Tocqueville Gold Strategy First Quarter 2013 Investor Letter...our recent website article for the...

Tocqueville Asset Management L.P.

40 West 57th Street 19th Floor ● New York ● NY ● 10019-4001

Tel: (212)698-0800 ● Fax: (212)262-0154 ● www.tocqueville.com

Tocqueville Gold Strategy

First Quarter 2013 Investor Letter

The bottoming process in gold and gold mining shares continues to be an extended and frustrating affair.

Nevertheless, the fundamental rationale for positioning physical bullion and gold mining shares seems more

compelling than ever. The metal dropped approximately 4.5% during the quarter, but the mining shares (basis

XAU) dropped almost 19%. From the September 2011 peak of 227, the XAU had declined -26% to year end 2012

where it stood at 167. Until the end of 2012, the decline was orderly. The decline accelerated sharply in the

first quarter of 2013, almost equaling the percentage decline during the previous 16 months.

The accelerated decline in the first quarter of 2013, in our opinion, suggests a capitulative phase in which

investors are giving up on the notion of exposure to gold, and especially gold mining shares. The mining shares,

which were already historically cheap at the beginning of the quarter, became even cheaper. Intense liquidation

of GLD and other gold ETFs during the quarter (see Chart 28 on p.5 of the appendix) also seemed characteristic

of a broad capitulation. Gold, a favorite investment theme two years ago, has become toxic to many.

To recap the factors we believe led to the decline:

gold became overbought during the threatened government shutdown in August of 2011. As one of

our favorite technicians stated, when the price of anything attempts to go parabolic, it must suffer

from a hangover.

the stock market has provided superior returns over the past four years

the numerous and cumulative sins of gold mining managements wore investor patience thin.

as conviction in the upward trend of the gold price dissipated, the rationale for owning gold mining

stocks disappeared.

several high profile investment firms (Goldman Sachs, SocGen and others) turned negative on gold

fundamentals, and the weight of media commentary followed suit.

Deserving special mention in the category of being useful inverse barometers of contrary opinion is the

New York Times, which featured on the front page of the 4/11/13 Business Day section: “A Sure Bet Loses Its

Luster: Gold, Long a Secure Investment Has Lost 17% of Its Value Since 2011.” A brief quote from the article is a

paean of shallow conventional wisdom:




“Now, the worst of the Great Recession has passed. Things are looking up for the economy, and, as a

result, down for gold. On top of that, concern that the loose monetary policy at the Federal Reserve might

set off inflation – a prospect that drove investors to gold – has so far proved to be unfounded.”

For a contrarian, commentary such as this provides great cheer.

As a hard boiled value investing convict, I am well aware of the perils of bottom picking. Given this caveat,

I believe that the precious metals sector has arrived at a significant bottom and that the next leg in the gold bull

market is ready to commence. My evidence:

Gold bullion has withstood intense liquidation by holders of GLD and Comex traders in paper gold as

well as withering and intensely adverse commentary by media, brokerage, technicians and assorted

soothsayers, especially during the past 90 days. However, the December 2011 low of $1523 has not

been breached, despite three successive assaults.

The fundamental case for owning gold has improved since year end 2011. Real interest rates remain

negative, worldwide quantitative easing has proliferated, and the events in Cyprus demonstrate that

uninsured deposits in the commercial banking system are at risk in any resolution scenario.

Many of the shortcomings of the gold mining sector, both real and imagined, are on the mend.

Shareholder dissatisfaction has prompted significant turnover in executive suites. Managements that

were clueless, especially with respect to legitimate shareholder concerns, have been replaced. Where

there was arrogance and overconfidence, there is now contrition and introspection. Many of the

problems that can be fixed, will be, in our opinion. Of course, there will always be exceptions.

The gold price itself seems poised to begin the next leg of its multi-year bull market. (Please refer to

our recent website article for the possible rationale, "The Investment Case for Gold: Part 2"). When the

gold price re-establishes an upward trend, we expect the gold mining stocks to revive and produce very

satisfactory returns.

The appended data package shows:

- strong macro fundamentals for gold

- investor sentiment at a negative extreme

- compelling valuations in the mining shares

It seems like a contrarian’s dream scenario to us.

http://tocqueville.com/insights/investment-case-gold-part2




Best regards, John Hathaway Portfolio Manager and Senior Managing Director © Tocqueville Asset Management L.P. April 11, 2013

This article reflects the views of the author as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized.

References to stocks, securities or investments should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by Tocqueville. We will periodically reprint charts or quote extensively from articles published by other sources. When we do, we will provide appropriate source information. The quotes and material that we reproduce are selected because, in our view, they provide an interesting, provocative or enlightening perspective on current events. Their reproduction in no way implies that we endorse any part of the material or investment recommendations published on those sites.

1

Section I. Macro

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2000 2002 2004 2006 2008 2010 2012

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%Fig.1. Gold and US Real Rates

US Real Rates

Gold Price

Source: Bloomberg

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1995 1999 2003 2007 2011

Fig.2. Fed Balance Sheet ($B)

Source: Bloomberg

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2002 2004 2006 2008 2010 2012

€ 0

€ 200

€ 400

€ 600

€ 800

€ 1,000

€ 1,200

€ 1,400

€ 1,600 Fig.3. Gold and ECB Real Rates

Gold

ECB Real Rates

Source: Bloomberg

€ 0

€ 500

€ 1,000

€ 1,500

€ 2,000

€ 2,500

€ 3,000

€ 3,500

1999 2003 2007 2011

Fig.4. ECB Balance Sheet (€B)

Source: Bloomberg

￥0

￥2,000

￥4,000

￥6,000

￥8,000

￥10,000

￥12,000

￥14,000

2000 2002 2004 2006 2008 2010 2012

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%Fig.5. Gold and PBC Real Rates

PBC Real Rates

Gold

Source: Bloomberg

￥0

￥5,000

￥10,000

￥15,000

￥20,000

￥25,000

￥30,000

￥35,000

2003 2005 2007 2009 2011 2013

Fig.6. PBC Balance Sheet (CNY B)

Source: Bloomberg

2

Section I. Macro

$4

$6

$8

$10

$12

$14

$16

2006 2007 2008 2009 2010 2011 2012 2013

Fig.7. The Biggest 6 Central Bank Balance Sheets

US, UK, Japan, China, EU & Switzerland (US$T)

Source: Bloomberg

$0

$20

$40

$60

1999 2003 2007 2011

$0

$500

$1,000

$1,500

$2,000

Tho

usa

nd

s Fig.8. Gold and M2 (US$B; Fed, ECB, PBC)

Gold

M2

Source: Bloomberg

-5%

0%

5%

10%

15%

20%

25%

1970 1980 1990 2000 2010

Fig.9. US M1 YoY%

Source: Bloomberg

0%

5%

10%

15%

1970 1980 1990 2000 2010

Fig.10. US M2 YoY%

Source: Bloomberg

0%

5%

10%

15%

20%

1999 2001 2003 2005 2007 2009 2011 2013

Fig.11. ECB M1 YoY %

Source: Bloomberg

0%

2%

4%

6%

8%

10%

12%

1999 2001 2003 2005 2007 2009 2011 2013

Fig.12. ECB M2 YoY %

Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996 2000 2004 2008 2012

Hu

nd

red

s Fig.13. PBC M1 YoY %

Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

1996 2000 2004 2008 2012

Fig.14. PBC M2 YoY %

Source: Bloomberg

3

Section I. Macro

Fig.15. Inflation

2/28/13 US Euro Area China

Headline CPI 2.0 1.8 3.2

Core CPI 2.0 1.3 n/a

Shadowstats 9.6 n/a n/a

0%

1%

2%

3%

4%

5%

6%

7%

1999 2001 2003 2005 2007 2009 2011

Fig.19. Average Annual Interest Rate Paid on Debt

Source: Bloomberg; US Treasury

10%

12%

14%

16%

18%

20%

22%

24%

1988 1992 1996 2000 2004 2008 2012

Fig.20. Interest Expense as % of Total Government Outlays

Source: Bloomberg; US Treasury

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

1980 1990 2000 2010

Fig.16. US Public Debt Outstanding ($T)

Source: Bloomberg

120%

170%

220%

270%

320%

370%

1947 1957 1967 1977 1987 1997 2007

Fig.17. US Total Credit market Debt as % of GDP

Source: Bloomberg

$13

$14

$15

$16

$17

2010 2011 2012

Fig.18. The Debt Ceiling ($T)

Source: Bloomberg

Source: Bloomberg; Shadow Government Statistics

4

Section I. Macro

0

50

100

150

200

250

300

350

400

1999 2001 2003 2005 2007 2009 2011 2013

$0

$500

$1,000

$1,500

$2,000Fig.21. Quality Spread and Gold

Gold PriceMoody's Seasoned Corp Aaa vs Baa

Source: Bloomberg

-$20

$20

$60

$100

$140

$180

$220

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Fig.24. China Net purchases Long-Term US Securities (annual US$B)

Source: US Treasury; MacroMavens, LLC

-$100

$400

$900

$1,400

$1,900

2004 2006 2008 2010 2012

Fig.22. Global Forex Accumulation (US$B, 12 month sum)

Source: Bloomberg; MacroMavens, LLC -$100

$100

$300

$500

$700

2000 2002 2004 2006 2008 2010 2012

Fig.23. Foreign Purchase of US Treasuries (US$B, 12 month sum)

Source: US Treasury; MacroMavens, LLC

5

Section II. Gold

Fig.25. Gold Supply and Demand (tonnes)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Supply

Mine production 2,591 2,592 2,478 2,550 2,481 2,476 2,409 2,584 2,739 2,827 2,848

Old gold scrap 835 944 829 886 1,107 956 1,217 1,672 1,723 1,669 1,626

Traditional supply 3,426 3,536 3,307 3,436 3,588 3,432 3,626 4,257 4,463 4,495 4,473

Net producer hedging (412) (279) (445) (86) (373) (444) (349) (252) (108) 10 (20)

Official sector sales 545 617 497 662 367 484 236 30 - - -

Total supply 3,559 3,874 3,359 4,012 3,582 3,472 3,513 4,034 4,355 4,505 4,453

Demand

Jewellery 2,680 2,522 2,673 2,707 2,283 2,405 2,187 1,760 2,017 1,972 1,908

Other 360 385 416 431 458 462 436 373 466 453 428

Total fabrication 3,040 2,907 3,089 3,138 2,741 2,867 2,623 2,134 2,483 2,425 2,336

Bar & coin retail investment 373 314 396 412 421 446 649 743 1,205 1,519 1,256

Official sector purchases - - - - - - - - 77 457 535

ETFs & similar 3 39 133 208 260 253 321 617 382 185 279

Implied net investment 143 614 (259) 254 160 (94) (80) 541 207 (81) 47

Total demand 3,559 3,874 3,359 4,012 3,582 3,472 3,513 4,034 4,355 4,505 4,453 Source: World Gold Council

20% 22%

6%

0%

5%

10%

15%

20%

25%

1934 1982 2012

Fig.26. Market Cap of Above Ground Gold as % of Total US Financial Assets

Source: Federal Reserve, World Gold Council

0

500

1,000

1,500

2,000

2,500

3,000

2004 2006 2008 2010 2012

Fig.27. Gold Held By Gold ETFS (tonnes)

Other GLD

Source: Company Filings, World Gold Council

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1/11 5/11 9/11 1/12 5/12 9/12 1/13

Fig.28. Total Net Asset Value in the SPDR Gold Trust (tonnes)

Source: Company Filings

6

Section II. Gold

Investment Adviser, 19.80%

Broker, 8.70%

Private Banking,

1.10%

Pension Fund, 0.50%

Hedge Fund, 8.30%

Mutual Fund, 3.60%

Insurance Company,

0.20%

Non-Institutional, 57.80%

Fig.30. SPDR Gold Trust Ownership by Type

Source: FactSet

00 01 02 03 04 05 06 07 08 09 10 11 12

-600

-500

-400

-300

-200

-100

0

100

200

300

400

500

600 Fig.32. Central Banks Net Purchases (tonnes)

Source: World Gold Council

29,500

30,000

30,500

31,000

31,500

32,000

32,500

33,000

33,500

34,000

2000 2002 2004 2006 2008 2010 2012

Fig.33. Central Banks Holdings of Gold (tonnes)


Fig.31. Notable Transaction in 1Q13

Country Tonnes Transaction

Kazakhstan 1.50 Purchase

Korea 20.00 Purchase

Russia 12.20 Purchase

Turkey 10.30 Addition

8%

9%

10%

11%

12%

13%

14%

2000 2002 2004 2006 2008 2010 2012

Fig.34. Gold as % of Total Reserves


38

39

40

41

42

43

44

Dec-11 Apr-12 Aug-12 Dec-12 Apr-13

Fig.29. SPDR Gold Trust Net Asset Value (MOz)

Source: Company Filings

7

Section II. Gold

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013

Fig.35. Web searches for "Gold Bubble"

Source: GoogleTrends

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fig.36. Web searches for "Gold Investment"

Source: GoogleTrends

$0$200$400$600$800$1,000$1,200$1,400$1,600$1,800$2,000

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013

Fig.37. Bernstein's Daily Sentiment Index

DSI

Gold

Source Bloomberg, Bernstein's DSI

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013

Fig.38. Market Vane Bullish Consensus

Market Vane

Gold

Source Bloomberg, Market Vane

8

Section II. Gold

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

800

1000

1200

1400

1600

1800

2000

2006 2008 2010 2012

Fig.39. Comex Gold Futures Open Interest (tonnes)

Open Interest

Gold

Source: Bloomberg

-20%

80%

180%

280%

380%

480%

2000 2002 2004 2006 2008 2010 2012

Fig.40. Gold vs Continuous Commodity Index

CCI Index

Gold

Source: Bloomberg

$900

$1,100

$1,300

$1,500

$1,700

$1,900

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

7/10 9/10 11/10 1/11 3/11 5/11 7/11 9/11 11/11 1/12 3/12 5/12 7/12 9/12 11/12 1/13 3/13

Fig.42. Commercial Net Shorts as % of Total Open Interest

Net Short/Open Interest

Gold

Source: Bloomberg; The McClellan Market Report

More Net Short

Less Net Short

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

(1,000)

(800)

(600)

(400)

(200)

-

200

400

600

800

2006 2007 2008 2009 2010 2011 2012 2013

Fig.41. Comex Gold Futures Activity (tonnes)

Net Large Speculators

Net Hedgers/Commercials

Gold

Source: CFTC

9

Section III. Gold Mining Equities

0%

10%

20%

30%

40%

50%

60%

70%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Fig.43. XAU and HUI as a Ratio of Gold

HUI/GoldXAU/Gold

Source: FactSet

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1H

07

2H

07

1H

08

2H

08

1H

09

2H

09

1H

10

2H

10

1H

11

2H

11

1H

12

2H

12

1H

13

Fig.44. Net Fund Flows For Lipper's Equity Precious Metals Fund Universe ($M)

Source: Morningstar 1H13 - as of 2/28/13

15%

20%

25%

30%

35%

40%

2003 2005 2007 2009 2011

Fig.46. Gold Miners Dividend Payout Ratio

Source: FactSet Universe: ABX, NEM, GG, AU, GFI, KGC, NCM, BVN, HMY, AUY, IAG, CG, EGO, GOLD

$0

$2

$4

$6

$8

$10

$12

$14

$16

2006 2007 2008 2009 2010 2011 2012

Fig.45. Market Cap of Van Eck Gold Equity ETFs ($B)

Source: FactSet

0

20

40

60

80

100

120

140

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

2000 2002 2004 2006 2008 2010 2012

Fig.47. Equity Capital Issued by Gold Miners

$B of Equty Issued

# of Transactions

Source: RBC Capital Markets

10


-2%

0%

2%

4%

6%

8%

10%

02 03 04 05 06 07 08 09 10 11 12

Fig.48. Senior Producers Return On Capital

Source: FactSet Universe: NEM, ABX, GG, KGC, AUY, NCM, AU, GFI, HMY

15%

20%

25%

30%

35%

40%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

01 02 03 04 05 06 07 08 09 10 11 12 13 14

Fig.51. Gold Production Costs ($/Oz)

Avg Gold Price

Aft Tax Cash Cost

Margin

Source: Company filings

0%

10%

20%

30%

40%

50%

60%

70%

$0

$100

$200

$300

$400

$500

$600

05 06 07 08 09 10 11 12

Fig.49. Average Cost of Acquisitions in the Gold Sector ($/Oz)

Acquisition Cost As Ratio of Gold Price

Source: RBC Capital Markets

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fig.50. Senior Producers Cash Costs and Margin ($/Oz)

Cash Margin

Cash Costs

Source: Bloomberg

11


2007 2008

2009

2010

2011

2012

2013

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

Yr 0 Yr 1 Yr 2 Yr 3 Yr 4

Fig.52. Consensus Forecast Gold Price ($/Oz)

Source: Scotiabank

Source: BMO Capital Markets



Fig.53. Gold Price Discounted by Market ($/Oz) Fig.54. NAV Premiums – Senior & Intermediate Producers (N.A.)

Fig.55. P/CF – Senior Producers (N.A.)

Tocqueville Gold Strategy First Quarter 2013 Investor Letter...our recent website article for the...

Documents

Transcript of Tocqueville Gold Strategy First Quarter 2013 Investor Letter...our recent website article for the...