The Golden Opportunity: Beginning of the End or the End of the Beginning?

   

 

   

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TERA  MANAGEMENT  LLC  –  TOCQUEVILLE  BULLION  RESERVE  

           

•  Tocqueville Asset Management is a New York-based, SEC registered investment advisor formed in 1985.

–  Contrarian, fundamental investor that specializes in undervalued assets; –  $11B of client assets under management as of 11/30/12, of which –  $3B is invested in gold-related strategies.

•  Eidesis Capital is a New York-based specialty asset manager formed in 1998.

–  Expertise in macro and systemic risks and special situations; –  Since inception, principals have raised and deployed over $2.5B of capital; –  Launched an institutional partnership for holding physical gold in 2011.

TOCQUEVILLE  BULLION  RESERVE,    

INSTITUTIONAL-­‐GRADE  VEHICLE  TO  OWN  GOLD  GLOBALLY,  OUTSIDE  THE  FINANCIAL  SYSTEM

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PROSPERITY  THROUGH  “WEALTH  EFFECT”  –  NEW  AND  IMPROVED  APPROACH  

           

   ARE  THINGS  EVER  REALLY  “DIFFERENT  THIS  TIME?”    

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CORPORATE  DEBT  OUTSTANDING  IS  AT  ALL-­‐TIME  HIGH  

 Leverage  feels  great  while  debt  service  is  cheap  and  earnings  strong.  

 

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RETURN-­‐FREE  RISK  -­‐  YIELDS  ON  THE  SUB-­‐CAA  BONDS  ARE  AT  ALL-­‐TIME  LOW  

BETWEEN  17%  AND  43%  OF  SUB-­‐CAA  BONDS  DEFAULT  WITHIN  12  MONTHS.      BETWEEN  57%  AND  83%  OF  SUB-­‐CAA  RATED  BONDS  DEFAULT  WITHIN  60  MONTHS.      

           2011  Moody’s  Default  Study  

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US  DEBT  TO  GDP  IS  AT  THE  POST-­‐WW  II  HIGH;  INTEREST  TO  GDP  IS  NEAR  THE  LOW      

 Since  1975  US  Debt  to  GDP  tripled  but  Interest  to  GDP  is  UNCHANGED.  

Feels  like  a  free  lunch…  for  now.              

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MANIPULATED  DATA  ARE  NO  MORE  INSIGHTFUL  THAN  RORSCHACH  TEST  CARDS      

 Rorschach  is  based  on  biases,  not  facts  driving  data  interpretacon.    

               

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Age-­‐old  wisdom  is  universal  because  it  disclls  common  sense

He who laughs last, laughs best

Wer zuletzt lacht, lacht am besten!

Rira bien qui rira le dernier

Ride bene chi ride l'ultimo

Хорошо смеется тот кто смеется последний

                                                   

   

       

SOMETHING  THAT  DOES  NOT  MAKE  SENSE…  DOES  NOT  MAKE  SENSE    

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WHAT  DOES  COMMON  SENSE  TELL  US  ABOUT  CURRENT  SYSTEMIC  RISKS?      

•  TBTF  banks  geeng  bigger  since  2008  cannot  mean  the  risk  got  smaller.  

•  Princng  currencies  without  limits  cannot  be  good  for  their  value  over  cme.  

•  It  is  a  fact  that  historical  record  of  financial  engineering  is  very  poor.  

•  In  history,  unrestrained  debt  accumulacon  has  never  led  to  a  posicve  outcome.  

•  Cash  flows  at  the  lowest  discount  rates  possible  cannot  be  a  good  deal.  

•  Mispriced  risk  has  never  NOT  resulted  in  misallocacon  of  capital.  

•  If  interconnectedness=systemic  risk,  and  it  does;  risk  has  never  been  higher.  

•  EU  pushing  to  expropriate  Cyprus  deposits  means  “bail-­‐in”  is  a  new  policy  tool.  

 Whatever  happens,  structural  systemic  risks  must  be  addressed  by  all  prudent  investors.  

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Convenconal  Market  Wisdom  Circa  April-­‐May  2013:    

Central  Banks  are  firmly  in  control  and  will  succeed.        

European  systemic  risk  has  been  taken  off  the  table.    

The  Fed  is  nearing  an  “EXIT”  as  recovery  takes  hold.    

“Inflacon”  has  been  and  will  concnue  to  remain  low.    

The  “Safe  Haven  Trade”  has  run  its  course.    

Gold  prices  dropped  sharply  =  gold  is  not  a  safe  haven.        

 Convenconal  wisdom  drives  momentum  but  is  notoriously  wrong  at  seeing  change.  

Regardless  of  Inconsistencies,  Bullish  Bias  is  Driving  the  Markets  

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•  Supply  and  demand  are  driven  by  expectacons  and  need/want.    

•  In  the  absence  of  need,  expectacons  drive  demand.  

•  When  confidence  rises,  demand  for  safe  havens  should  decline.  

•  Gold’s  price  declined  as  confidence  rose,  which  is  what  should  happen.  

•  The  quescon  is  whether  confidence  is  misplaced.  and  needs  

Insights  From  the  Gold’s  Selloff  –  Price  Accon  Made  Sense  

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   •  As  the  Safe  Haven  Trade(rs)  rushed  to  sell,  Safe  Haven  seekers  rushed  to  buy.  

•  Traders  proved  to  be  “weak  hands”;  physical  buyers  –  “strong  hands.”  

•  Physical  gold  inventory  for  immediate  delivery  was  again  proved  cght.  

•  Many  products  were  quickly  sold  out;  the  same  happened  in  the  fall  of  2008.          •  Whereas  liquidity  of  financial  assets  dries  up  in  crashes,  gold’s  surged.  

•  Absence  of  liquidity  risk  is  the  hallmark  of  a  genuine  Safe  Haven.  

   

Key  Insights:  Weak  vs  Strong  Hands;  Physical  Scarcity;  Liquidity  

Price  of  a  Safe  Haven  asset  can  be  volacle  but  it  is  always  liquid.    

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 If  Physical  Demand  Surged,  Why  did  the  Prices  not  Recover?  

•  drivers  of  supply  and  demand  are  expectaPons  and  needs  

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Futures  and  “Paper  Gold”  Data:    

•  LBMA  Daily  Volume  (2011)                                                                  $241  B  •  CME  Daily  Volume  Record  (2012)                                            $84  B  •  ETP  Annual  Demand/Outstanding  (2012)                                                  $15  B/$140  B  •  GLD  -­‐  Average  Daily  Volume  (2013)                                                                          $2  B  

 Physical  Gold  Data:    

•  Global  Annual  Demand  for  Bars  and  Coins  (2012)                    $67  B  •  US  Annual  Demand  for  Bars  and  Coins  (2012)                                      $3  B  

 CME  Group,  World  Gold  Council,  LBME  

 To  date,  the  gold  bull  has  been  driven  by  the  paper  traders:  

 Volumes  of  the  paper  markets  overwhelm  the  physical  market.  

WHAT  DROVE  THE  GOLD  BULL  –  A  PAPER  CHASE  OR  A  GOLD  RUSH?  

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What  is  a  “Safe  Haven  Trade”?    

What  are  Safe  Havens?    

What  qualifies  as  a  Safe  Haven  in  the  current  environment?    

   

 Choice  of  a  proper  Safe  Haven  depends  on  the  risks.      

         

Parsing  the  Safe  Haven  Fundamentals  

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“SAFE  HAVEN  TRADE”  AIMS  TO  PROFIT  FROM  MOMENTUM  AND  VOLATILITY  

 Tools  of  the  Safe  Haven  Trade  –  ETPs,  “paper  gold”  and  derivacves.      

Momentum  follows  expectacons:      

 As  expectacons  of  inflacon  declined,  so  did  gold  prices.  

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 Hedges:    •  Private  or  exchange  traded  financial  instruments  whose  value  is  expected  to  move  in  

the  opposite  direcPon  of  the  overall  porcolio.    Insurance:    •  Agreement  in  which  you  pay  a  company  money  and  the  company  pays  the  cost  if  you  

have  an  accident,  injury  or  loss.    

   Convenconal  hedges  rely  on  counterparces  and  funcconing  markets.              

Tools  For  Managing  Convenconal,  Idiosyncracc  Risks  

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Structural  Risks  Can  Impair  Value  Realizacon  When  Most  Needed  

￭     Crisis  of  2007-­‐2009  confirmed  that  all  “structural”  risks  are  highly  correlated:  

 –  Financial  counterparPes  could  not  perform  without  

government  bailouts.  –  Liquidity  of  derivaPves  and  ETPs  mirrored  financial  

markets,  not  the  physical  markets.  –  Whenever  custodians  failed,  custodial  assets  were  

lost  -­‐  Lehman,  MF  Global,  Refco.  

–  Prices  of  numerous  derivaPves  and  ETPs  diverged  from  the  underlying  assets.  

–  Listed  securiPes  were  subjected  to  sovereign  fiat:  margin  rules,  shorPng  bans,  trading  limits.    

–  Complexity,  opacity  and  limited  exit  opPons  exacerbated  the  losses.    

“Structural” risks exacerbate the “risk-off”

dynamic prevalent in times of stress.

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 High  Correlacon  is  the  key  driver  of  Catastrophic,  Uninsurable  Risks:    •  War,  Riots,  InsurrecPon,  Floods,  Earthquakes  

•  Sovereign  Debt  Crises,  Currency  Reforms,  Depressions,  Market  Crashes,  etc.    “Jump  Risk”  is  the  hallmark  of  High  Correlacon:    •  Most  catastrophic  events  occur  suddenly,  before  the  market  has  priced  in  the  risk.      

CORRELATION  AND  UNCONVENTIONAL,  CATASTROPHIC  RISKS  

 Level  of  interconnectedness,  especially  in  finance,  has  never  been  higher.  

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Only  real  assets  offer  proteccon  when  convenconal  financial  arrangements  fail.    Reserves:  •  Cash,  or  assets  readily  converPble  into  cash,  held  aside  to  meet  expected  or  

unexpected  demands;  resources  not  normally  called  upon  but  available  if  needed.  

•  Gold  bullion  is  the  ideal  reserve  asset  –  it  is  the  only  real  asset  that  is  always  liquid.    Safe  Havens:    •  A  safe  or  peaceful  place  in  an  otherwise  dangerous  area,  e.g.  financial  system.  

Gold  is  the  only  liquid  asset  that  can  be  pracccally  held  outside  the  banks.  

 Financial  instruments  are  concngent  promises  to  perform  in  the  future.  

 Reserves  and  Safe  Havens  are  REAL  and  ready  for  use  at  all  cmes.    

               

TOOLS  FOR  OF  Managing  Unconvenconal,  Correlated  Risks:  

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 Higher  cost  of  invescng  in  Safe  Haven  Assets  is  the  cost  of  Systemic    Proteccon.    

“SAFE  HAVEN  TRADE”  CANNOT  OFFER  AN  EFFECTIVE  SAFE  HAVEN  

 Safe  Haven  Trade  –  Profits  from  fear  but  loses  if  event  occurs.    

§   Complete  reliance  on  funcPoning  capital  markets  and  counterparPes’  performing;  §   High  sovereign  risks;  §   Low  execuPon  costs,  high  liquidity  (so  long  as  financial  markets  funcPon).  

   Safe  Haven  Assets  –    Profits  from  fear  AND  if  event  occurs.      

§   No  reliance  on  funcPoning  capital  markets  or  on  counterparPes’  performing;  §   Low  sovereign  risks;  §   Higher  execuPon  costs;  lower  liquidity  but  not  dependent  on  financial  markets.  

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   How  they  do  it:  

   

Warning:  None.      

Timing:  Over  a  weekend.      

ObjecPve:  Stem  the  Pde  by  expropriaPng  value.      

Stated  RaPonale:  Protect  the  public  against  speculators,  hoarders,  etc.        

   

                                                   

   

       

MY  SLIDE  ON  SYSTEMIC  RISK  FROM  THE  APRIL  2012  GRANT’S  CONFERENCE  

 Cyprus  events  were  predictably  “unpredictable”  and  caught  most  people  unprepared.  

 Vast  majority  gets  caught  due  to  complacency  –  “It  can’t  happen  here;  it  won’t  happen  to  me.”      

               

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•  Since  2008,  bailout-­‐based  policies  miPgated  tradiPonal  structural  risks:    

•  Depositors,  counterparPes  and  stakeholders  were  made  whole  and  expected  future  bailouts.            

•  Cyprus  was  not  a  “one-­‐off”  but  a  preview  of  the  new  resoluPon  policy:  

•  “Resolving  Globally  Accve,  Systemically  Important,  Financial  Insctucons”  –  a  12/2012  joint  paper  by  the  FDIC  and  the  Bank  of  England  laid  out  principles  for  handling  future  failures:  

 •  “…losses  of  any  financial  company  placed  into  receivership  will  not  be  borne  by  taxpayers,  but  by  

common  and  preferred  stockholders,  debt  holders,  and  other  unsecured  creditors…”  •  “Uninsured  deposits  would  be  treated  in  line  with  other  similarly  ranked  liabiliPes  in  the  resoluPon  

process,  with  the  expectaPon  that  they  might  be  wrilen  down.”  •  “In  the  U.S.,  these  powers  had  already  become  available  under  the  Dodd-­‐Frank  Act.”      

•  All  customer  assets  held  within  financial  insPtuPons  will  be  exposed  to  losses  in  case  of  failure.        

 

                                                   

   

       

What  Happened  in  Cyprus  Won’t  Stay  in  Cyprus    

Prudence  calls  for  a  “safe  haven”  liquid  reserve  outside  of  financial  insctucons  and  markets.  

Gold  bullion  is  the  only  non-­‐financial  asset  that  is  liquid  and  pracccal  to  hold  outside  the  banks.  

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Tocqueville Bullion Reserve n n n

Unencumbered Ownership of Physical Gold No Direct Correlation to “Structural” and Financial Risks

Choice of Vaults – East Asia, US, Switzerland Expert Management and Institutional Controls

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Investors

Broker Dealer

Stock Exchange

Authorized Participants

ETF Trust

Bank

Investors

TBR

Non-Bank Vaults

ETF  vs  TBR  =  Complexity  vs  Simplicity  

The ETF Model Exchange-traded indirect claims against an allocated gold bank account.

The TBR Model Directly redeemable “warehouse receipts” fully backed by gold held in non-bank vaults.

TOCQUEVILLE  BULLION  RESERVE  –  PROTECTION  AGAINST  SYSTEMIC  RISK    

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•  No  dependence  on  financial  counterparPes  or  infrastructure:  –  TBR  does  not  use  leverage,  derivaPves  or  any  other  financial  instruments.  –  TBR  uses  secure,  fully  insured  storage  within  non-­‐financial  vaults  around  the  globe.  –  Direct  subscripPon  process  eliminates  the  risks  of  custodial  accounts.    

•  No  price  or  liquidity  divergence  between  L.P.  interests  and  physical  gold:  –  TBR  account  value  directly  Pes  to  the  NAV  of  the  underlying  gold  bullion.    –  L.P.  interests  always  represent  pass-­‐through  ownership  of  fully-­‐allocated  bullion.  –  Liquidity  of  the  L.P.  interests  depends  on  the  global  bullion  markets,  not  financial  markets.      

•  Flexible  exit  opPons,  full  transparency  and  global  diversificaPon:    –  TBR  offers  daily  liquidity  (24-­‐hour  noPce)  either  in  cash  or  in  gold  bullion.  –  Transparency,  robust  insPtuPonal  controls,  reporPng  and  customer  service.    –  Choice  of  mulPple  storage  jurisdicPons  in  close  proximity  to  acPve  bullion  markets.        –  Ease  of  execuPon,  costs  and  liquidity  terms  are  compePPve  with  the  ETPs.  

TBR Offers Pure Gold Exposure Without the Structural Risks

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A Global Team of Premier Service Providers

Cash Custody Secure Gold Custody Administration, Accounting, Reporting

Legal Financial Audit

Full Value Insurance Inventory Audit

TBR  –  Adding  Value  Through  Global,  Insctuconal  Relaconships  

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TBR GLD

Vehicle Type Open-ended Private Partnership ETF

Trading Commissions 0% YES

Share Bid/Ask Spread 0% YES

NAV Premium/Discount 0% YES

Mgt Fees/Gross Expenses 0.35%/0.50% (>$1mm) 0.30%/0.40%

Gold Transaction Costs 0% - 0.20% N/A

Redemptions in Gold Unrestricted Via Auth. Participants; 100k shares minimum

Purchase/Sale Directly via TBR Secondary Market

Liquidity Daily, 24 hr Notice Market Hours

Evidence of Ownership Physical Electronic/DTC

Gold Custodians Brinks, ViaMat, Malca-Amit HSBC

Storage Jurisdictions US, Switzerland, Singapore, Hong Kong UK

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TBR  –  INSTITUTIONAL  FIDUCIARY  CONTROLS  AND  PROCEDURES  

•  Storage providers perform daily, weekly and monthly inventory checks and email daily inventory reports reflecting any changes.

•  Credit Suisse Administration Services (“CSAS”), TBR’s administrator, maintains independent real-time access to the vaults’ inventory systems and receives daily inventory reports independently from the manager.

•  CSAS maintains each investor's capital account, calculates daily Net Asset Value (“NAV”) and prepares and distributes monthly NAV statements indicating the level of gold backing.

•  Inspectorate International Limited, an independent global provider of inventory control services, performs quarterly inspections and full bullion count.

•  Annual audits are performed by Rothstein Kass and Co., one of the largest U.S. providers of audit and tax services to the financial industry.

•  The manager conducts on-going monitoring and reconciliation of the inventory reports and performs on-site due diligence visits and inventory counts.

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 Those  who  establish  reserves  can  withstand  a  range  of  outcomes.      

   

Those  without  reserves  can  only  afford  a  happy  ending.            

Successful Wealth Preservation Requires Resiliency

 Human  history  is  not  a  Hollywood  film;    it  is  the  story  of  the  ebbs  and  flows  of  great  civilizacons  and  fortunes.

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TacPcs  without  strategy  is  the  longest  path  to  victory.  Strategy  without  tacPcs  is  the  noise  before  defeat.  

 Sun  Tzu    

 Q:  Why  do  we  not  remember  great  fortunes  made  in  the  1920?    A:  Because  majority  of  them  were  lost  in  the  1930s.    

     

Wealth Preservation Project is a Not a Momentum Trade

   

Only  32%  of  the  459  families  listed  in  the  Hamptons  Blue  Book  in  1927  were  scll  listed  in  1940.    

Nick  Colas,  CovergeX  (via  Zero  Hedge)      

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 PROTECTION  Is  cheap  whenever  consensus  under-­‐escmates  Probability.      

 

GETTING  TECHNICAL:  HOW  MUCH  SHOULD  ONE  PAY  FOR  PROTECTION  

     Price  of  Proteccon  =  Expected  Loss              Expected  Loss  =  Event  Probability  X  Potencal  Loss  Severity                Since  Potencal  Loss  Severity  in  systemic  events  is  catastrophic,          Consensus  about  Event  Probability  is  the  key  determinant  of  cost.          

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•  Price  of  lifeboat  seats  to  cruise  passengers  is  irrelevant.  

•  Value  of  lifeboat  seats  on  Titanic  was  immeasurable.        •  In  an  environment  perceived  safe,  gold  price  is  debatable.    •  In  the  1978  Vietnam,  7oz  of  gold  bought  a  ccket  to  freedom.      of  supply  and  demand  are  expectaPons  and  needs  

 What  is  the  value  of  a  gold  hoard  vs  an  expropriated  Cyprus  account?  

           

Safe  Haven’s  Price  Should  Not  be  Confused  with  Value  

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 AS  UNSOUND  POLICIES  FAIL  TO  DELIVER  RECOVERY,  

 SYSTEMIC  RISK  WILL  MANIFEST  ITSELF  WITH  A  VENGEANCE  

 DRIVING  INVESTORS  TOWARDS  REAL  SAFE  HAVENS.  

 THEN,  WHAT  HAS  BEEN  A  SPECULATIVE  “PAPER  CHASE”  

 WILL  TURN  INTO  A  REAL  GOLD  RUSH.    

       

What about the Golden Opportunity?

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This presentation was prepared by TERA Management LLC and is for information purposes only. Neither the information nor any opinion contained in this presentation or any appendices constitutes a solicitation or offer by TERA Management LLC or any affiliates to buy or sell any securities or other financial instruments or provide any investment advice or service. TERA Management LLC does not undertake to advise of changes in its opinions or information contained in this presentation. Any data included in this presentation is obtained from sources believed to be reliable but cannot be, and is not guaranteed by TERA Management LLC. Any opinions or projections expressed herein are those of the TERA Management LLC and cannot and should not be relied upon as representations of fact or investment advice. Past returns cannot be relied upon as a predictor of future performance. No material from this presentation may be used, reproduced or otherwise disseminated in any form to any person or entity without the explicit prior written consent of TERA Management LLC.

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