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Page 1 of 4

Tocqueville Gold Strategy

Second Quarter 2016 Investor Letter

Weeks Where Decades Happen

The precious metals markets have clearly turned the corner, becoming flat-out bullish following the extensive and painful correction from August 2011 to year-end 2015. Year-to-date through June 30, the US dollar gold price has increased 24.57 percent, while the XAU (Philadelphia index of gold and silver stocks) benchmark has increased 116.16 percent. Positive gold cycles have historically lasted for at least three to five years, and some longer. Despite the impressive year-to-date advance, we believe this cycle is still in its infancy, and that it promises to be extremely powerful.

We believe that fiscal and monetary policy in all developed countries has reached a dead end, and is all but bankrupt. More important, we maintain that the persistent application of and adherence to idiotic/unproductive public policies have substantially ramped up systemic risk. Investors are beginning to look to gold, fearing that the purchasing power of all paper currency – including the US dollar – is imperiled. The three-decade low in the pound sterling following the Brexit vote is a warning that the practice of central-bank-managed currency exchange rates is unravelling. Mainstream economists are beginning to express concern:

Brexit is a shock to an already fragile system…. The situation is extremely unstable and if not taken seriously

quickly enough could end up setting the European recovery back substantially, threatening the political sustainability of the single currency project. (Note by Torsten Slok, chief economist, Deutsche Bank Securities, 7/5/16)

According to a June 25, 2016, Financial Times commentary, “The Fed is fast becoming a sideshow as

forces work against a rate rise.” In our view, interest rates will rise, and cannot be normalized without another financial crisis that would mirror or exceed the intensity of the 2008 global credit meltdown. Super-easy money has, in our opinion, reached the end of the road as a credible palliative for economic underperformance. What comes next is anybody’s guess, but under almost any imaginable scenario, gold benefits.

With popular market averages hovering near all-time highs, complacency seems to rule the financial markets. Confidence seems to rest on the belief that a return to a normal interest-rate structure is achievable, and that the exit from radical monetary policy can be painless. However, ultralow interest rates – the lowest in 5,000 years, according to Bank of America Merrill Lynch’s Michael Hartnett (MarketWatch, 6/14/16) – have inflated asset values while failing to trigger economic growth. A return to normal interest rates cannot in our opinion occur without damage to financial markets. According to Citibank, negative rates are “poison to the financial system,” threatening the viability of the capital-formation process and institutions at the core of the financial system.

We agree with Stephanie Pomboy of MacroMavens that the lesson of Brexit is that political and financial elites are clueless as to fundamental realities: “The markets never could truly embrace polls suggesting a possibility of a vote to leave because they see no problem with the status quo in the first place.” However, she concludes, “Things aren’t nearly as good as non-GAAP earnings and sell-side assurances would have them believe.” For example, consumer goods orders have had negative comparisons in 21 of the last 22 months; orders ex transportation have been down 17 months in a row on a year-over-year basis; factory orders have been down 10 months in a row on a year-over-year basis.

It is difficult to square these and other economic reports with market averages hovering near all-time highs, unless one were to hypothesize central-bank manipulation of these averages for optical purposes to affect consumer and business behavior.

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It is impossible to know what headlines, and when, will drive more investors to acquire gold. We

believe that the market situation for precious metals is identical to the 1999 bottom, which preceded a 12-year advance of 615 percent. Apparent then, and again at year-end 2015, was nearly universal negativity for gold’s prospects. To pinpoint future reasons for a reversal of sentiment is analogous to guessing which snowflake will trigger the avalanche. What should be obvious to the residents in the valley below is the buildup of the cornice (systemic risk). As Lenin said, “There are decades when nothing happens, and there are weeks where decades happen.” It is the nature of bull markets to leave most investors on the sidelines, scratching their heads as to what has changed. The upsurge in gold could be a warning of seismic shifts in financial markets.

As we have noted in Paper Gold: Utopia for Alchemists and our Fourth Quarter 2015 Investor Letter, physical gold is in extremely short supply relative to the potential demand that could be activated by a shift in sentiment. That is because 99 percent of the gold traded is in the form of paper contracts (futures, ETFs, derivatives, etc.) that are settled for cash instead of for physical metal. In a financial crisis, counterparty risk is likely to become a paramount concern, leading to a run on the credit-based, cash-settled system of gold trading. Flows into gold ETFs, which must translate inflows into physical holdings, are likely to trigger an outsized gain in the gold price because of the scarcity of physical gold.

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Mining stocks are likely to outpace gains in the metal in the years ahead. Since December 2015, they

have done so by a factor of 4 to 1. The mining industry has cut costs, focused on cash generation, and observed financial discipline that was lacking preceding the 2011 market top. The XAU index of gold and silver mining equities was launched 37 years ago at a value of 100. As of June 30, 2016, it printed at 97.64, which suggests to us that there is ample upside potential. According to the 6/27/16 Belkin Report, “Gold assets are long-term depressed, negatively correlated to the stock market, and have completed a bear market; while stock indexes have entered a bear market….switch out of overvalued equities as global economies contract – into gold-mining equities.”

Gold, having been written out of the monetary script in the years following President Nixon’s closing of the gold window in 1971, appears set to return to center stage. It has recently received serious consideration from noteworthy academic and policy thought-leaders. In a May 3 commentary (“Emerging Markets Should Go For The Gold”), Harvard economics professor Kenneth Rogoff argued that emerging-market central banks should allocate as much as 10 percent of their reserves to gold and away from sovereign debt of wealthy nations:

Why would the system work better with a larger share of gold reserves? The problem with the status quo is that emerging markets as a group are competing for rich-country bonds, which is helping to drive down the interest rates they receive. With interest rates stuck near zero, rich-country bond prices cannot drop much more than they already have, while the supply of advanced-country debt is limited by tax capacity and risk tolerance.

Gold, despite being in nearly fixed supply, does not have this problem, because there is no limit on its price. Moreover, there is a case to be made that gold is an extremely low-risk asset with average real returns comparable to very short-term debt. And, because gold is a highly liquid asset – a key criterion for a reserve asset – central banks can afford to look past its short-term volatility to longer-run average returns.

In a June 27, 2016 Bloomberg interview, Alan Greenspan stated that as a result of Brexit, “we are in the early days of a crisis which has got a way to go,” and that the best solution would be a return to the gold standard that was the basis for international finance from 1870 to 1913. The former Fed chairman (1987-2006) was, in our opinion, an architect and intellectual predecessor for current radical central-banking

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activism. For him to make such a statement is an eye-opener, suggesting that this former policy insider no longer believes that the dollar-centric fiat currency system is workable.

It seems to us that we have entered a momentous period for gold: “weeks where decades happen.” The rewards of gold exposure, in our opinion, promise to be of historic magnitude. At such a moment, it would be counterproductive for investors to dwell upon issues of market timing. Gold is extremely under-owned, and therefore likely to react dynamically to even modest inflows. Despite strong recent gains, we believe that the current alignment of political and economic factors is unusually compelling. In our view, substantial gains lie ahead.

John Hathaway

Senior Portfolio Manager

© Tocqueville Asset Management L.P.

July 12, 2016

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 2014 2016-5%-4%-3%-2%-1%0%1%2%3%4%5%Fig.1. Gold and US Real Rates

US Real RatesGold ($/Oz)

Source: Bloomberg

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500$5,000

1995 1998 2001 2004 2007 2010 2013 2016

Fig.2. Fed Balance Sheet ($B)

Source: Bloomberg

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2002 2004 2006 2008 2010 2012 2014 2016€ 0

€ 200

€ 400

€ 600

€ 800

€ 1,000

€ 1,200

€ 1,400

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

Gold (€/Oz)ECB Real Rates

Source: Bloomberg

€ 500

€ 1,000

€ 1,500

€ 2,000

€ 2,500

€ 3,000

€ 3,500

1999 2001 2003 2005 2007 2009 2011 2013 2015

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 2014 2016-5%-4%-3%-2%-1%0%1%2%3%4%5%Fig.5. Gold and PBC Real Rates

PBC Real RatesGold (¥/Oz)

Source: Bloomberg

￥5,000

￥10,000

￥15,000

￥20,000

￥25,000

￥30,000

￥35,000

￥40,000

2003 2005 2007 2009 2011 2013 2015

Fig.6. PBC Balance Sheet (¥B)

Source: Bloomberg

2

Section I. Macro

$4

$6

$8

$10

$12

$14

$16

$18

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fig.7. The Biggest 6 Central Bank Balance SheetsUS, UK, Japan, China, EU & Switzerland (US$T)

Source: Bloomberg

-5%

0%

5%

10%

15%

20%

25%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.9. US M1 YoY%

Source: Bloomberg

0%

2%

4%

6%

8%

10%

12%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.10. US M2 YoY%

Source: Bloomberg

0%

5%

10%

15%

20%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.11. ECB M1 YoY %

Source: Bloomberg

0%

2%

4%

6%

8%

10%

12%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.12. ECB M2 YoY %

Source: Bloomberg

0%5%

10%15%20%25%30%35%40%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.13. PBC M1 YoY %

Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.14. PBC M2 YoY %

Source: Bloomberg

$0

$10

$20

$30

$40

$50

1999 2002 2005 2008 2011 2014$0

$500

$1,000

$1,500

$2,000Fig.8. Gold and M2 (US$B, Fed, ECB & PBC)

Gold

M2

Source: Bloomberg

3

Section I. Macro

Fig.15. Inflation May 2016US Euro Area China

Headline CPI 1.0 0.1 1.9Core CPI 2.2 0.8 n/a

Shadowstats 8.1 n/a n/a

$13

$14

$15

$16

$17

$18

$19

$20

2011 2012 2013 2014 2015 2016

Fig.18. The Debt Ceiling ($T)

Total Federal DebtDebt Ceiling Limit

Source: Bloomberg

Source: Bloomberg, Shadow Government Statistics.

2.0%

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 2012 2014 2016

Fig.19. Average Annual Interest Rate on US Debt

Source: US Treasury, Meridian Macro.

$0

$5

$10

$15

$20

$25

1940 1950 1960 1970 1980 1990 2000 2010

Fig.16. US National Debt ($T)

Source: TreasuryDirect.gov, USDebtClock.org

120%

170%

220%

270%

320%

370%

1947 1957 1967 1977 1987 1997 2007

Fig.17. Credit Market Debt as % of GDP

Source: Stlouisfed.org

0%

5%

10%

15%

20%

25%

1988 1992 1996 2000 2004 2008 2012

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

Source: Bloomberg; US Treasury

4

Section I. Macro

-$20

$20

$60

$100

$140

$180

$220

$260

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Fig.23. China Net Purchases Long-Term US Securities(annual US$B)

Source: US Treasury; MacroMavens, LLC

-$800

-$300

$200

$700

$1,200

$1,700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fig.21. Global Forex Accumulation (US$B, 12 month sum)

Source: Bloomberg; MacroMavens, LLC

-$100

$100

$300

$500

$700

1978 1983 1988 1993 1998 2003 2008 2013

Fig.22. Net Purchases of US Treasury Notes and Bonds by All Foreign Countries (US$B, 12 month sum)

Source: US Treasury; MacroMavens, LLC

5

Section II. Gold

19.6%21.8%

3.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1934 1982 2015

Fig.25. Market Value of Above Ground Gold as % of Total US Financial Assets

Source: Federal Reserve, World Gold Council

0

40

80

Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15

Mill

ions

of O

unce

s

Fig.26. Gold Held by ETFs

All ETFS

SPDR Trust

Source: Bloomberg, Company Filings.

Fig.24. Gold Supply and Demand (tonnes)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q 2016

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 3,019 3,114 3,186 734

Old gold scrap 835 944 829 886 1,107 956 1,217 1,672 1,723 1,669 1,626 1,371 1,122 1,093 361

Traditional supply 3,426 3,536 3,307 3,436 3,588 3,432 3,626 4,257 4,463 4,495 4,473 4,390 4,236 4,279 1,095

Net producer hedging -412 -279 -445 -86 -373 -444 -349 -252 -108 10 -20 -50 42 -21 40

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 4,340 4,278 4,258 1,135

Demand

Jewellery 2,680 2,522 2,673 2,707 2,283 2,405 2,187 1,760 2,017 1,972 1,908 2,198 2,153 2,455 479

Other 360 385 416 431 458 462 436 373 466 453 428 409 389 331 81

Total fabrication 3,040 2,907 3,089 3,138 2,741 2,867 2,623 2,134 2,483 2,425 2,336 2,603 2,542 2,786 559Bar & coin retail

investment 373 314 396 412 421 446 649 743 1,205 1,519 1,256 1,654 1,064 1,012 254

Official sector purchases - - - - - - - - 77 457 535 369 477 588 109

ETFs & similar 3 39 133 208 260 253 321 617 382 185 279 -881 -159 -133 364

Implied net investment 143 614 -259 254 160 -94 -80 541 207 -81 47 595 354 5 -152

Total demand 3,559 3,874 3,359 4,012 3,582 3,472 3,513 4,034 4,355 4,505 4,453 4,340 4,278 4,258 1,135Source: World Gold Council

6

Section II. Gold

Investment Adviser, 13.7%

Broker, 17.1%

Private Banking, 6.1%

Pension Fund, 2.9%

Hedge Fund, 10.4%Mutual Fund,

4.1%

Insurance Company, 0.1%

Non-Institutional,

45.6%

Fig.27. SPDR Gold Trust Ownership by Type

Source: FactSet

-800-700-600-500-400-300-200-100

0100200300400500600700800

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Fig.29. Central Banks Net Purchases (tonnes)

Source: World Gold Council

Fig.28. Notable Transaction in May 2016 (YTD)Country Tonnes TransactionRussia 66.9 PurchaseTurkey 51.4 DecreaseChina 46.0 Purchase

Source: World Gold Council

8%

9%

10%

11%

12%

13%

14%

3/00 3/02 3/04 3/06 3/08 3/10 3/12 3/14 3/16

Fig.31. Gold as % of Total Reserves

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 2014 2016

Fig.30 Central Banks Holdings of Gold (tonnes)

Source: World Gold Council

7

Section II. Gold

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014 2015

Fig.32. Web searches for "Gold Bubble"

Source: GoogleTrends

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Fig.33. 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 2014 2015 2016

Fig.34. Bernstein's Daily Sentiment Index

DSIGold

Source Bloomberg, Bernstein's DSI

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

-

20.00

40.00

60.00

80.00

100.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fig.35. Market Vane Sentiment Index

MV

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

1,000

1,200

1,400

1,600

1,800

2,000

2006 2008 2010 2012 2014 2016

Fig.36. Comex Gold Futures Open Interest (tonnes)

Open InterestGold ($/Oz)

Source: Bloomberg

-20%

80%

180%

280%

380%

480%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Fig.37. Gold vs Continuous Commodity Index Performance

CCI IndexGold

Source: Bloomberg

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

0%

20%

40%

60%

80%

100%

7/10 7/11 7/12 7/13 7/14 7/15

Fig.39. Commercial Net Shorts as % of Total Open Interest

Net Short/OpenInterestGold

Source: Bloomberg; The McClellan Market Report

More Net Short

Less Net Short

$0

$500

$1,000

$1,500

$2,000

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fig.38. Comex Gold Futures Activity (tonnes)

Net Large SpeculatorsNet Hedgers/CommercialsGold ($/Oz)

Source: CFTC

0

100

200

300

400

500

600

0

1

2

3

4

5

6

2003 2005 2007 2009 2011 2013 2015

Mill

ions

of O

unce

s

Fig. 40. Registered COMEX Gold Stocks vs. Owners per Ounce

Registered Stocks

Owners per Ounce

Source: Bloomberg

9

Section III. Gold Mining Equities

0%

10%

20%

30%

40%

50%

60%

70%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig.41. XAU and HUI as a Ratio of Gold

HUI/GoldXAU/Gold

Source: FactSet

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

1H07

1H08

1H09

1H10

1H11

1H12

1H13

1H14

1H15

1H16

Fig.42. Net Fund Flows For Lipper's Equity Precious Metals Fund Universe ($M)

Source: Morningstar 1H16 is through 3/31/16

0

100

200

300

400

500

600

$0

$2

$4

$6

$8

$10

$12

$14

$16

03 04 05 06 07 08 09 10 11 12 13 14 15

Fig.44. Equity Capital Issued by Gold Miners

$B of Equty Issued# of Transactions

Source: Bloomberg

$0

$2

$4

$6

$8

$10

$12

$14

$16

5/06 5/07 5/08 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16

Fig.43. Market Cap of Van Eck Gold Equity ETFs ($B)

Source: FactSet

10

Section III. Gold Mining Equities

-2%

0%

2%

4%

6%

8%

10%

02 03 04 05 06 07 08 09 10 11 12 13 14 15

Fig.45. Senior Producers Return On Capital

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

0%

10%

20%

30%

40%

50%

60%

70%

$0

$100

$200

$300

$400

$500

$600

05 06 07 08 09 10 11 12 13 14

Fig.46. Average Cost of Acquisitions in the Gold Sector ($/Oz)

Acquisition Cost As Ratio of Gold PriceSource: RBC Capital Markets, Bloomberg.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

After Tax Cash Cost ($/oz) 209 210 253 311 363 413 552 738 661 814 987 1,108 1,087 988 903 868Margin (%) 23% 32% 30% 24% 18% 32% 21% 15% 32% 34% 37% 34% 23% 22% 22% 24%

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400Fig.47. Gold Mining Industry Production Costs

After Tax Cash Cost ($/oz)

Margin (%)

Source: Tocqueville Asset Management, FactSet.

11

Section III. Gold Mining Equities

Source: BMO Capital Markets

Fig.48. Gold Price Discounted by Market ($/Oz)

Fig.49. NAV Premiums – Senior & Intermediate Producers (N.A.)

Source: ScotiabankSource: Scotiabank

Fig.50. P/CF – Universe of Coverage AverageFig.51. Adjusted Market Cap per Oz of Resource

Divided by Gold Price

Source: BMO Capital Markets