Hathaway:  “Right now I am focused on this bedeviling issue of the paper gold vs the physical gold market.  Paper gold may be setting the price, but the abuses in the paper market are just staggering to me.  For example, on Tuesday we saw 17,000 contracts sold in the space of a few minutes (which hammered the price of gold). That’s around 2 million ounces of gold....

Continue reading the John Hathaway interview below...


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“These guys don’t even have to borrow the gold to sell it.  It’s probably a couple of bullion banks, and they use their balance sheets to justify the leverage of selling gold they don’t possess.  In some ways this is just a travesty.  We have entities moving this major market and making leveraged bets, but they do it without having to take physical possession and short the way you would do it on a normal exchange.

So they just wreak havoc in the gold market and damage investor psychology, but it will come to an end.  This is a continuing story that has to be watched.  Aside from the macro issues that surround gold, I think the chain of custody, the paper trail between derivative paper instruments and the real metal, is of great interest to me.

This (the paper market) is something that potentially breaks down as more and more large entities and investors decide that they want physical gold, rather than some paper claim.  I also still believe the June low in gold was a ‘hard’ low. 

Even though this grinding consolidation in gold seems to be taking forever, my prognosis is still that we are building a solid base for the next move up.  What’s going to trigger that move higher is anybody’s guess, but people have to understand that where gold is currently trading is about the level where gold companies cannot build new mines.

So at $1,300 gold, there is very little room for error by these mining companies.  If we stay at or below the $1,300 level, I just don’t see virtually any new mines being started.  After a couple of years production will really fall off a cliff in that environment.  So, that macro-economic view is constructive for gold right now.

Right now the general stock markets are overvalued, and the earnings cycle is turning down, so it seems to me that equities are vulnerable.  Bonds are also vulnerable because of the Fed’s balance sheet and the fact that if they try to exit, they will have second order consequences which are not good for the financial markets.

The other side of that is that if the Fed tries to exit and they get frightened away like they did this last time, especially if the economy is weak as I expect it to be, this means the Fed balance sheet would continue adding to its already enormous bloat.  So stocks are overvalued, bonds are overvalued, paper assets in general are overvalued, and all of this will eventually come back to benefit gold. 

But this whole concept regarding chain of custody of an asset and rehypothecation is a really big deal.  If you are a customer of Merrill Lynch and you think you own assets, you may think you own those assets, but the way the rules have been rewritten they really favor the big banks in any kind of disaster scenario.  Meaning, what you think you own, you probably don’t really own it in the event of a catastrophic situation -- that’s a big deal.”

Hathaway added:  “This whole mainstream media frenzy over the US government shutdown is nonsense.  Some type of cosmetic deal will be reached so that each side can save face and it will be back to business as usual -- that means the politicians will be back on the road to bankrupting the US government.”

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