denver gold · pdf file · 2014-10-03in hard assets, including direct ... "...

Tocqueville Bullion Reserve! real asset. real ownership. !

TERA management TERA

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Denver Gold Forum n n n

Gold and Systemic Risks

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Tocqueville Bullion Reserve n n n

Institutional Partnership for Owning Gold

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TERA management

John Hathaway, CFA, co-founder and member of the TERA executive board. Mr. Hathaway is also a Portfolio Manager at Tocqueville Asset Management L.P. Mr. Hathaway joined Tocqueville in 1997 where he is a co-portfolio manager of the Tocqueville Gold Fund as well as other investment vehicles in the Gold Equity strategy. He is also the portfolio manager of private funds. Prior to joining Tocqueville, Mr. Hathaway founded and managed Hudson Capital Advisors followed by seven years with Oak Hall Advisors as the Chief Investment Officer in 1986. In 1976, he joined the investment advisory firm David J. Greene and Company, where he became a Partner. Mr. Hathaway began his career in 1970 as an Equity Analyst with Spencer Trask & Co. Mr. Hathaway earned a B.A. from Harvard College and an M.B.A. from the University of Virginia. He also holds the CFA designation.

Simon A. Mikhailovich, co-founder and member of the TERA executive board. Previously, Mr. Mikhailovich co-founded and managed Eidesis Capital, a special situations-focused asset management firm formed in 1998. Since inception, Eidesis has raised and deployed over $2.5B of capital through special opportunity funds focused on strategies in high yield corporate bonds and loans, credit derivatives, distressed CDO and mortgage securitizations, and gold. Between 1985 and 1998, Mr. Mikhailovich was a Portfolio Manager at Falcon Asset Management overseeing private placements and alternative investments in hard assets, including direct investments in oil and gas properties, timberlands and agricultural ventures. During the early 1990s, he headed a global workouts effort responsible for the restructuring and disposition of non-core direct investments in North America and Europe. Mr. Mikhailovich received a M.S. in Business (Finance) from the University of Baltimore and a B.S. from Johns Hopkins University.

Who We Are:

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TERA management

What We Do: TBR is a private partnership that sources, securely stores and sells gold, all without dependence on financial counterparties and capital markets. TBR offers professional management, safety, fiduciary controls and personal service expected in institutional investments and private banking.

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TBR offers liquid non-financial accounts that do not rely on banks or capital markets.



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“Won’t Happen to Us” is Not a Strategy

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Conventional Wisdom Never Sees it Coming

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Gold vs SP500 vs Long-dated Treasuries

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Market’s ability to properly assess and discount catastrophic risks is poor. Demand for insurance and its cost soar AFTER the storm, not before.

§  01/07-03/08 Gold rises ~50% and peaks on the Bear Stearns bailout. Headlines: “The Fed saves the day.”

§  03/08-10/08 Gold declines ~30% on a “systemic risk is off the table” thesis. Actual risk was higher than ever.

§  10/08-08/11 Gold rises ~100% and peaks as market realizes that US does not have a “debt ceiling problem.”

§  08/11-08/14 Gold declines ~30% on a “systemic risk is off the table” thesis. ACTUAL RISK?


TERA management

Formula of the 2008 Crisis:

Risks (Model + Concentration + Leverage) * IIliquidity = Counterparty Failure

§  Bad model assumptions behind subprime bonds triggered large losses at several key market makers; liquidity evaporated.

§  All major financial counterparties could not perform; financial system collapsed requiring massive overnight bailouts.

§  In 3 out of 3 broker-dealer bankruptcies, customers’ assets were lost and/or sequestered - Lehman, MF Global, Refco.

Implications:

§  A model-dependent, levered, concentrated system is inherently fragile.

§  Systemic failure cannot be hedged within the system.

§  Ability of the counterparties to pay depends on the system being sound.

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TERA management

Key Question on Current Systemic Risks:

Q: Can the system withstand a cyclical downturn without a 2008-like collapse?

A: Unlikely:

Leverage – debt levels are higher than ever;

Model Dependence – all financial asset values rely on artificially-low rates;

Concentration – fewer liquidity providers and larger-then-ever TBTFs.

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Systemic risks are material and must be factored into strategic portfolio positioning.


TERA management

§  Global debts are at $100 trillion, up 40% since 2007.

§  Derivatives are as high as 2007, currently $693 trillion = 10x global GDP.

§  This record leverage is supported by valuations, which rely on discount rate –

see Model Risk.

Data as reported by BIS as of 6-2013 9

Leverage – Global Debts are Higher Than Ever


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Leverage – Growth in Financial Assets Far Outpaced Growth in GDP


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Leverage – Derivatives Dwarf Assets that Back Them.


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The secret to too much leverage? LOW MONTHLY PAYMENTS

Since 1975 US Debt to GDP tripled but Interest to GDP is UNCHANGED. Feels like a free lunch… for now.

Total Public Debt as % of GDP Federal Interest Outlays as % of GDP


TERA management

§  Debts exploded while rates imploded down 60% since 2007.

§  Long term junk bonds now yield ~5% - less than 30 day LIBOR did in 2007.

§  Return of rates to historic norms would trigger a system-wide re-pricing.

§  System-wide re-pricings are never orderly.

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Model Risk – All Financial Valuations Now Rely on Ultra-Low Rates

Brutality of Financial Models: PV of perpetual cash flow streams (e.g. stocks) halves if the discount rate doubles.


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Concentration Risk – the TBTFs are Bigger Than Ever.

In 20 years, 37 major financial institutions (liquidity providers) have become 4 TBTFs.


TERA management

US HY CCC or Below Effective Yield

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Extreme complacency tends to portend extreme volatility.

§  1999-2003 Normal yields and stress preceded a natural credit cycle without systemic crisis.

§  2007-2009 Historically low yields and stress preceded massive credit crash and systemic crisis.

§  2009-2014 Yields and stress index are at all-time lows: the calm before the STORM.

St Louis Fed Financial Stress Index


TERA management

§  Western economies have enjoyed V-shaped recoveries for 65+ years.

§  Mainstream investors have never experienced a depression or repression, financial or political.

§  Disdain for history and post-WWII Western exceptionalism underpin hubris:

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of the those who do not have insight to appreciate the incredible wonders of the present.”

John K. Galbraith

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Q: If risk measures are flashing red, why is volatility near all-time lows? A: Complacency – A Product of Positive Personal Experience

Objective risk measures suggest complacency is misplaced.


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Despite all risks, investors remain over-exposed to financial assets.


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Sovereign defaults have been and remain the usual outcome of financial irresponsibility.



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Defaults are for Small Countries; The U.S. Has Never Defaulted!

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Actually, US has defaulted in the past - de facto, if not de jure. Gold nationalization was done to enable subsequent dollar devaluation.


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Nixon stopped dollar convertibility into gold and assured that “devaluation” would not be a problem because “most Americans only bought American-made products.”

Nixon: “In recent weeks the speculators have been waging on all-out war on the American dollar. …I have ordered measures to defend the dollar against the speculators.”


TERA management

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Despite assuring Americans that worries over devaluation were merely a “Bugaboo,” Nixon’s action set off a massive dollar devaluation.

Nixon speaks.


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”The U.S. can pay any debt it has because we can always print money to do that.” Alan Greenspan

Default by any other name would hurt as badly…



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Which Brings Us to Gold

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Gold’s proven intrinsic value – independent, global liquid buying power.

§  Gold is not tied to any country, financial system or counterparty - it is no-one’s liability.

§  Gold bullion is the most widely recognized and universally accepted valuable in the world.

§  The only tangible, liquid non-financial asset that is practical to own outside the financial system.

§  Bullion is liquid at transparent prices across the world’s financial centres, without exception.

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Reserves must perform if conventional arrangements fail, which is why they must be de-correlated from the risks of financial assets, currencies and financial system.


TERA management

Gold Bullion is uniquely feasible as a liquid but tangible store of value.

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1 Liter Bottle

1 Liter Bottle Filled With:

Weight Lbs.

Current Value $ US

Volume/Value Gold = 1

Gold 42.56 847,906.90 1

Silver 23.15 7,146.62 119X

Copper 19.76 59.58 14,230X

Zinc 15.74 14.38 58,964X

Sugar 3.51 1.03 820,423X

Gasoline 1.63 0.68 1,243,767X

Texas Crude 1.92 0.53 1,608,653X

Prices as of 3-13-2014

Note: Diamonds, art and real estate are not uniform and, therefore, cannot have transparent pricing required for universal liquidity.



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Gold: the Oldest Idea Whose Time has Come (Again).

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Significant Upside without Counterparty Risk; Uncorrelated Reserves; Liquid Buying Power.

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Systemic Bets, Hedges and Insurance - Key Technical Considerations

§  Liquidity – liquid purchasing power, i.e. negotiability without “haircuts”.

§  Optionality – maximum flexibility.

§  Correlation – reliably predictable behavior.

§  Asymmetry – compelling upside with limited downside.

§  Sustainability – ability to hold the trade.

§  Time Value Decay – the “option killer”.

§  Counterparty Risk – if the bet wins, you need to make sure that you will get paid.

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All else equal, technical attributes of gold bullion are superior to those of most financial instruments.


TERA management

Liquidity – liquid purchasing power, i.e. negotiability without “haircuts”.

§  Financial Instruments:

§  Lesson of 2008 – all financial markets are liquid… until many are not.

§  Gold Bullion:

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Gold bullion is more liquid than stocks; liquidity is global and prices are available 24/7.


TERA management

Gold Bullion – Asymmetric Option without Counterparty Risks

§  Significant advantages over derivatives:

§  No margin calls, no counterparty risks, no expiration. Bullion has never been worthless.

§  Derivatives track specific nominal prices; gold tracks general confidence and purchasing power.

§  Annual costs are attractive versus negative real rates or shorting risks.

§  Versatile bet with asymmetric upside:

§  Gold has soared during deflation (1930s), inflation (1970s) and systemic instability (2000s).

§  Price is levered to systemic concerns when new demand soars even as supply dries up.

§  Bullion is heavily under-owned in the West; the East is aggressively accumulating.

§  Overwhelmingly bearish sentiment creates asymmetry at current levels.

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Gold bullion has potential to deliver compelling upside with limited capital risk.



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Tocqueville Bullion Reserve n n n

Strong Property Rights, Competitive Costs,

Professional Management, Compliance and Financial Controls.

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TERA management

ETF vs TBR = Complexity vs Simplicity; TBR Structure Strengthens Property Rights

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 insured non-bank vaults.

Investors

Broker Dealer

Stock Exchange

Authorized Participants

ETF Trust

Bank

Investors

TBR

Commercial Vaults

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TERA management

Investors leverage TBR relationships with the miners, refiners, bullion traders, vaults and logistics

firms in North America, Switzerland, Dubai, Singapore and Hong Kong

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TERA management

TBR offers secure ownership of physical gold outside the financial infrastructure and enables investors to maximize liquidity options via global relationships with the key players in the commercial bullion markets.

Executive Summary – TBR Highlights: §  An institutional vehicle to acquire and store gold.

§  Secure storage of gold bullion within insured commercial vaults in all the key global bullion markets.

§  Professional management, strong financial controls, reporting, compliance, service, discretion.

§  4 of the 10 largest gold mining companies have invested in TBR.

§  TBR offers advantages unavailable through gold securities & banks:

§  Minimal financial and counterparty risks;

§  Global liquidity options - redemptions in cash or in bullion;

§  Investors have a choice of four storage jurisdictions;

§  No reliance on functioning financial markets and intermediaries

§  Daily pricing and liquidity;

§  No hidden fees.

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TERA management

TERA Management LLC!

41 West 57th Street, 7th Floor New York, NY 10019

Contact:

Simon A. Mikhailovich [email protected]

Telephone: (212) 792-2172

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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. An offer or solicitation to buy or sell securities will only be made to eligible investors by means of an offering memorandum and related subscription materials. The information contained herein is qualified in its entirety, please refer to the offering materials for specific and complete terms and conditions. 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.

denver gold · pdf file · 2014-10-03in hard assets, including direct ... "...

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