Gold Maven Unbowed by Fed Speak

For investors frazzled by the recent decline in gold and related shares, John Hathaway, portfolio manager for Tocqueville Asset Management, has some encouraging words. Chief among them: Don't fear the Federal Reserve, a particularly contrarian viewpoint these days.

"The correction is over," Hathaway declared Tuesday at the Denver Gold Group's San Francisco gold forum. "I see clear sailing -- new highs this year."

Hathaway, who manages about $700 million in gold-related assets, including the (TGLDX)Tocqueville Gold fund, referred to a roughly 25% drop in gold shares since early December, as measured by the Amex Gold Bugs Index, and the yellow metal's apparent double top this spring at just under $430 per ounce. (Full disclosure: I am long Hathaway's fund, which is down 16.5% year to date but up 35.2% in the past three years and 25.2% in the past five.)

Ironically, his comments came on the same day Alan Greenspan said the Fed is "prepared to do what is required" to restrain inflation, and prior to Wednesday's declines amid concerns about the potential for more aggressive Fed tightening.

Gold fell $6.60 to a three-week low of $385.20 per ounce Wednesday while the Gold Bugs Index tumbled 4.9%; industry bellwether Newmont Mining (NEM) fell 5%, while Harmony Gold (HMY), Freeport McMoran Copper & Gold (FCX) and Gold Fields (GFI) were among the Big Board's biggest percentage losers.

The session further evinced how the yellow metal has become "co-opted by the reflation trade," Hathaway said Tuesday, presciently citing a near-term concern.

The 'reflation trade' refers to a notion -- which dominated Wall Street in late 2002 and much of 2003 -- that the Fed, fearing deflationary pressures, would maintain a highly accommodative monetary policy. The so-called carry trade -- in which money is borrowed at low short-term rates and invested at higher long-term rates -- was the practical means by which 'reflation' bets were made. As a classic inflation hedge, gold benefited greatly from the Fed's efforts to actually spur some inflation, rising from under $300 per ounce in early 2002 to nearly $430 this spring. Another result was the historically anomalous circumstance in which gold traded in tandem with equities (and other financial assets) in much of 2003.