Thought Leadership

Tocqueville Gold Strategy First Quarter 2017 Investor Letter

By John Hathaway on April 11, 2017
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Reality Check

“We strongly believe a synchronized, self-sustaining global expansion is underway.” (Evercore ISI Weekly Economic Survey, 4/2/17)


“Atlanta Fed Sees GDP Growth Slowest in Two Years.” (Reuters, 3/15/17)

“Real Consumer Spending Fell for Second Consecutive Month.” (Evercore, 3/31/17)

“Real consumer spending drops .28% over the past two months, largest two month drop since the recession. (Meridian Macro, 3/31/17)

“Individual Tax Remittances to the US Treasury fell 1.5% in February, the sharpest decline since the great recession.” (MacroMavens, 3/23/17)

“Restaurant sales and traffic tumble in February. Same store sales fell 3.7%, with traffic declining 5%.” (Black Box Intelligence, 3/8/17)

“Auto sales post big miss…. Total sales 16.54 million units [seasonally adjusted annual rate] vs. expectations of 17.3 million units…lowest since February 2015.” (Meridian Macro, 4/3/17)

“Delinquency rate on subprime auto loans jumped to 5% in the 4th quarter, while the charge off rate on those loans rose to 10.5%.” (Fitch)

“Sears to close 150 stores (10% of total); JC Penney 120 (14% of total), Macy’s 100, Payless 1000, Radio Shack 552, Limited 250. Anchor tenants drive most of mall foot traffic…. According to real estate research firm Green Street Advisors, one third of the nation’s malls are at ‘high risk’ of closing.” (Casey Research, 3/23/17 – “Why The Retail Apocalypse Has Only Just Begun.”)

“Bank credit and lending is falling precipitously, as it does before every recession. At 97 months old, this economic expansion is now twice as long as the average expansion.” (Belkin Report, 3/28/17)

“Nonfarm payrolls increased by only 98,000 in March. CNBC’s Hampton Pearson reports the number of new jobs fell far below expectations as the retail sector lost 30,000 jobs in March.” (CNBC, 4/7/17)


The cheery consensus outlook for which Evercore is a proxy is clearly out of sync with reality. The Fed’s expectation is that the economy is strengthening. “Animal spirits have been unleashed,” said NY Fed President William Dudley in a February 28, 2017, CNN interview, noting further that:

“The stock market is up a lot…. It seems to me that most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty steady, inflation has actually drifted up a little bit as energy prices have increased.”

The Fed’s expectation for strong economic growth is their cornerstone for communicating an aggressive stance on monetary tightening to the financial markets. This stance in our opinion has been weighing on gold prices.

If the consensus view for robust growth proves wrong, what could it mean for gold? The Trump bull market is in our opinion mass self-delusion. While a presidential administration may be able to chart a course and set objectives, to our knowledge no administration in history has been able to repeal the business cycle. In our view, the current 97- month-old business expansion is running on fumes.

An awakening could threaten deflation of financial asset values propped up by unsupportable corporate earnings expectations. A rapid reversal of monetary tightening would ensue. Gold would stand to benefit from a long-overdue loss of confidence in monetary policy. That loss of confidence could well set the stage for a Trump takeover of the Fed, with three of seven seats on the Fed’s Board of Governors open (the most since the Woodrow Wilson administration), including Chair Yellen, by next January. Any remaining pretense that the Fed is an independent institution could vanish.

The rationale for investing in gold is this: The practice of radical monetary policy for the past two decades has conflated systemic risk and will continue to do so. We believe that no escape is possible, including a return to normalized interest rates, in the absence of robust economic growth. Easy-money policies since the Great Recession have solved nothing and only bought time. Hope for sufficient economic growth to restore a healthy ratio between debt and productive activity seems futile. Results from the enunciation and implementation of pro-business policies and practices will be achieved only in the longer term, and in a time frame too short for political purposes to outweigh the inherited legacy of excessive debt and overinflated capital markets.

As noted by Lacy Hunt of Hoisington Investment Management, “Debt is likely to restrain economic growth in an increasingly nonlinear fashion.” (Grant’s Conference, 10/4/16). Quoting from Hoisington’s 4th-quarter 2016 investment review, “By pursuing the monetary and fiscal policies in which debts are accumulated worldwide, spending from the future is brought forward to today.” In the same note, he goes on to quote William R. White (BIS economist): “As time passes, and the future becomes the present, the weight of these claims grows ever greater.” According to Hunt:

“Monetary policy has become asymmetric due to over-indebtedness. This means that an easing of policy produces little stimulus while a modest tightening is very powerful in restraining economic activity…”

According to the IMF, global non-financial sector debt totaled $152 trillion (225% of global GDP) at the end of 2015, higher than during the 2008 financial crisis and still rising. Easy money and fiscal deficits, the recipe prescribed by policy makers and central bankers, cannot provide a foundation for the “self- sustaining global expansion” envisioned by mainstream economic analysts. Easy money has brought about only more debt and anemic growth. In our opinion, sufficient growth is never going to happen without a global monetary reset. A sign of that recognition would be a much higher gold price.

The innumerable potential positives that could result from Trump’s pro-business agenda will prove elusive, in our opinion, because the persistence of anemic growth will only serve to widen the political fractures from which the populist movement arose. It is clear to us that current public policy is not working. If the economy continues to stall, as we believe it will, answers will be sought. Trump and his advisors are pragmatists. They have no allegiance to past policies and have the opportunity to affect lasting and positive change by reincorporating gold into the monetary system. Trump himself is on record as being friendly toward gold:

We believe he would have little problem scapegoating the Fed and the intellectual elites that have crafted the failed public policies of the past two decades. The appeal of gold is visceral and consonant with the anti-elite sentiment of populism. So much the better for the barbarous relic.

The possibility that gold might be incorporated into a formal monetary role by the Trump administration is obviously pure speculation and inference on our part. It is a speculation that does not by itself constitute a rationale for investing in gold or related stocks. We have already provided extensive discussions for the investment rationale; for example, here and here. However, the possibility is an intriguing outlier, which one is paying next to nothing for at the current gold price. One could have said something similar as to Trump’s chances on the evening of November 4, 2016.

In the absence of a credible monetary standard, we expect no escape from the treadmill of rising debt, both US and globally, that outpaces economic growth. Income inequality, wage stagnation, overvaluation of financial assets, and speculation instead of productive investment are likely to be prolonged under the current monetary regime. Whether or not policy makers take a proactive approach to address monetary reform, the fact remains that gold is massively underpriced in all paper currencies. It would be preferable if the necessary adjustments could occur without a repeat of a 2008-like financial crisis. We give this possibility a chance, albeit slim. In any event, we expect a significant repricing of gold higher during the current administration, either by design or because of market events. Whenever a repricing happens, we expect broad grassroots support for that outcome.

Tocqueville Gold Monitor [pdf]

John Hathaway
Senior Portfolio Manager
© Tocqueville Asset Management L.P.
April 7, 2017

This article reflects the views of the author as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized.

References to stocks, securities or investments should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by Tocqueville. We will periodically reprint charts or quote extensively from articles published by other sources. When we do, we will provide appropriate source information. The quotes and material that we reproduce are selected because, in our view, they provide an interesting, provocative or enlightening perspective on current events. Their reproduction in no way implies that we endorse any part of the material or investment recommendations published on those sites.

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