Tocqueville Gold Strategy First Quarter 2013 Investor Letter

Transcription

1 Tocqueville Asset Management L.P. Tocqueville Strategy First Quarter 213 Investor Letter The bottoming process in gold and gold mining shares continues to be an extended and frustrating affair. Nevertheless, the fundamental rationale for positioning physical bullion and gold mining shares seems more compelling than ever. The metal dropped approximately 4. during the quarter, but the mining shares (basis XAU) dropped almost 19%. From the September 211 peak of 227, the XAU had declined -26% to year end 212 where it stood at 167. Until the end of 212, the decline was orderly. The decline accelerated sharply in the first quarter of 213, almost equaling the percentage decline during the previous 16 months. The accelerated decline in the first quarter of 213, in our opinion, suggests a capitulative phase in which investors are giving up on the notion of exposure to gold, and especially gold mining shares. The mining shares, which were already historically cheap at the beginning of the quarter, became even cheaper. Intense liquidation of GLD and other gold ETFs during the quarter (see Chart 28 on p.5 of the appendix) also seemed characteristic of a broad capitulation., a favorite investment theme two years ago, has become toxic to many. To recap the factors we believe led to the decline: gold became overbought during the threatened government shutdown in August of 211. As one of our favorite technicians stated, when the price of anything attempts to go parabolic, it must suffer from a hangover. the stock market has provided superior returns over the past four years the numerous and cumulative sins of gold mining managements wore investor patience thin. as conviction in the upward trend of the gold price dissipated, the rationale for owning gold mining stocks disappeared. several high profile investment firms (man Sachs, SocGen and others) turned negative on gold fundamentals, and the weight of media commentary followed suit. Deserving special mention in the category of being useful inverse barometers of contrary opinion is the New York Times, which featured on the front page of the 4/11/13 Business Day section: A Sure Bet Loses Its Luster:, Long a Secure Investment Has Lost 17% of Its Value Since 211. A brief quote from the article is a paean of shallow conventional wisdom: 4 West 57th Street 19th Floor New York NY Tel: (212)698-8 Fax: (212)

2 Tocqueville Asset Management L.P. Now, the worst of the Great Recession has passed. Things are looking up for the economy, and, as a result, down for gold. On top of that, concern that the loose monetary policy at the Federal Reserve might set off inflation a prospect that drove investors to gold has so far proved to be unfounded. For a contrarian, commentary such as this provides great cheer. As a hard boiled value investing convict, I am well aware of the perils of bottom picking. Given this caveat, I believe that the precious metals sector has arrived at a significant bottom and that the next leg in the gold bull market is ready to commence. My evidence: bullion has withstood intense liquidation by holders of GLD and Comex traders in paper gold as well as withering and intensely adverse commentary by media, brokerage, technicians and assorted soothsayers, especially during the past 9 days. However, the December 211 low of $1523 has not been breached, despite three successive assaults. The fundamental case for owning gold has improved since year end 211. Real interest rates remain negative, worldwide quantitative easing has proliferated, and the events in Cyprus demonstrate that uninsured deposits in the commercial banking system are at risk in any resolution scenario. Many of the shortcomings of the gold mining sector, both real and imagined, are on the mend. Shareholder dissatisfaction has prompted significant turnover in executive suites. Managements that were clueless, especially with respect to legitimate shareholder concerns, have been replaced. Where there was arrogance and overconfidence, there is now contrition and introspection. Many of the problems that can be fixed, will be, in our opinion. Of course, there will always be exceptions. The gold price itself seems poised to begin the next leg of its multi-year bull market. (Please refer to our recent website article for the possible rationale, "The Investment Case for : Part 2"). When the gold price re-establishes an upward trend, we expect the gold mining stocks to revive and produce very satisfactory returns. The appended data package shows: - strong macro fundamentals for gold - investor sentiment at a negative extreme - compelling valuations in the mining shares It seems like a contrarian s dream scenario to us. 4 West 57th Street 19th Floor New York NY Tel: (212)698-8 Fax: (212)

3 Best regards, John Hathaway Portfolio Manager and Senior Managing Director Tocqueville Asset Management L.P. April 11, 213 Tocqueville Asset Management L.P. 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. 4 West 57th Street 19th Floor New York NY Tel: (212)698-8 Fax: (212)

4 Section I. Macro $1,8 $1,6 $1,2 $8 $6 $2 Fig.1. and US Real Rates US Real Rates Price % 3% 2% 1% -1% -2% -3% -4% - $3,5 Fig.2. Fed Balance Sheet ($B) $3, $2,5 $1,5 $ ,6 1,4 1,2 1, Fig.3. and ECB Real Rates ECB Real Rates % 3% 2% 1% -1% -2% -3% 3,5 Fig.4. ECB Balance Sheet ( B) 3, 2,5 2, 1,5 1, , 12, 1, 8, 6, 4, 2, Fig.5. and PBC Real Rates PBC Real Rates % 3% 2% 1% -1% -2% -3% -4% - 35, Fig.6. PBC Balance Sheet (CNY B) 3, 25, 2, 15, 1, 5,

5 Thousands Section I. Macro $16 $14 $12 $1 Fig.7. The Biggest 6 Central Bank Balance Sheets US, UK, Japan, China, EU & Switzerland (US$T) $6 $4 Fig.8. and M2 (US$B; Fed, ECB, PBC) M2 $1,5 $8 $6 $2 $5 $ Fig.9. US M1 YoY% Fig.11. ECB M1 YoY % Fig.13. PBC M1 YoY % Fig.1. US M2 YoY% % Fig.12. ECB M2 YoY % 1 8% 6% 4% 2% Fig.14. PBC M2 YoY %

6 Section I. Macro Fig.15. Inflation 2/28/13 US Euro Area China Headline CPI Core CPI n/a Shadowstats 9.6 n/a n/a ; Shadow Government Statistics $18 Fig.16. US Public Debt Outstanding ($T) $16 $14 $12 $1 $8 $6 $4 $ Fig.17. US Total Credit market Debt as % of GDP $17 $16 Fig.18. The Debt Ceiling ($T) $15 17 $ $ % 6% Fig.19. Average Annual Interest Rate Paid on Debt 24% 22% Fig.2. Interest Expense as % of Total Government Outlays 2 4% 18% 3% 16% 2% 14% 1% 12% ; US Treasury ; US Treasury 3

7 Section I. Macro Fig.21. Quality Spread and Price Moody's Seasoned Corp Aaa vs Baa $1,5 $ $1,9 Fig.22. Global Forex Accumulation (US$B, 12 month sum) $7 Fig.23. Foreign Purchase of US Treasuries (US$B, 12 month sum) $5 $9 $3 $1 -$ ; MacroMavens, LLC -$1 Source: US Treasury; MacroMavens, LLC $22 $18 Fig.24. China Net purchases Long-Term US Securities (annual US$B) $14 $1 $6 $2 -$ Source: US Treasury; MacroMavens, LLC 4

8 Section II. Fig.25. Supply and Demand (tonnes) Supply Mine production 2,591 2,592 2,478 2,55 2,481 2,476 2,49 2,584 2,739 2,827 2,848 Old gold scrap , ,217 1,672 1,723 1,669 1,626 Traditional supply 3,426 3,536 3,37 3,436 3,588 3,432 3,626 4,257 4,463 4,495 4,473 Net producer hedging (412) (279) (445) (86) (373) (444) (349) (252) (18) 1 (2) Official sector sales Total supply 3,559 3,874 3,359 4,12 3,582 3,472 3,513 4,34 4,355 4,55 4,453 Demand Jewellery 2,68 2,522 2,673 2,77 2,283 2,45 2,187 1,76 2,17 1,972 1,98 Other Total fabrication 3,4 2,97 3,89 3,138 2,741 2,867 2,623 2,134 2,483 2,425 2,336 Bar & coin retail investment ,25 1,519 1,256 Official sector purchases ETFs & similar Implied net investment (259) (94) (8) (81) 47 Total demand 3,559 3,874 3,359 4,12 3,582 3,472 3,513 4,34 4,355 4,55 4,453 Source: World Council 2 2 Fig.26. Market Cap of Above Ground as % of Total US Financial Assets 22% Source: Federal Reserve, World Council 6% 3, 2,5 2, Fig.27. Held By ETFS (tonnes) Other GLD 1,4 1,35 1,3 Fig.28. Total Net Asset Value in the SPDR Trust (tonnes) 1,5 1,25 1, 1,2 5 1, Source: Company Filings, World Council 1,1 1/11 5/11 9/11 1/12 5/12 9/12 1/13 Source: Company Filings 5

9 Section II Fig.29. SPDR Trust Net Asset Value (MOz) Fig.3. SPDR Trust Ownership by Type Investmen t Adviser, 19.8 Broker, 8.7 Non- Institution al, 57.8 Private Banking, Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Source: Company Filings Insurance Company,.2 Source: FactSet Mutual Fund, 3.6 Hedge Fund, 8.3 Pension Fund,.5 Fig.31. Notable Transaction in 1Q13 Country Tonnes Transaction Kazakhstan 1.5 Purchase Korea 2. Purchase Russia 12.2 Purchase Turkey 1.3 Addition 6 Fig.32. Central Banks Net Purchases (tonnes) Source: World Council 34, 33,5 33, 32,5 32, 31,5 31, 3,5 3, Fig.33. Central Banks Holdings of (tonnes) 29, Source: World Council 14% Fig.34. as % of Total Reserves 13% 12% 11% 1 9% 8% Source: World Council

10 Section II. 1 8 Fig.35. Web searches for " Bubble" Source: GoogleTrends Fig.36. Web searches for " Investment" Source: GoogleTrends Fig.37. Bernstein's Daily Sentiment Index 2 DSI Source Bloomberg, Bernstein's DSI Fig.38. Market Vane Bullish Consensus Market Vane Source Bloomberg, Market Vane $1,8 $1,6 $1,2 $8 $6 $2 $1,8 $1,6 $1,2 $8 $6 7

11 Section II Fig.39. Comex Futures Open Interest (tonnes) Open Interest $1,8 $1,6 $1,2 $8 $6 $ Fig.4. vs Continuous Commodity Index CCI Index (2) Net Large Speculators (4) Net Hedgers/Commercials (6) (8) (1,) Source: CFTC Fig.41. Comex Futures Activity (tonnes) $1,8 $1,6 $1,2 $8 $6 $ Fig.42. Commercial Net Shorts as % of Total Open Interest Net Short/Open Interest $1,9 $1,7.7 $1,5.6.5 More Net Short $1,3.4 $1,1 Less Net Short.3 $9 7/1 9/1 11/1 1/11 3/11 5/11 7/11 9/11 11/11 1/12 3/12 5/12 7/12 9/12 11/12 1/13 3/13 ; The McClellan Market Report 8

12 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11 2H11 1H12 2H12 1H13 Section III. Mining Equities Fig.43. XAU and HUI as a Ratio of HUI/ XAU/ Source: FactSet $3,5 $3, $2,5 $1,5 $5 -$5 - -$1,5 Fig.44. Net Fund Flows For Lipper's Equity Precious Metals Fund Universe ($M) Source: Morningstar 1H13 - as of 2/28/13 $16 $14 $12 $1 $8 $6 $4 $2 Fig.45. Market Cap of Van Eck Equity ETFs ($B) Source: FactSet Fig.46. Miners Dividend Payout Ratio Source: FactSet Universe: ABX, NEM, GG, AU, GFI, KGC, NCM, BVN, HMY, AUY, IAG, CG, EGO, GOLD $18 $16 $14 $12 $1 $8 $6 $4 $2 Fig.47. Equity Capital Issued by Miners $B of Equty Issued # of Transactions Source: RBC Capital Markets

13 Section III. Mining Equities 1 8% 6% 4% 2% Fig.48. Senior Producers Return On Capital $6 $5 $3 $2 $1 Fig.49. Average Cost of Acquisitions in the Sector ($/Oz) % Source: FactSet Universe: NEM, ABX, GG, KGC, AUY, NCM, AU, GFI, HMY Acquisition Cost As Ratio of Price Source: RBC Capital Markets $1,8 $1,6 $1,2 $8 $6 $2 Fig.5. Senior Producers Cash Costs and Margin ($/Oz) Cash Margin Cash Costs $1,8 $1,6 $1,2 $8 $6 $2 Fig.51. Production Costs ($/Oz) Avg Price Aft Tax Cash Cost Margin Source: Company filings

14 Section III. Mining Equities $1,7 $1,5 $1,3 $1,1 Fig.52. Consensus Forecast Price ($/Oz) $ $7 28 $5 27 Yr Source: Scotiabank Yr 1 Yr 2 Yr 3 Yr 4 Fig.53. Price Discounted by Market ($/Oz) Fig.54. NAV Premiums Senior & Intermediate Producers (N.A.) Source: BMO Capital Markets Source: BMO Capital Markets Fig.55. P/CF Senior Producers (N.A.) Source: BMO Capital Markets 11