tocqueville gold investor letter - third quarter 2012

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


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


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


-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



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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


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



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Fig. 38: Ned Davis Research Gold Sentiment Composite

Fig. 39: Hulbert Newsletter Gold Sentiment Index



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Fig. 40: Market Vane Bullish Consensus

Source: Market Vane

Fig. 41: Bernsteins Daily Sentiment Index

Source: Bernsteins DSI


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


-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


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


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.)


Fig. 60: P/CF Senior Producers (N.A.)



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 gold investor letter - third quarter 2012

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