All That Glitters

SAN FRANCISCO -- Gold is back on Wall Street's radar screen, even if most market watchers continue to view the group with a skepticism that borders on derision.

I made a passing reference to gold

Wednesday night in the context of a wider story about inflation. Clearly, there are reasons to suggest gold is no longer a good indicator of inflation, including that few major currencies are still pegged to the metal and gold isn't as widely used in industrial production as other basic materials.

But there's no denying the perception that gold as an inflation hedge remains intact. Furthermore, it's hard to knock the group's performance this year. After yesterday's 5.9% rally, the

Philadelphia Stock Exchange Gold & Silver Index

is up 19.7% year to date, far outperforming major equity proxies.

With all due respect to


Helene Meisler

-- in fact, in deference to her -- I made some calls yesterday regarding her

prediction that gold stocks might soon face resistance.

John Hathaway, manager of the

(TGLDX) - Get Report

Tocqueville Gold fund, expressed delight at continued bearish sentiment surrounding the group.

"I'm glad to hear that's a consensus view," Hathaway said. "I'd hate nothing more

than to see a bullish article or

someone on bubble vision promoting gold."

I turned to Hathaway, first and foremost, because he's been successful in a terrifically difficult sector. From its inception on June 30, 1998, through March 31, the Tocqueville Gold fund posted cumulative returns of 5.2%, outperforming not only the gold index, but the

S&P 500

and the


. The fund fell 7.7% in the first quarter, but again outperformed broader market averages.

A second reason for calling Hathaway is that he generally eschews the

conspiracy theories that other "gold bugs" focus on. He tends to look at fundamentals, as was the case yesterday.

"What's happening here is the


is lowering rates with a sense of urgency

and this latest reduction didn't have any suggestion they were done," the fund manager said. "They're desperately trying to get the economy going and the market up, and in the process are lowering real interest rates,

creating a good macro backdrop for these shares and the metal."


Treasury bills now yielding about 3.6% and the

consumer price index

rising 3.3% year over year, the so-called real interest rate is below 1%, perhaps explaining why those who


think the Fed isn't easing aggressively enough haven't been mentioning "real" rates recently. Since the 1950s, gold stocks have generally outperformed when the real interest rate is below 2%, Hathaway said.

When real rates were above 2%, it "paid to be short" because investors could sell short gold, then invest in one-year Treasury bills and "be ahead of the game as long as gold remained in a downtrend," he explained. With the current state of real interest rates, that incentive to short gold has been removed and "there's no longer much of a penalty for being long."

The Tocqueville fund is already "long up to our eyeballs," Hathaway said, arguing the price of gold could soon eclipse $300 an ounce (it rose 1.5% to $272.40 Wednesday). "We've had a succession of higher lows" since the metal bottomed in the high $250s.

The unwinding of still heavy short positions in the metal and weakness in the dollar could be additional catalysts in the months and years ahead, Hathaway argued. "I think we're reaching an inflection point that could mark the end of the bear market in gold," the fund manager said. "Early stage bull markets proceed without any recognition. That's what I think is happening" now.

The roughly $20 million fund is fully invested, but if he were to get new monies, Hathaway "wouldn't be afraid to invest" in gold stocks, particularly liquid names such as

Newmont Mining

(NEM) - Get Report


Placer Dome



Harmony Gold Mining




(AEM) - Get Report


Meridian Gold






Tocqueville Gold fund is long shares of all of the above.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.