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LAWRIE WILLIAMS: COMEX is fiction; a casino for paper gold – Hathaway

John Hathaway – Senior Portfolio Manager for Tocqueville Asset Management in the U.S. is one of the most respected gold fund managers and analysts around so his observations should not be taken lightly.  Speaking late in the afternoon on the second day of the Mines & Money conference and exhibition in London  - following on from a busy day featuring a hugely impressive array of some of the resource sector’s top investors, miners and commentators including Frank Holmes, Pierre Lassonde, Grant Williams, John Kaiser, Rick Rule, David Humphreys, Mark Bristow, Peter Hambro, Neil Froneman, Rob McEwen and several more – Hathaway had some very harsh words for the impact on the gold market and on price of the massive paper gold trading volumes on the COMEX in particular.  Describing COMEX as ‘fiction: a casino for paper gold’ he seized on latest figures showing that paper gold trades on COMEX in a day were running at a level around 300 times annual daily new physical gold supply and questioning how such trades can effectively set the gold price bearing little or no relation to gold supply and demand fundamentals.

On fundamentals he said he wouldn’ t be surprised to see new mine supply fall by around 25% over the next few years failing any substantial gold price increase.  And even then it would be difficult for the industry to recoup these supply losses.  Virtually no major new gold mines are coming on stream or are any longer in the pipeline, expansion projects have been put back or abandoned and mineral exploration, particularly by juniors, is grinding to a halt.

With sales out of the major gold ETFs falling back, yet continuing huge demand from Asia he said the only way the gold price could still be falling, as it is, is if physical gold supply is being supplemented by movements out of above ground stocks.  And the availability of unallocated gold from these is reducing.  London vaulted available gold has fallen by around one third from its 2011 level of 3,414 tonnes with most of this gold moving to Switzerland for re-refining into smaller bars destined for the Asian markets while eligible gold stocks on COMEX are tiny.  Levels are so small that if only one or two contract holders were to take delivery of physical gold, rather than just turn the paper over, then a serious supply squeeze would develop.  It could probably be covered by shipping in gold from COMEX registered stocks and/or from London, but the scope for so doing is falling along with the inventories.

Could the gold price turn around and start to appreciate strongly?  Hathaway believes that yes it could and such a move would likely be triggered by an equities crash.  Financial markets are all about confidence and at the moment the investing public and funds are confident about equities, but this could all change, which is in part why the U.S. Fed will have to keep a wary eye on the impact of its likely interest rate raising strategy which could turn a fragile market downwards.

Unlike some gold bulls, Hathaway obviously has faith in gold ETFs, saying that he would like nothing better than for investors to return to investing in the ETFs again.  These are mandated to buy physical gold in line with investment income which would again give a fillip to physical gold consumption.

In general most of the expert speakers at Mines & Money were suggesting that gold was at or near the bottom of a cyclical downturn and would turn up sharply, but wouldn’t be drawn on how long it might take the upturn to come about.

01 Dec 2015 | Categories: Gold

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