Gold Outlook with John Hathaway

Gold Outlook with John Hathaway

April 1, 2024 | 14 mins 34 secs 

What will make the gold price higher? John Hathaway, Senior Portfolio Manager, provides his thoughts on why gold isn't moving and what will take it higher.

Video Transcript

James Connor: Hi, John. Thank you so much for joining us today. You have been investing in gold and gold equities for many years, and I want your views on that sector. But before we do so, I want to start with the economy and get your views on where it's going.

This time last year, the economy was going at 3% growth. In Q1 of this year, it came in at 1.6%, then revised to 1.3%. Where do you think we're heading now at the end of Q2? Do you believe we are approaching 0 growth or maybe negative growth?

John Hathaway: I would start with the investment consensus, which is positioned for a soft landing. I would question that. The evidence is mounting that we will have a downturn that nobody, including the Fed, expects.

What could we point to? We could point to the rise in unemployment. In the last two non-prior payrolls, we've seen an increase in unemployment. I think we're now at 4%. We can point to weaker retail sales. In the non-prior payroll survey, I get stuck on the fact that most of the job creation is in part-time jobs and government education. They're not economic jobs.

Lastly, they're theoretical. It's not like somebody goes out and knocks on the door of a household or a business and asks what the job picture is. They had this birth/death ratio, which is a theoretical formula. That job creation has exceeded and mainly explained the so-called job growth over the last 12 months. I don't have the exact numbers, but it's been huge.

But if you look at the household survey, where they go out and knock on doors and ask a family what's going on, it diverges dramatically. I'll mention one name, Lacy Hunt, a highly respected economist and bond bull, that there will be substantial downward revisions, maybe later this summer. I think he told me recently, early next year, that we will move in the direction of the household survey and that job creation that everyone believes has been taking place just isn't there.

That's maybe too much on jobs, but it's one of the big things. The numbers come from the Bureau of Labor Statistics, under the administration, and we're in an election year. Wouldn't it be strange if they weren't budging the numbers to make them look better for the incumbent administration now? I don't want to sound like a tin-foil hat, but evidence suggests that the economic consensus is that Powell will stick us off landing.

I'd take the under on that. I would say he's not going to. They're going to have egg on their face. They will have to hit the retro rockets on this so-called monetary stringency, and we will probably go into a rate-cutting cycle at warp speed in the next six months. That will probably be very helpful for precious metals. Hopefully, mining stocks as well.

James Connor: I want to summarize a few of the comments that you've just made. You don't think we're going to hit a soft landing. It sounds like you think it will be a lot more aggressive than the economy could be, or we’ll be going into a recession. Do I have that right?

John Hathaway: Yes. I think we'll have a recession. If there is a recession, I believe the evidence is starting to mount in favor of a much weaker economy than the consensus expects. One is regional banks are heavily invested in commercial real estate. Commercial real estate is a problem area for many reasons, but the big one that most people would understand is that more and more people don't want to go to the office every day and don't need to. Good and bad.

The other domino I think would be exposed big time in a recession is private equity, which is believed to be an alternative asset class. Maybe at one time, it was a very good idea, and businesses were better managed under the guise of private equity groups, but now so much money is flowing in. They're buying car washes and golf driving ranges, and the multiples are ridiculous.

Again, this is not my area of expertise; it is just stuff I've read and anecdotal. Still, I think those two things, regional banks and private equity, could be exposed big time if the economy slips into a recession. Is a global financial crisis worthy? Everyone says who I've read about is, "It's not systemic." When you hear that, you say, "It is systemic. It could be."

Are we headed to another episode like 2007 or 2008? Who knows? But I think it's more likely that the economic outlook has a lot of downsides. I'm not even giving you a chance to ask questions. One of the things that I think is missing for gold mining stocks is the comfort level that mainstream investors have with how they're positioned. They're positioned in all things AI. They're positioned in very few stocks, which explains the movement of the S&P. It's a very crowded trade. I think that crowded trade starts to unwind, people will look around and say, what else is there? In my opinion, they'll be able to discover the opportunities in precious metals mining stocks, which we can discuss as we go along here, but that is the setup I see of gold mining stocks and precious metals.

James Connor: You raised some interesting comments about private equity and private credit, reminiscent of 2008 and 2009 when you had these mortgages valued by third-party valuation firms. The same thing is going on with these private equity funds. The values that are being placed on them are not the true values. They could be significantly lower.

John Hathaway: There needs to be price discovery, and I think you'll get that in an economic downturn.

James Connor: You mentioned that you think the economy is slowing down and possibly going into a recession or in a recession. I want to bring up the Fed. In 2021, the Fed made a serious policy error by saying that inflation was transitory. By March of 2022, they woke up to the fact that, "Oh my God! It's not. We have a serious problem here. We got to contain it." They lifted interest rates 11 times over the ensuing 16 months. Do you think the Fed is making another policy or a rate now by not cutting rates faster?

John Hathaway: The short answer is yes. They will be forced to become very aggressive in terms of monetary ease and hit the retro rockets from where they're standing. They will be as surprised as the rest of the world that they've been restrictive too long.

I remember I heard Tom Hoenig, who was a member of the FOMC for many, many years in Kansas City. He was the one who centered for many years on the zero-interest rate policy. I met him a few years ago at a conference, and he said deals and financings done in a zero-interest-rate environment could not survive a 5% interest rate environment.

The longer we are at 5%, the more damage there will be because, as you hit this wall of refinancings, which is another thing to talk about, the carry that was once very achievable at 0%, or 1%, or 2% no longer makes sense. The credit problems arising from the Fed overstaying this restricted monetary stance would again contribute to a deeper and more protracted recession than anybody expects.

James Connor: The scenario you are painting is bullish for gold. We have a slowing economy. Because the Fed is behind the curve, they will be forced to cut interest rates drastically. That will result in a lower U.S. dollar and a higher price of gold.

Let's look at the price of gold right now. It's trading at or near an all-time high. I believe it's up between 10-15% on the year, but the equities are not participating in this move. They're trading at a big discount. Why do you think that is?

John Hathaway: I think there are a couple of reasons. One is that I don't think the average investor is paying any attention because they're very comfortable in their current investment program, which, as I said earlier, is heavily weighted towards things that approach the definition of a bubble.

While there's been some recognition that the gold price is in record territory, the connection between what that means for earnings and cash flow and mining companies is just pretty much of an academic exercise and little interest as long as there's a comfort level with current investment positioning. We have mining companies that are trading at historically cheap discounts to NAV.

There has been a big disconnect, not so much this year but over the last five years, of the relationship between gold mining stocks and the gold price. There's a huge mean reversion trade ahead of us, assuming gold prices stay at these levels. I could argue why they could still move higher if and when people lose their comfort and complacency with their current position.

I think that lies ahead, and that's why I would say we are at the cusp of a big move in mining stocks, even if the gold price stays where it is, and I don't think that will be the case.

James Connor: One of the reasons why gold is trading at or near all-time highs is because central banks worldwide have been massive buyers. In the last couple of years, I believe, in 2022 and 2023, they acquired approximately 25% of all annual production, according to the World Gold Council.

Do you think that because of the central banks buying, they are creating artificial rights in the price of gold? In other words, if they weren't buying, the price of gold would be much lower. It may be that the equities are factoring in the real price of gold, which could be 1,600 to 1,800 bucks, depending on what names you look at.

John Hathaway: I think that's right. I believe the recent central banks are buying that we're seeing a shift in trade, particularly in the BRIC nations, China, Russia, and Brazil. Many emerging market economies are trading among themselves, not recycling trade surpluses into U.S. Treasuries. They are recycling; first, the trade takes place through Saudi Arabia selling China oil.

China pays in RMB, its currency. The Saudis now accept Chinese currency, whereas before, the Chinese would have had to acquire U.S. dollars to pay for the oil. That's no longer taking place. How does that work? What that means is that Saudis are accepting Chinese currency. China's starting to sell things to Saudi Arabia that the Saudis paid for with the RMB that they've accumulated.

Maybe there's a trade surplus on the Saudi side, which was always the case. They would take that surplus and invest it in U.S. Treasuries, collecting interest, and then send it that way. What the Dow is doing now is asking the Chinese to settle the surplus in gold.

That's the utility of gold for the BRIC countries. It's not happening in the U.S. or Europe, but it's happening in the BRIC part of the world, which is more than a third of the global land mass and probably a third of the global GDP. A lot of trade is taking place that way. I think 20% of energy is now traded away from the U.S. dollar.

That's why central banks have been buying gold to recycle, trade surplus, settle trade deficits, and surpluses with gold, which is a neutral reserve asset as opposed to the U.S. dollar. That has implications down the road, which may not become apparent for a few years. But here in the U.S., we issue record amounts of U.S. Treasuries because of our deficits.

The pool of capital that used to find U.S. Treasuries useful because they could recycle trade surpluses into them is not doing that anymore. The supply of U.S. Treasuries is going up, and demand outside the U.S. is going down. That tells me that it is potentially a serious issue for credit markets, bond markets, and, in particular, sovereign bond markets, at some point over the next two or three years.

Getting back to your original question, I don't think central bank buying, which is the big explanation or where the gold price is today at record highs, is a bubble. I think it reflects the reorientation of the global trading system, which has sustainable characteristics. It's not the algorithms in New York, London, and Europe buying gold because it's going up and piling into an unsustainable scenario. Gold is thought to be more useful and preferable than U.S. treasuries in playing a part in trade among a big part of the world.

James Connor: John, you touched on debt levels. I have to bring this up and get your views on this, but we have these record debt levels in the U.S. Federal debt is around $35 trillion, growing by $1 trillion every 100 days. These numbers are just mind-boggling when you think about them. Debt to GDP is around 125%. I believe that's at or close to an all-time record.

What are your thoughts on these debt levels? How do you think it gets resolved? What does this ultimately mean for the gold price?

John Hathaway: Some very smart economists would take a different view than what many people say about debt levels. They would say that debt levels are high, but if the economy can grow, we can service the debt. But for that to be right, we must have a growing economy. That argument falls apart if we have an economic slowdown, making it harder to service the debt. It also means that more debt will be issued because you've issued more debt in a recession.

Those are two opposing points of view on the issue that you just brought up. I would be of the school that says I can understand the argument that debt levels are okay if we have a strong economy that we're growing and can service the debt. But if the economy weakens, then that's a different story. That creates what I said earlier, with foreign countries finding U.S. debt less and less useful to recycle trade surpluses.

John Hathaway: You've got a question on price discovery. That would say maybe the four-and-a-quarter percent tenure isn't the right level for U.S. Debt. Perhaps it should be 6%. Maybe it should be 7% if we have proper price discovery. If that were to be right, think about what that would be. The Fed is irrelevant.

It would mean that no matter what Powell thinks, says, or does, it doesn't matter because we don't have a viable long-term debt market, and everything will need to be financed on the short end. They're already doing that. They're already shortening maturities because they laid an egg when they tried to do this 7-10-year and maybe 30-year auctions.

Today, we're increasingly forced into what you would think of as a banana republic, where we're financing everything on the short end. That's the easiest part of the yield curve to control. The gold market would see through that, positively affecting the gold price.

James Connor: John, there is a lot of economic uncertainty in the world. We have geopolitical risks in the Middle East and also Ukraine. The U.S. has a slowing economy, record-high debt levels, sticky inflation and an upcoming election. What are you suggesting to investors? How do they position themselves in this current environment?

John Hathaway: I suggest they reposition themselves more in the direction of gold and related mines. I have a chart, which I'm just citing from memory, showing that the exposure of financial advisers in the U.S. to gold and mining stocks is the lowest it's been in five years.

I would say to think about that. In this context, if you were to agree with some of the things I've said, why wouldn't you reweight your exposure to gold, which is almost nothing? Maybe reweight from 1%, about what it is, to 2 or 3%. I think people will do that.

If the economy goes the way I think it will, they'll be forced to do it rethink. Because the investment positioning that they have now will not be working, and their clients will be asking them what else they should be doing. That's the sequence I would see for gold to move higher for where it is today, maybe 15 or 20%. It's not crazy to think about $3,000 gold if we have a recession.

If we have $3,000 gold, what does that mean for mining stock earnings, which are already, as we've talked about, historically disconnected from the usual valuation relationship to the gold price?

That means that many gold mining stocks, which are still depressed relative to their earnings power and relative to where the current gold price is, have significant upside over the next 12 months. I'm not sure that I'll have a lot of people listening to me right now, but that's what I think they should do. That's what they will do if we head into a recession.

James Connor: John, that was a fascinating discussion, and I want to thank you very much for spending time with us today. You and your team are prolific writers on all things gold. If somebody would like to read some of your reports, where can they go?

John Hathaway: Go to the Sprott website, which is But we have a tremendous flow of information, not just for me but for many of our portfolio managers and analysts, which I think investors who might want to check out this line of reasoning would find very helpful.

James Connor: Once again, John, thank you, and I look forward to our following conversation.

John Hathaway: Thanks a lot. I have enjoyed it.

John Hathaway
John Hathaway, CFA
Managing Partner, Sprott Inc.; Senior Portfolio Manager, Sprott Asset Management USA
Read Bio
James Connor
James Connor,
Managing Partner at Bloor Street Capital

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