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at the bell

Despite a small uptick last week due to Cyprus jitters, the price of gold has been heading south in fits and starts since hitting a record near $1,900 (U.S.) an ounce back in September, 2011. Gold-mining shares have been just about the worst investment on the stock market, with the TSX global gold index losing about a third of its value over the past two years.

Being a gold bug has clearly become a painful investment thesis and investors are responding accordingly by yanking money from the sector. Holdings in the world's biggest bullion-backed fund, the SPDR Gold Trust, have recently fallen to their lowest since mid-2011, according to Bloomberg. Big-name investors, such as hedge fund operator George Soros, have been bailing from gold, too.

Amid the despondency, John Hathaway, manager of the $1.8-billion Tocqueville Gold Fund, remains optimistic, arguing that the current downturn is just a pause that will refresh the long-term gold bull market. "If anything, it looks better than ever," says Mr. Hathaway of the outlook. The negative mood, in his opinion, is "usually what happens before you make a big low."

A chat with Mr. Hathaway on gold is always worth the effort. He's considered one of the world's best gold managers, with his fund's performance ranking No. 1 over the past five years in the sector, according to Morningstar.

He had the impeccable timing of setting up his fund in 1998, just when everyone on the Street had gone delusional by chasing dot-coms, overlooking the incredible value that had been building up during the long bear market in gold that began in 1980. The fund has been among the best investments in the world since then, returning 17.8 per cent annually, net of fees, from inception to the end of December, although recent performance has been weak because of the decline in gold shares.

Many people have been spooked by Mr. Soros' selling but not Mr. Hathaway, who views the well-known U.S. hedge fund manager as a contrary indicator when it comes to gold. "I don't think he's ever gotten it right," Mr. Hathaway says, dismissing Mr. Soros's gold trading as being "like a retail investor."

For Mr. Hathaway, the plan last week to confiscate part of the savings of bank deposit holders in Cyprus is a graphic reminder of why those with money should have some exposure to gold. You never know when some politician is going to try to make off with your savings. "Everyone is going to say, 'Oh, it's just Cyprus,' but it's part of a bigger picture. There is a global assault on private wealth. It's politically driven," he says. "Anybody with liquid wealth has to think about having some of it in gold."

Gold, of course, is the perfect vehicle for avoiding political heists because it's a portable asset that isn't as easily seized as electronic forms of money imbedded in the financial system.

But Mr. Hathaway believes the main reason gold will remain in a long-term bull market isn't because of blatant, Cypriot-style taking of savings. He thinks the big driver is more subtle, and more insidious: the decision by central banks to suppress interest rates to below the rate of inflation.

This amounts to theft through inflation because interest rates aren't high enough to offset the decay in the value of money. These negative real interest rates, a form of what he calls "monetary extremism," will continue to drive money into gold for the foreseeable future, according to Mr. Hathaway.

He says the gold bull market will be over when governments and central banks decide to have normal interest rates that offer a competitive return relative to gold. After all, goes the thinking, who would own gold if 90-day Treasury bills offered a real return of 3 or 4 per cent a year?

Mr. Hathaway thinks gold could easily vault 25 per cent from current levels to $2,000 an ounce. He has 10 per cent of his fund in the metal itself, but the balance in precious metal-related equities, which he believes are so depressed they will have an explosive rally when the bull market resumes. He wouldn't be surprised to see some gold shares double in response to a 25 per cent bullion price increase.

Although he declined to talk about the merits of individual stocks in his portfolio, the nine largest equity holdings are dominated with Canadian names. Eldorado Gold Corp. is his largest holding followed by Goldcorp Inc., Silver Wheaton Corp., Royal Gold & Silver Corp., Newmont Mining Corp. of Canada Ltd., Osisko Mining Corporation, Franco-Nevada Corp., Yamana Gold Inc. and Randgold Resources Ltd.

He also holds intermediate-sized and junior companies, the most hated sector of the gold market. The juniors hold the prospect of an "exploration kicker" should they find anything. "Of course again, these days nobody cares [about the juniors], but there will come a time when people do, and those are the ones that give you the 10 baggers," he says, referring to stocks that rise tenfold.