Eric King:  “John, yesterday we had gold with a $50 trading range.  After plunging $20, gold then reversed and closed on the highs up nearly $30, your thoughts here.”

Hathaway:  “At one level it shows fairly conclusively that the market has turned, and this is the shorts really starting to feel the pain.  At a a very technical level I think it’s just confirmation that the market has made a significant low, and now all that remains to be seen is whether this is in fact the platform for gold to go to new all-time highs.

There is a crunch in terms of supply right now.  Some people that have purchased gold still don’t have it after 8 weeks....

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“You look at the shrinking COMEX warehouse inventories, and a similar story out of London, and it’s obvious that there is a shortage of physical gold. 

You and I have been saying this for the last 3 or 4 months -- talking about the disconnect between paper and physical gold.  The question was, how would this disconnect be resolved?  We have massive demand from China and India, and this is despite the Indian government’s attempts to stifle imports.  But we are still seeing an increase in gold demand from India.

So investors, particularly in Asia, want physical gold.  We are also seeing that same activity with investors here in the United States.  The idea that having GLD, which is a terrific tracking index, actually gives you physical gold exposure is incorrect.  It may track gold but it isn’t the same thing as physical gold.  I think more and more investors in the West are starting to recognize that, and so consequently they want their hands on the real thing.”

Eric King:  “People being interviewed on KWN have been bringing up the escalating fear around the world about the breakdown of the Western fractional reserve gold system.  We had a fantastic piece from Grant Williams illustrating paper claims hitting all-time highs.  There is this mad dash for entities to get their hands on physical gold because of the massive imbalance between real gold vs paper claims on gold.”

Hathaway: “Exactly.  I think Grant is correct.  The leverage on physical is at least 100 to 1 if you look at the pyramid of paper claims surrounding it.  Some of this is in the form of derivatives, options, etc, but that really is a house of cards and it will be toppled by people asking for physical gold.

The other thing that is driving the move toward physical gold is that we are beginning to see some fissures develop around the financial markets.  We are seeing 10-Year yields rise.  We are also seeing weakness in the stock market.  Earnings are well below their peak levels -- down 6% year-to-date.

You can point to a lot of things that suggest the financial markets could be in for a very rough ride over the rest of the year.  So, where do investors go in that environment?  One place is certainly a battered down sector like gold and gold mining shares.  I think that’s a pretty good trade for the next six months.

The recent action in the miners is a good example of how rapidly the shares can escalate in price.  The shares still have a long way to go.  It’s like a slingshot, and as people become convinced that the downward movement in the price of gold is over and that gold will continue to rebound, the shares will respond quite aggressively to that.

The shares are so oversold that I think you can see triples and quadruples in most of the stocks, even if gold just gets back to some moving average that the technicians are watching.  Investors just have to understand that there is much more leverage in the mining shares than there is in gold itself.”

Eric King:  “John, it is mind-boggling this run we are seeing on physical gold, and it seems to be intensifying.  This is what has some entities greatly concerned -- that they buy gold and they are waiting for 2 months to get it, but it just doesn’t get delivered.”

Hathaway:  “Especially if you want it in any size.  And you look at the premiums you have to pay, this is all a sign of what we are talking about.  There is no question that there are a lot of people in that ‘100 to 1 house of cards,’ who think they have gold but really don’t.  You have more and more people realizing that they don’t want to be forced to settle in cash -- that they want the real thing.  Part of owning gold is wanting to get away from that risk.  That’s accelerating the rush to physical we are seeing.

There is distrust of the mechanisms on the COMEX.  There is also distrust in the mechanisms surrounding the LBMA.  So I think more and more people are looking to have physical gold, in possession, in vaults that are not part of the banking system.  This is going to be a big story over the next couple of years, not just the last part of this year.”  

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

To learn more about John Hathaway of Tocqueville AM and his management services CLICK HERE.

The audio interviews with William Kaye, Grant Williams, Dr. Paul Craig Roberts, Gerald Celente, James Turk, Hugo Salinas Price, Chris Powell, Eric Sprott, David Stockman, Art Cashin and Marc Faber are available now. Also, other outstanding recent KWN interviews include Jim Grant and Felix Zulauf to listen CLICKING HERE.

Eric King

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