabilized after a tumultuous past week stemming from worries that economic growth will stagnate in the second half of the year. The price of gold remains a safe haven as the yellow metal has been one of the only asset classes outside of U.S. Treasuries to appreciate over the past five weeks.
The gold price is up over 3% since the beginning of May, while stock prices have fallen over 10%, as measured by the S&P 500. Commodities have declined alongside stocks, as oil is off nearly 20% from its 2010 high and copper is down a huge 26% from its April high print.
While the gold price has been buoyant in the face severe liquidation pressure, the same cannot be said of gold stocks. Since the end of April, the Market Vectors Gold Miners ETF (GDX) is down 3.4%, succumbing to the selling that has driven the broader stock market lower. One high-profile gold stock fund manager who is predicting both a much higher gold price and great share price appreciation in the gold stocks is John Hathaway, manager of the $1.4 billion Tocqueville Gold fund.
In an interview with Barron’s, Hathaway dismissed talk of a gold price bubble, opining that “if this were a football game, we would be at the beginning of the third quarter.” The long-time gold bull highlighted the bubble not in gold, but in sovereign debt, noting that the market is beginning to react to nations’ “unsustainable” dependence on “deficit finance to fund promises that have been made in the past and promises that are still being made to the voters.”
Hathaway sees gold stocks outperforming the gold price in future years, although he did take issue with the “excessive issuance of stock” that has contributed to the recent underperformance of the gold miners versus gold. Despite these criticisms, the veteran fund manager pointed out that he sees profit margin expansion occurring as the gold price has risen relative to other commodities, depressing input costs. He offered insight into a number of his top stock picks, which included Franco-Nevada (FNV.TSX), Newmont Mining (NEM), Osisko Mining (OSK.TSX), Randgold Resources (GOLD), and Royal Gold (RGLD).
The macro-economic outlook presented by Hathaway over the past few years has been accurate, and the bullish outlook he presents for the gold price going forward are in line with current fundamentals. Loose fiscal and monetary policies have helped drive the gold price higher as central bankers and politicians have aggressively fought to plug the vacuum in private demand with public funds. However, despite the weak employment report, tepid improvement in the housing market, and the sovereign debt crisis in Europe, the appetite for additional fiscal stimulus among the U.S. populace is minimal.
America’s gaping budget deficit and the constant picture of happenings in Greece have made the American public concerned of digging a deep fiscal hole and ending up in the situation facing Greece. The problem is that the massive amount of stimulus injected into the economy is abating. An imminent depression may have been averted, but the steroids have begun to wear off. Whether the private sector is strong enough to generate growth is the key question facing the markets.
The increasing number of economic challenges facing the global economy and the loss of appetite for aggressive deficit spending will result in a slower process of normalizing monetary policy. Chairman Bernanke and the U.S. Federal Reserve will undoubtedly leave interest rates near zero - further supporting the gold price. Bernanke, on Friday, cited the fact that loans to small businesses were down and he has alluded to an improving employment picture as key in order for the Fed to upgrade its macroeconomic outlook.
With a mere 41,000 private sector jobs created in the month of May, it is fair to say the labor market in the U.S. remains under duress. These facts suggest that the Fed will be on hold indefinitely and real interest rates will remain in negative territory. Negative real interest rates destroy the purchasing power of money and are one of the most positive fundamental drivers of a higher gold price. A weak stock market, falling commodities, a 3.20% 10-year yield, and mounting debt loads in both the private and the public sector assure that deflation is still enemy number one of central bankers.
Fighting deflation is bullish for the gold price, while fighting inflation leads to a lower gold price. With central bankers in the U.S., Europe, and Japan firmly in the former camp, the outlook for the gold price - notwithstanding bouts of often violent volatility - is decidedly positive.
