Saturday, July 17, 2010

Hathaway on Gold and the Dollar

The Tocqueville Gold Fund has been an excellent performer for me. I've owned it for almost 10 years and in that time it's up about 25% a year. This is staggering performance, especially when the S&P 500 (major stock benchmark) has returned -0.19% in that same time. I always read the annual letter to Shareholders by John Hathaway, the fund manager, because he is a very clear and respected thinker. This passage below seemed a little extreme to me, but I thought I would pass it on as a way to show what could be possible. It's clear to me that politicians will take the easy way out and try to inflate away debt, as Hathaway predicts. However, I don't think the entire Western economic model will crumble. However, it's worth a few thoughts as to how bad things could get, just so you are prepared.

Also, please remember that Gold is insanely volatile. While it has gone up 4x in 10 years, it's been a wild ride and you should not allocate a big % of your portfolio to it, unless you share Hathaway's conviction and his investing acumen.

John Hathaway: "We believe that the viability of the economic model of the modern democratic state is in serious jeopardy if there are finite limits imposed by markets on deficit finance. What is the alternative to tax and spend? We expect that disoriented politicians will soon gather under the banner of austerity. Of course anyone with a memory will not take such calls seriously. However, the bandwagon for belt tightening is likely to further damage the consumer psyche and strengthen the forces of deflation. This all leads, in our opinion, to the end of the dollar based reserve system for international trade and commerce. It could be only a matter of time before the dollar is sacrificed to the exigencies of domestic political pressure. This sacrifice would set the stage for a period of powerful inflation and further discredit for political leadership, financial institutions, and even social conventions. It is not too late to position gold, in our opinion."