John Hathaway's Macro View on Gold

September 9, 2024 | 29 mins 58 secs 

In this exclusive interview with Metals and Miners, John Hathaway offers a comprehensive analysis of the current economic landscape. From the deteriorating economic metrics to the growing threat of de-dollarization, Hathaway provides expert insights on the most pressing issues facing investors today. John Hathaway is a Managing Partner and the Senior Portfolio Manager for Sprott Asset Management and has more than five decades of experience as a portfolio manager, founder and Certified Financial Advisor.

Video Transcript

John Hathaway: They start losing money in their conventional investment strategies. That's why a bear market is so important to this line of reasoning. Once you start feeling less confident in your FA's recommendations to be long, the usual garden variety of overpriced stock, you're going to start asking questions and looking around.

I think that's the thought process that will lead money to flow into gold. Believe me, there will be continued upside surprises if we have an equity bear market, again, in the very early stages. But, personally, I think that's where we're headed.

Gary Bohm: Welcome back to Metals and Miners. I'm its founder and host, Gary Bohm. Today, we have a great discussion lined up. We're fortunate to have John Hathaway with us. John is a Managing Partner and the Senior Portfolio Manager at Sprott Asset Management. He has more than five decades of experience as a portfolio manager, founder, and certified financial advisor. John, thank you so much for joining us today.

John Hathaway: Pleasure. Thanks, Gary.

Gary Bohm: Let's begin with the Fed and their likely upcoming rate cuts. Unemployment is going in the wrong direction, and many companies are planning or initiating layoffs, downsizing or going out of business. Even a 50 basis point rate cut won't put people back to work for a very long time. That won't increase demand for gasoline, a bellwether for everything in the economy for a very long time.

We're borrowing and spending a trillion dollars every 90 days just to stand still, and we're falling, albeit slowly, but so is everyone else, so it's harder to see. OPEC cut nearly six million barrels daily, which is 6% of global production, yet prices are still falling. These trends in demand and unemployment are not bottoming; they're accelerating. Do you expect things to get better or worse from here?

John Hathaway: I think the Fed is behind the curve as usual. What's, to me, most important to point out is that the financial markets, particularly the stock market, have been trading on the expectation of a rate cut. Whether it's 25 or 50 basis points doesn't matter, in my opinion. I think it won't change anything, as you said in your lead-in.

I think when they cut, the focus will start to turn to poor corporate earnings and worsening economic numbers. In all of that, I would see, and I think we're already there in a bear market—probably an extended bear market—multiple rate cuts and resumption of QE and all other crazy stuff, probably because it's an election year, maybe some stuff on the fiscal side that nobody's talked about.

It isn't going to do any good because the forces forcing us into recession are well in place. That includes a dramatic slowdown in liquidity and the money supply's growth rate. You mentioned negative employment trends.

If you just look at some of the corporate earnings, Dollar General is a great example. That is the lower end of the bottom of the pecking order in terms of consumers. Those poor people are living from paycheck to paycheck. At the end of the month, they don't have enough to spend. That's what Dollar General said in its press release regarding its negative earnings surprise.

The Fed is just out of touch, looking at the wrong kinds of things, and the market has been buying it hand over foot. To me, Gary, the markets are very poorly positioned for what lies ahead: a bear market, a recession. I think that will ultimately prove very positive for precious metals.

Gary Bohm: John, government spending appears to be the only reason recessionary forces dragging down the private sector have taken so long to prevail, keeping the soft landing narrative alive. Year-over-year growth in government spending has exceeded 20% in recent months.

John Hathaway: Right.

Gary Bohm: That spending will be financed by increased government debt issues.

John Hathaway: Debt issues.

Gary Bohm: As you talked about, this, in turn, will deepen the concerns about a sovereign debt crisis in the absence of real economic growth. Does the increased deficit spending lose its ability to prop up the economy at some point in the near future? If so, what are those ramifications?

John Hathaway: The answer is yes. One of the great surprises we could find out in the next six months or a year is that the old playbook of increasing fiscal spending may not have the zing for economic growth it historically has. I think each round of fiscal stimulation over the last 20 years, let's say, has had a smaller and smaller impact on growth. Could we be in a situation where fiscal and monetary policy are just churning their wheels and not working? If that were to happen, and I wouldn't rule it out, we could see gold double from here.

Gary Bohm: I believe that the term for this is the law of diminishing returns.

John Hathaway: Right, exactly. We played that old playbook forever. You mentioned the sovereign debt crisis. Well, who will buy our paper, especially on the long end? We know that they've trimmed the auction sizes of anything with duration. Everything is being financed on the short end. That is what banana republics are doing.

Gary Bohm: I believe the last round of QE returns was about 55 cents on the dollar. It wasn't even more than a dollar return for the dollar they put in.

John Hathaway: Right. I think many people, including Lacy Hunt of Hoisington, have pointed out that the returns on government stimulus have been negative for quite a while. But that's all we have left.

Gary Bohm: Speaking of Lacy, he speaks a lot about the net national savings. It's negative for only the second time since the Great Depression. Over the last 100 years, it's been negative only one other time, and that was in 2008 during the Great Financial Crisis, when they said, "Look, we're headed towards and possibly the next Great Depression." Why is the negative net national savings a very important metric that we should all be paying attention to, yet very few are?

John Hathaway: You're right that nobody pays. Most people don't even know what it is. But when you think about Dollar General's consumers, you will see that they don't have any savings. That is a recipe for economic contraction. Quoting Lacy because he's such a great economist, the only way out of this is a period of extended austerity.

That is not in the repertoire of any politician around.

Gary Bohm: Right.

John Hathaway: The idea that we would tighten our belts, God forbid, that people would stop spending and start to save. That would be the answer to these issues, and probably more enlightened economic policies on the other side. I don't see that happening without a deeper recession and certainly a lower stock market, probably higher bond prices, and lower interest rates for some period of time. Believe me that is not on anybody's radar.

Gary Bohm: You're right. I believe Kamala Harris has some policies that she wants to enact if she becomes president. Things like a $6,000 per child tax credit, $25,000 for new homeowners who have successfully paid their rent over the last 24 months, and a $50,000 tax write-off for startups. On the other hand, I believe Trump has come out saying, "Look, I'm going to put tariffs on everything from vehicles to any country that is no longer or even trying to shy away from the US dollar. We're going to impose 100% tariffs." All of that is inflationary.

John Hathaway: Yes, it is from different paths.

Gary Bohm: Not focusing on austerity.

John Hathaway: I didn't hear you say austerity once. I don't think anybody could get elected on, "Well, we're going to tighten our belts. We're going to lower our spending. Maybe we won't take as many vacations in Europe or wherever. Can't buy that RV." I don't hear anybody talking about that.

Unfortunately, something like that, and that's what you had in World War II, everybody got behind the idea, "We're tightening our belt. We're all pulling together." That was the last time you could point to when we had an extended austerity, and it was a consensus. Everybody agreed with that. Just imagine what happens to get people back on the side for that outlook.

Gary Bohm: It seems like it would be complete societal chaos.

John Hathaway: I wouldn't say I like to go there, but it is a long way from the mentality of the political body and the consumers and, frankly, business and economic leaders. I don't think people think like this. It's one of those things that ultimately will come to a head. I do not know the timing, but the path seems pretty clear.

Investors should be exposed to gold because everybody's excited—well, not everybody; nobody's excited except me that the gold price has done well in the last few years. It's just another way of saying, "Your purchasing power is going down, and you're losing wealth if the gold price is going up." It's a signal that nobody understands. Again, how do you protect yourself? Well, you own gold, and that way, you maintain purchasing power.

Gary Bohm: John, the movement by BRIC nations to circumvent US Treasury Bonds or to de-dollarize as a mutual reserve asset to recycle trade surpluses is beginning to gain traction. DC is even noticing. As I mentioned earlier, Trump came out and repudiated this idea. He stated that he would slap a 100% tariff on countries sidestepping the dollar. However, the weaponization of the US dollar in response to the Russian invasion of Ukraine in February '22 was the catalyst to this whole movement.

John Hathaway: Sure.

Gary Bohm: What are the implications of the de-dollarization efforts by the BRICS that you're expecting and watching for, understanding that right now it's happening on the margins?

John Hathaway: It's still in its infancy, embryonic stage, let's call it. But it is gaining traction for the reasons you cited. What are the implications? One is trade balances, surpluses, and deficits among BRIC countries, which gold transfers will partially settle. You're beginning to see that. The other thing, and I think it's probably even more important, is that the use of the dollar US treasuries to recycle surpluses is diminishing.

That means that as treasury issuance is going up, as we talked about earlier, the offshore pool willing to absorb that is shrinking. What does that mean? If you had a fair market for interest rates instead of a managed long-term interest rate, rates would be much higher than they are.

What are the implications of that? Well, higher rates equal lower equity valuations, for one thing. I think of bonds as no longer a safe asset for some of the reasons we discussed. But I can see the trade. The trade is if we go into recession, there will be that Pavlovian reflex of going to safety.

Bonds are probably a good trade but no longer a safe asset. That 60/40 risk parity portfolio may no longer work. Where does that lead us? That means we've got to find a safe asset.* Lo and behold, that could be gold exposure. We're not even close to that, but I think that's coming.

Gary Bohm: The evidence supporting a weaker economy is extensive. We've been talking about it throughout this discussion. Yet the investment consensus ignores it as, well, we'll just call it inconvenient, likely because it supports the historically high equity valuations that currently exist.

As you've been saying, a recession would lead to new bouts of money creation by central bankers, fiscal excess, and monetary debasement by both sides, just as it has in the past. A recession, an event for which financial markets are not positioned at this time, would likely cause demand for gold to surge just as it has in the past. In your analysis, is this exactly what you're expecting?

John Hathaway: Right. We haven't talked about it yet, but this rally in gold from slightly below 2,000 an ounce to where we are today, roughly $2,500 an ounce, is taking place mainly because of de-dollarization and central bank buying. The algorithms have caught on to this, so they're long. I guess the futures positions they're long, and they're trend followers.
But if you look at the positioning of most wealth managers and their clients, it's at the lowest level in gold in the last five years. That shoe has yet to drop. Again, why will Americans and Europeans with very little exposure to gold change their minds? The biggest reason is that they start losing money through conventional investment strategies. That's why a bear market is so important to this line of reasoning.

Once you start feeling less confident in your FA's recommendations to be long, the usual garden variety of overpriced stock, you're going to start asking questions and looking around. I think that's the thought process that will lead money to flow into gold. Believe me, there will be continued surprises on the upside if we have an equity bear market. Again, it's in the very early stages, but personally, I think that's where we're headed.

Gary Bohm: John, we're talking about sentiment here. According to Bloomberg, the consensus projection for long-term gold prices is for them to trend lower than the current spot price of approximately 25 or 30 an ounce. In your estimation, how can consensus thinking be explained in light of these macro forces around us?

John Hathaway: I think it's another reflection of how poorly positioned the consensus is. To me, it's just absurd. We started looking at it because sell-side analysts have models to value mining stocks, so they have to expect to plug into those models of where gold prices will be in three, four, or five years. They take off-the-shelf projections by major strategists at all the big firms.

Some are changing, and some are chasing the gold price. But they're not chasing it. They're chasing it at the moment. They are not willing to suggest that three or four years from now, the gold price could be 20, 30, or 40% higher. Nobody is saying that. Therefore, they're not connecting the dots of de-dollarization, recession, and lower equity prices. That's an inconvenient truth. Therefore, we're blithely sailing off into this different world, yet the acknowledgment and recognition of that will probably only come through some pain for the everyday investor.

Gary Bohm: If your thesis is correct, then the majority of them are way off sides in their positioning, which means that the downside will likely be much stronger.

John Hathaway: Right. Again, the amount of leverage in the system, everyone thinks, "Well, we can't have another GFC." I'm not sure I'd be comfortable making that statement. I'm not saying we will have one, but I don't think the amount of leverage in the system is fully accounted for. I'm considering private equity as one example of this bubble we're in. Everybody looks and fixates on the Magnificent Seven, which has lost some luster recently.

Then there's the non-bank sector. Pension funds and insurance companies are all loaded with this private equity, questionable value. I'm biting my tongue and using the right adjective. I think that day of recognition that there's no there there, or at least the there is worth a lot less, is the thing that can extend a downturn and, of course, lead to a panicked response by policy officials.

Gary Bohm: Gold has surged past that psychological $2,500 level we touched here. It's been driven by factors not easily explained by traditional market variables. It suggests that central bank and sovereign activity have been the major reason, not other usual market dynamics. In your analysis, what are you expecting from here over the next six or so months for the gold price?

John Hathaway: Gary, I never discuss a projection with a number and a date in the same sentence. I think there will continue to be upside surprises. Of course, we'll have occasional pullbacks, which I recommend folks take advantage of. The sentiment right now is quite positive, but it's not reflected in the actions of investors.

I think the sentiment is a measurement of algorithms, robots, and commodity traders. If you ask the everyday investor whose accounts are managed by the usual firms, they're not doing anything. They're just holding tight, and probably for the time being, riding losing propositions down. We're not even close to seeing that positioning shift from retail or institutional investors toward precious metals.

Again, I think part of it is because it is so inconvenient and contrary to who received wisdom on no recession, soft landing, "Powell's going to stick a soft landing," and all that, and no recession and all of that. That is the complacency that needs to be disrupted. I think it will not be disrupted by some courageous strategist at one of the large firms saying, "Look, we're heading into a tough period here, own some gold." They'll be dragged into it, kicking and screaming.

Gary Bohm: John, in Western capital markets, gold ownership remains at rock bottom levels, just like you've said. Disinterest is astonishing because gold has outperformed equities and bonds since 2000.¹ What does this, and the relative lack of commentary or analysis from mainstream financial media, suggest for gold moving forward?

John Hathaway: I think it's very bullish because if you're a contrarian and nobody's on board and it's going up, that means it's got more upside. Surprises will come on the higher end of the price chart. Again, the gold price will move once you start to see flows into ETFs, which we haven't seen yet. So far, you've mentioned two things people don't care about de-dollarization and central bank buying.

The average investor doesn't care about that. What the average investor cares about is his portfolio, which is invested in a lot of stuff that may start to disappoint. That will motivate him to say, "Hey, FA, Mr. FA or Mrs. FA, what about gold?" I am not saying that. The level of interest so far is zero. From everywhere, except for people like me, portfolio managers who care about it, it's a very small space.

Gary Bohm: Gold will continue to climb that wall of worry until two things show themselves: the advisors in the Western world start telling their clients, "Hey, we need gold here, 5, 10, 15%, whatever it is," and the media starts sharing some positive sentiments, some positive stories, and some positive reasons to own gold.

John Hathaway: Right. There has been some media coverage, but it is like a drop compared to what it could be. Again, the accompaniment, which would be a more common acceptance of a recessionary outlook and the resulting policy efforts to arrest an economic contraction, is nowhere to be found. You're starting to see people worry based on this last month and a half or so. The market's made a double top.² I'm not a technician. I'm just quoting from someone I follow. It hasn't gone anywhere since early summer. Hope springs eternal until losses start to pile up.