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Online Extra: "A Friendly Environment for Gold"


A six-month correction in gold prices doesn't worry John Hathaway, manager of the Tocqueville Gold Fund (TGLDX). He says the economy might continue to sputter, which bodes well for gold. Investors in his portfolio certainly have struck it rich -- the $500 million fund, which has an overall A rating from BusinessWeek, gained an annualized 23.3% for the past five years, ending June 30. BusinessWeek Personal Business Editor Lauren Young recently spoke to Hathaway about his outlook and the fund's recent purchases. Following are edited excerpts of their conversation:

Q: What's driving the recent dip in gold?

A: Last year, gold was caught up in a reflation trade -- people were borrowing U.S. dollars at record low rates and investing them in hard assets, especially in Asia. Once there was a threat that the carry was going to disappear, everything got pummeled, including gold.

Q: What's your outlook now for the sector?

A: The new ingredient everyone has to contend with is this backdrop of rising interest rates. Now that a rise in rates is baked into the outlook for just about everything, we can turn to other considerations such as the resumption of decline of the dollar vs. the euro and the yen. People are generally unsatisfied with other financial assets. Few areas of the market are showing much by ways of positive returns. That's a friendly environment for gold.

Q: What are the catalysts for gold going forward?

A: The most bullish thing for gold in the second half are signs of weakness in jobs data or the [Institute for Supply Management] report, which tracks manufacturing. Economic weakness is the biggest enemy of the Fed, and the biggest ally of gold.

Q: What has the fund been buying lately?

A: About 10% of the fund is in physical gold metal, and the rest is in gold producers and miners like Newmont Mining (NEM). We have a large holding in Placer Dome (PDG).

I've been spending more time lately on some of the recent mergers in the sector. Very little value is being created by all the M&A activity in the business. Scale, in most cases, doesn't add a lot of value. Clearly, the synergies from combining two separate gold-mining companies are not very meaningful. Unitizing operations in a gold camp is much more value.


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