Thursday, January 25, 2007

Tocqueville's John Hathaway on gold

Earlier in the week, Dow Theory Letters writer Richard Russell reprinted some interesting remarks from John Hathaway of Tocqueville Asset Management on gold. I'd like to include some of those comments here.

From Hathaway's 2006 essay, "Trivial Pusuit?":

The idea that all “hard” assets provide a safe haven from depreciating currencies is a dangerous one. It might seem valid for a while based upon the power of common belief to generate capital flows, but it will inevitably fall apart during periods of severe economic distortion caused by monetary imbalances.

Efforts to trivialize gold’s monetary significance are a key to the present day money illusion, that more paper equals more prosperity. It is far more palatable to the political and economic establishment to explain away the strength in the price of gold as a consequence of growing Asian prosperity or the reflection of an extreme fringe of investment thought (as suggested by Greenspan) than to read it as a reflection of flawed economic policies, archaic conventions, and corrupt institutions.

A rise in the price of gold is equivalent to a fall in the value of financial assets. The strength in the metal is a sign of distrust in the ability of present day financial instruments, including paper currencies, to preserve capital over time. The global bid for physical gold is potentially immense. It will be generated not by ephemeral and flaky speculative interests seeking instant gratification, but rather by the considered actions of capital interests with a long term perspective driven primarily by the desire to convey present day wealth to future generations.

Russell capped off this discussion in his "daily remarks" letter by confirming his belief in the value of gold and precious metals as a time-honored store of value. When it came to deciding what to pass down to his children and grandchildren, he said he would not hand them a portfolio of stocks or a house, but gold coins.

Food for thought.