tocqueville gold investor letter - third quarter 2012
TRANSCRIPT
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7/31/2019 Tocqueville Gold Investor Letter - Third Quarter 2012
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40West57thStreet,NewYork,NY10019 Tel:(212)6980800 www.tocqueville.com
TocquevilleAssetManagementL.P.
Tocqueville Gold Third Quarter 2012 Investor Letter
Gold and precious metals stocks rallied sharply in the third quarter. The rally suggests that thelengthy correction which began in August of 2011 has been completed, setting the stage for apowerful new leg in the bull market for precious metals and related mining shares. During thequarter, the metal rose 10.9% to $1,772/oz. while the XAU index rose 21.7% to 191. Since mid-May, precious metals shares as measured by the XAU have outperformed gold bullion, with theXAU index rising 35.9% against a 14.8% advance for the metal. Outperformance by the sharesover the metal has historically coincided with the strongest advances in both absolute and relative
terms for the precious metals complex.
The trigger for the strong advance was the overt resumption of quantitative easing by the Fed andECB in late August. The resumption of aggressive monetary easing, in our opinion, had beenforeshadowed by the failure of gold to make new lows after repeated denials by the Fed duringthe first half of 2012 that such action was off the table. As we opined in 1Q12 and 2Q12quarterly commentaries, as well as our web site article Gold, Gold Mining Shares, and QE;golds resilience in the face of superficially bad news was signaling that repeated Feddisavowals of the need for more monetary stimulus would prove to be misguided and misleading.
Where do we go from here? We expect gold to trade at new highs against the $US in the next
twelve months. It is already trading at record levels against the euro. We believe that preciousmetals stocks will rally strongly once the metal shows that it can breach the previous high andtrade sustainably in new high territory. It has been our conviction over the past year that themain thing ailing precious metals stocks was market uncertainty as to the future direction of thegold price. The headwind of a year-long correction in the metal prices was the principal reasonfor the dismal performance of mining shares. All of the other reasons advanced to explain thepoor performance of the shares was, in our opinion, sell-side research gibberish that extrapolatedpast transgressions of the mining companies into future expectations. For this reason, we believethat a more favorable perception of the condition of the gold bull market will translate intooutsized relative performance for the mining shares.
What are the fundamentals that will drive gold to new highs? We believe it all starts with negativereal interest rates. Negative real rates are the universal source of dissatisfaction and potentialmayhem in the capital markets. They drive capital to seek alternatives to what would otherwisebe regarded as safe havens for liquid assets and in the process misprice both safety and risk. Realinterest rates at 4% in 90 day Treasuries would represent a significant headwind for gold.However, it is difficult to imagine a transition to real rates of 4% without inflicting significantdamage to the financial markets or the economy.
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Some suggest that a Republican victory in November would be a game changer for gold. It couldbring about the dismissal of Bernanke, the taming of fiscal deficits, the painless elimination ofexcess liquidity from bloated central bank balance sheets, and the restoration of robust economicgrowth. All of this would need occur within the four years allotted to a new administration whilevoters patiently awaited the magic to take effect. While this rosy scenario is possible, we believeit would be a long shot. Therefore, we regard any possible pre-election weakness in gold andmining stocks based on such a possibility as a buying opportunity.
Another scary scenario for gold would be that the lame duck congress, post the election, embracessomething akin to the Simpson Bowles plan. One only has to look at previous attempts tointroduce formulas to limit government spending and reform the tax code to see that this is a longshot as well. In our opinion, there is no political consensus to implement the kind of changerequired for meaningful reform. Political consensus of the sort required for a basic alteration ofentitlement programs and the tax code will most likely arise from a financial crisis on the order of2008. We believe that the fiscal and monetary policies that are currently in place will lead to suchan outcome. Until then, we find exposure to gold a strategic imperative.
The appended Gold Monitor consists of three sections: Macro, Gold Specific, and MiningEquities. There are 60 separate charts, graphs and tables pertinent to these categories. A fewobservations:
Macro: Real interest rates remain negative for most key economies and central bank balancesheets are bloated. Reported inflation is muted and economic activity is lackluster. Creditspreads are creeping higher, and are almost at levels preceding the 2008 financial meltdown. Thisis a space to watch. Minimal interest rates in our opinion represent a time bomb with the interestcomponent of the federal budget at the lowest level since 1988 despite an increase in the federaldebt outstanding of 6.2x. China is exhibiting a growing distaste for U.S. securities.
Gold Specific: Sentiment has improved substantially since the historic lows earlier this year,suggesting the possibility of a short term pullback. Central banks have moved decisively to thebuy side over the past few years, but are very underweight the metal and overweight paperwith no yield. Mining production is creeping higher at best, but represents no threat to goldprices. Since 2008, gold has outperformed other hard assets by a wide margin.
Mining Equities: The shares remain historically cheap. Profit margins are at record highs andreturns on capital are approaching respectable levels. Equity capital issuance has dropped sharplyin the last few years, a reflection of the industrys much improved profitability. The sell sideconsensus assumes forward gold price is $1,313/oz., a discount of 26% to current spot.
John HathawayPortfolio Manager and Senior Managing Director Tocqueville Asset Management L.P.October 9, 2012
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This article reflects the views of the author as of the date or dates cited and may change at any
time. The information should not be construed as investment advice. No representation is made
concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or
opinion will be realized.
References to stocks, securities or investments should not be considered recommendations to buy
or sell. Past performance is not a guide to future performance. Securities that are referenced may
be held in portfolios managed by Tocqueville or by principals, employees and associates of
Tocqueville, and such references should not be deemed as an understanding of any future
position, buying or selling, that may be taken by Tocqueville. We will periodically reprint charts
or quote extensively from articles published by other sources. When we do, we will provide
appropriate source information. The quotes and material that we reproduce are selected because,
in our view, they provide an interesting, provocative or enlightening perspective on current
events. Their reproduction in no way implies that we endorse any part of the material or
investment recommendations published on those sites.
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SECTION I: MACRO
Fig. 1: Gold and U.S. Real Rates Fig. 2: Fed Balance Sheet (US$B)
Fig. 3: Gold in EUR and ECB Real Rates Fig. 4: ECB Balance Sheet (euro B)
Fig. 5: Gold in RMB and Chinese Real Rates Fig. 6: PBoC Balance Sheet (RMB B)
TOCQUEVILLE ASSET MANAGEMENT, L. P.
GOLD MONITOR
0
500
1,000
1,500
2,000
00 02 04 06 08 10 12
-8
-4
0
4
8Gold
US Real Rates
(Inverted)
0
1,000
2,000
00 02 04 06 08 10 12
-3
-2
-1
0
1
2
3Gold
ECB Real Rates
(Inverted)
1,000
5,000
9,000
13,000
00 02 04 06 08 10 12
-6
-4
-2
0
2
4
6
Gold
Chinese Real Rates
(Inverted)
0
1,000
2,000
3,000
4,000
94 97 00 03 06 09
0
10,000
20,000
30,000
40,000
02 04 06 08 10 12
0
1,000
2,000
3,000
4,000
99 02 05 08 11
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Fig. 15: Inflation Fig. 16: Electrical Consumption
U.S.(Aug)
Euro area(Aug)
China(Aug)
Headline CPI 1.7% 2.6% 2.0%
Core CPI 1.9% 1.0% N/A
Shadowstats 9.3% N/A N/A
Source: Mark Lundeen, Barrons
Fig. 17: Total U.S. National Debt Outstanding (US$B)
Source: Meridian Macro Research, LLC
Fig. 18: Average Annual Interest Rate Paid on Debt Fig. 19: Interest Expense on Debtas a % of Total Government Outlays
Source: Meridian Macro Research, LLC Source: Meridian Macro Research, LLC
TOCQUEVILLE ASSET MANAGEMENT, L. P.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1980 1984 1988 1992 1996 2000 2004 2008 2012
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2000 2002 2004 2006 2008 2010 20129
11
13
15
17
19
21
23
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
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Fig. 20: Total Credit Market Debt as a % of GDP
Source: Ned Davis Research
Fig. 21: The Debt Ceiling
Fig. 22: Quality Spread and Gold
Source: Bianco Research
TOCQUEVILLE ASSET MANAGEMENT, L. P.
0%
2%
4%
99 03 07 11
0
1,0
2,0
Gold (RHS)
Moody's Seasoned Corp
Aaa vs Baa (LHS)
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Fig. 23: Global Forex Accumulation Fig. 24: Annualized Monthly Growth in(12 month sum, $B) Treasury and Agency Holdings under Custody ($B)
Source: MacroMavens, LLC
Fig. 25: China Net Purchases Fig. 26: China Recyclingof LT U.S. Securities (Annual $B) Purchases of U.S. Securities as % Forex Accumulation
Source: MacroMavens, LLC Source: MacroMavens, LLC
TOCQUEVILLE ASSET MANAGEMENT, L. P.
-50
0
50
100
150
200
99 00 01 02 03 04 05 06 07 08 09 10 11 12
-1,000
-500
0
500
1,000
1,500
00 01 02 03 04 05 06 07 08 09 10 11 12
-50%
0%
50%
100%
150%
200%
250%
99 00 01 02 03 04 05 06 07 08 09 10 11 12
-200
200
600
1000
1400
1800
04 05 06 07 08 09 10 11 12
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SECTION II: GOLD
Fig. 27: GFMS Gold Supply and Demand (tonnes)
Source: AngloGold Ashanti, GFMS
Fig. 28: Market Cap of Above Ground Gold/ U.S. Financial Assets
Source: Tocqueville Asset Management
20%
22%
8%
0%
10%
20%
30%
1934 1982 Q2'12
TOCQUEVILLE ASSET MANAGEMENT, L. P.
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Fig. 29: Tonnes of Gold Held by Gold ETFs Fig. 30: Ownership of GLD by Type
Source: World Gold Council Source: FactSet Research Systems
Fig. 31: Central Banks Net Purchases (tonnes) Fig. 32: Notable Transactions in Q2
Source: World Gold Council
Source: World Gold Council
Fig. 33: Central Banks Holdings of Gold (tonnes) Fig. 34: Gold as a Percent of Total Reserves
Source: World Gold Council Source: World Gold Council
Country TonnesTransaction
Turkey 34.6 Addition
Russia 22.3 Purchased
Kazakhstan 5.4 Purchased
Mexico 2.7 Purchased
TOCQUEVILLE ASSET MANAGEMENT, L. P.
0
500
1,000
1,500
2,000
2,500
3,000
04 05 06 07 08 09 10 11 12
GLD
Other
Non-instituti
50.6%
Broker, 8.2%
Hedge Fund, 16.0%
Investment
Adviser, 21.1%
Insurance
Company, 0.1%Mutual Fund, 2.7%
Pension Fund,
0.5%
Private Banking,
0.8%
-800
-600
-400
-200
0
200
400
600
01 02 03 04 05 06 07 08 09 10 11 12
29,000
30,000
31,000
32,000
33,000
34,000
00 01 02 03 04 05 06 07 08 09 10 11 12
1.0%
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
2000 2002 2004 2006 2008 2010 2012
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Fig. 35: Emerging Asias Share of Gold Demand
Source: GMO, GFMS, World Gold Council, Bloomberg
Fig. 36: Google Searches for: Gold Bubble
Fig. 37: Gold Investment
TOCQUEVILLE ASSET MANAGEMENT, L. P.
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Fig. 38: Ned Davis Research Gold Sentiment Composite
Fig. 39: Hulbert Newsletter Gold Sentiment Index
TOCQUEVILLE ASSET MANAGEMENT, L. P.
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Fig. 40: Market Vane Bullish Consensus
Source: Market Vane
Fig. 41: Bernsteins Daily Sentiment Index
Source: Bernsteins DSI
TOCQUEVILLE ASSET MANAGEMENT, L. P.
40
50
60
70
80
90
100
06 07 08 09 10 11 12
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100Market Vane (LHS)
Gold (RHS)
0
20
40
60
80
100
06 07 08 09 10 11 11
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
DSI (LHS)
Gold (RHS)
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Fig. 42: COMEX Gold Futures Fig. 43: COMEX Gold FuturesOpen Interest (tonnes) Activity (tonnes)
Fig. 44: Commercial Net Shorts Fig. 45: Goldas a % of Open Interest vs. Continuous Commodity Index
Source: The McClellan Market Report
TOCQUEVILLE ASSET MANAGEMENT, L. P.
-1,200
-800
-400
0
400
800
1,200
06 07 08 09 10 11 12
500
900
1,300
1,700
2,100
Gold (RHS)
Net Hedgers/
Commercials (LHS)
Net Large Speculators (LHS)
800
1,200
1,600
2,000
06 07 08 09 10 11 12
500
900
1,300
1,700
2,100
Open Interest (LHS)
Gold (RHS)
-100%
0%
100%
200%
300%
400%
500%
600%
00 01 02 03 04 05 06 07 08 09 10 11 12
Gold
CCI
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SECTION III: MINING EQUITIES
Fig. 46: XAU and HUI as a Ratio of Gold Fig. 47: GSAs Gold Stocks Valuation
Fig. 48: Net Fund Flows for Lippers EquityPrecious Metals Fund Universe ($B)* Fig. 49: Market Cap of Van Eck Gold Equity ETFs ($B)
Fig. 51: Cash Costs and Margin
*Note: 2H12 figure is through August.
Fig. 50: Gold Miners Dividend Payout Ratio*
*Universe includes: ABX, NEM, GG, AU, GFI, KGC, NCM, BVN, HMY , Source: Scotia Capital, GFMS
AUY, AEM, IAG, CG, EGO, and GOLD
TOCQUEVILLE ASSET MANAGEMENT, L. P.
0%
10%
20%
30%
40%
50%
60%
70%
84 87 90 93 96 99 02 05 08 11
XAU/Gold
HUI/Gold
-2.0
-1.0
0.0
1.0
2.0
3.0
1H06
1H07
1H08
1H09
1H10
1H11
1H12
0
5
10
15
06 07 08 09 10 11 12
0%
20%
40%
60%
00 01 02 03 04 05 06 07 08 09 10 11 12E
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Fig. 52: Total Cash Outflow ($/oz) Fig. 53: Returns on Capital*
Note: Operating = Operating costs + Corporate costs + Exploration costs +Royalties; *Universe: ABX, NEM, GG, AU, GFI, KGC, NCM, BVN,Capital = Ongoing + Expansion capital; Other = Finance costs and Other cash outflows HMY, AEM, IAG, GOLD, HL, BGO, CBJ, GLG, LIHR,
Source: Gold Fields MDG, PDG, HM, NDY, ASL
Fig. 54: Average Discovery Cost ($/oz) Fig. 55: Equity Capital Issued by Gold Miners
Source: Gold Fields, MinEx Consulting, MEG
Source: RBC Capital Markets, BMO Capital Markets
Fig. 56: Cost of Acquisitions in the Gold Sector
Source: RBC Capital Markets, BMO Capital Markets
TOCQUEVILLE ASSET MANAGEMENT, L. P.
0%
4%
8%
12%
9 9 0 0 01 02 0 3 04 05 06 07 08 09 10 11 12E
$0
$10
$20
$30
$40
$50
00 01 02 03 04 05 06 07 08 09 100
5
10
15
20
00 01 02 03 04 05 06 07 08 09 10 11 12
0
5
1
1
$B of Equity Issued (LHS)
# of Financings (RHS)
0
100
200
300
400
00 01 02 03 04 05 06 07 08 09 10 11 12
0%
10%
20%
30%
40%
Acquisition Cost ($/oz; LHS)
Acquisition Cost as a Ratio of Gold (RHS)
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Fig. 57: Gold Price Discounted by the Market Fig. 58: Consensus Forecast Gold Prices ($/oz)
Source: Assorted N.A. Brokerage Research
Source: BMO Capital Markets
Fig. 59: NAV Premiums- Senior & Intermediate Producers (N.A.)
Source: BMO Capital Markets
Fig. 60: P/CF Senior Producers (N.A.)
Source: BMO Capital Markets
TOCQUEVILLE ASSET MANAGEMENT, L. P.
500
800
1,100
1,400
1,700
2,000
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 LT
2011
2010
2009
2007
2008
2012
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John Hathaway
Portfolio Manager and Senior Managing Director Tocqueville Asset Management L.P.October 9, 2012
The information provided in this Appendix 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 periodically reprint charts or quote extensively from
articles published by other sources. When we do, we 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 used or the investment recommendations that may be published
on those sites.
TOCQUEVILLE ASSET MANAGEMENT, L. P.