Hathaway asserts, "These intermediaries in reality offer only a very indirect connection to physical metal and depend on a highly levered structure of collateral re-hypothecation, and in our opinion, market ignorance, in order to operate."
"Because the paper market in gold is deep and liquid in comparison to other futures markets such as, for example, pork bellies, it attracts speculative capital," he noted. "However, unlike other deep and liquid commodity markets such as oil, copper, or wheat, the commercial interests, i.e., gold mining companies, jewelry trade etc. have a comparatively small impact on day to day and year to year flows."
"Therefore, the paper market for gold is ideal for speculative capital inclined to manipulate for purposes of maximizing year-end bonuses," he declared.
Hathaway contends that the rationale for investing in the precious metals sector "remains compelling."
"The longer current Fed policies remain in force, the greater the potential disruption to financial markets when it changes, most likely due to events yet unforeseen," he said. "Still, conventional economic commentary remains confident of Fed competence to unwind its balance sheet. When this confidence dissipates, as we expect, investment demand for gold will resurface in the most forceful manner."
Other factors which Hathaway believes are supportive of future gold demand include:
- The mining industry is in the midst of a major retrenchment. Current gold prices are insufficient to justify new mine construction. Future mine supply seems likely to decline, perhaps significantly.
- The spread of "onerous banking and securities industry regulations" will drive investment demand for gold, which, if owned in the correct manner, has little or no counterparty risk and is not subject to financial market and banking industry control.
"In summary, we believe the gold market is set up for a major advance, but recognize that the timing of a turn has been elusive and frustrating," Hathaway advises.
"The current government shutdown is on the one hand an unfortunate headline grabbing side show, which drives aimless short term speculative trading activity. On the other hand, regardless of how it plays out, we regard this very divisive process as a fissure in US credit. We also believe persistent questions about economic recovery in the US and Europe could provide a catalyst in the form of a draw-down of equity market valuations or as a further undermining of Fed credibility."
"What is certain to us is that market reversals of the kind we anticipate require a tolerance for the pain that it takes to be invested at the low, and that money on the sideline will be paralyzed and unable to act until metals share prices have advanced strongly," he concluded.