Century Management s Gold Valuation Analysis

Transcription

1 March 13, 2014 Century Management s Gold Valuation Analysis Gold has confounded economists and investors throughout time. Nathan Meyer Rothschild ( ), the top financier of the early 19th century, said, There are only two people who understand gold: One is a director in the Bank of England, and the other an obscure clerk in the Bank of France. Unfortunately, they disagree. Today, nearly 200 years later, Ben Bernanke, the former Chairman of the U.S. Federal Reserve, remains equally perplexed when it comes to gold. In a statement to Congress on October 7, 2013, he said, Nobody really understands gold prices and I don t pretend to really understand them either. In addition, Janet Yellen, the current Chair of the U.S. Federal Reserve, stated in her testimony to Congress on November 14, 2013, Well, I don t think anybody has a very good model of what makes gold prices go up or down. With all the different opinions surrounding gold, there are basically only two different ways of looking at gold: as a commodity or as money. Some believe gold s sole value is that of a commodity, where it is most often used in jewelry, industry, medicine, dentistry, technology, electronics, and aerospace. Others believe as financier, banker, and philanthropist John Pierpont J.P. Morgan ( ) did: Gold is money. Investor demand has served as the biggest swing factor on the price of gold over time, as central governments, institutions and consumers have frequently invested large sums in gold during periods of great uncertainty, deflation or high inflation. For purposes of our research, we do not need to reconcile whether gold should be viewed as a commodity or as money, or why gold prices rise or fall. The focus of our research is to determine the price at which gold becomes an attractive investment. Chart 1: Century Management Valuation Zones For Gold The dollar amounts above represent gold prices per ounce in U.S. dollars, based on the London PM Fixing closing price. On January 31, 2014, gold closed at $1,251 per ounce. The numbers in this table have been rounded and are based on the average of Century Management s five different methods used to value gold. After having analyzed gold from five different viewpoints, we summarize our gold price zones in Chart 1. Our research suggests gold, which has been trading between $1,225 and $1,326 per ounce as of the first two months of 2014, is in a fair value zone. We believe the downside risk to gold is approximately $600 to $700 per ounce, and the extreme upside is between $1,800 and $2,200 per ounce. We believe gold is currently trading in a fair value zone and therefore not at an attractive price to buy as a commodity. However, in our February 21, 2014, newsletter titled Inflation, Gold, and Gold Mining Companies, we illustrated that a number of the 40-plus gold mining companies we researched and bought at the end of 2013 were priced as if gold Continued on page 2

2 were trading between $800 and $900 per ounce. While gold is currently trading in our fair value zone and would not qualify under our investment discipline as a buy today, we would recommend the purchase of gold for those who want to own it as a hedge against potential higher inflation or a currency crisis rather than for pure investment purposes. 2,500 Chart 2: The Price of Gold Relative to CM Valuation Zones From January 2011 through December ,000 Expensive Zone($1,800 to $2,200) 1,500 Fair Value Zone($1,100 to $1,300) 1, Buy Zone($800 to $1,000) Worst Case Zone($600 to $700) 0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 The dollar amounts above represent gold prices per ounce in U.S. dollars, based on the London PM Fixing closing price. Source: Century Management Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Century Management Gold Valuation Methodology To arrive at our gold valuation zone prices sited in Chart 1, we used these five methods of valuation: 1. The price of gold over time, adjusted for inflation 2. How much gold prices dropped during gold bear markets 3. The price of gold compared to the price of oil, housing, and commodities 4. The price of gold compared to the U.S. Consumer Price Index 5. The actual cost of producing an ounce of gold The remainder of this report details how we arrived at our gold valuation zones using each method. Comparing each method, some approaches yielded significantly different price ranges and valuation zones. These differences occur because, when compared to gold, other assets do not always reach their peaks or their bottoms at the same time. For example, the ratios of Gold-to-Housing and Gold-to-Oil suggest that housing is currently more depressed than the oil market. However, by averaging these ratios, we gain the benefit of insight from each market. Continued on page 3

3 $2000 $1800 $1600 $1400 $1200 $1000 $800 $600 $400 Chart 3: Gold Prices Not Adjusted for Inflation 6/21/1982 $ /21/1980 $ /24/1980 $ /1/1983 $ /4/2012 $1, /5/2011 $1, QE 1 11/25/2008 $ $200 2/26/1985 4/2/2001 $ $ $0 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Thomson Reuters FactSet Research Systems $3000 $2500 $2000 $1500 $1000 $500 Gold, London PM Fixing ($/ozt) - Close Recession Periods - United States Chart 4: Gold Prices Adjusted for Inflation Gold, London PM Fixing ($/ozt) - Close versus CPI Indexed to 100 Today Recession Periods - United States 1/21/1980 $2, /21/1982 $ /24/1980 $1, /26/1985 $ /1/1983 $1, /5/2011 $1, QE1 11/25/2008 $ /4/2012 $1, /2/2001 $ $0 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Thomson Reuters FactSet Research Systems 12/31/2013 $1, /31/2013 $1, Method 1: Historical Gold Prices, Adjusted For Inflation Chart 3 highlights the low and high prices for gold from 1968 through These prices are historical, meaning not adjusted for inflation. Using this approach, we benefit from observing the market s determination of gold prices at extremes. Chart 4 also shows the low and high prices for gold, except these prices are adjusted for inflation as measured by the U.S. Consumer Price Index (CPI). Now let s compare Charts 3 and 4 to see the impact of inflation on gold prices. The peak gold price was $850 per ounce on 1/21/1980 (Chart 3). Using the same date of 1/21/1980, but now looking at Chart 4, the price of gold is $2,546 in today s dollars (i.e. adjusted for inflation). The difference in price between these two charts suggests that inflation has averaged an annualized rate of 3.28% over the past 34 years. Method 2: How Much Gold Prices Dropped During Gold Bear Markets Chart 6 shows gold s bear markets over the past 40 plus years. We define a gold bear market as a minimum 25% decline from peak gold prices. During the six gold bear markets between 1974 and 2008, the price of gold declined 43% on average. The largest decline, which occurred from January 21, 1980 through June 21, 1982, was 65%. The current gold bear market, which started on September 5, 2011, and, in theory, ended on June 28, 2013, saw the price of gold decline 37%. However, based on gold s $1,225 to $1,326 per ounce trading range during the first two months of 2014, the jury is still out on whether June 2013 was the end of this last bear market. Only time will tell. Regardless, by analyzing gold s bear markets, we believe we can estimate a good worst case and buy price for gold. Continued on page 4

4 Gold US$/Troy Oz 2,000 1,800 1,600 1,400 1,200 1, Chart 5: Method 1: Historical Gold Prices Adjusted for Inflation: Price Ranges The dollar amounts above represent gold prices per ounce in U.S. dollars, based on the London PM Fixing closing price. The price ranges shown are Century Management s estimates based on averaging the data points using Method 1. The Gold Valuation Analysis Summary shown on Chart 22 at the back of this report shows which data points were averaged to arrive as these zones. The numbers in these zones have been rounded. Chart 6: Worst Case Analysis Source: Factset and Century Management Gold Bear Markets Current Decline Was This The Bottom? Time Will Tell.. Chart 7: Gold Bear Markets from Gold Bear Markets from 1972 through 2013 Peak to Trough Months Gold Prices Change Periods 12/30/74 to 08/30/ $195.3 down to $ % 01/21/80 to 06/21/ $850.0 down to $ % 02/16/83 to 02/25/ $509.3 down to $ % 12/14/87 to 03/10/ $499.8 down to $ % 02/07/96 to 08/27/ $414.5 down to $ % 03/17/08 to 10/24/ $1,011.3 down to $ % Average Decline -43% Largest Decline -65% 09/05/11 to 06/28/13 $1,895 down to $1,192-37% To calculate a worst-case price for gold, we used the September 5, 2011 peak gold price of $1,895 and multiplied the number by 35%, which represents one minus the 65% maximum gold bear market decline from 1972 to The worst case based on this calculation is $ To calculate a buy price for gold, we multiplied the September 5, 2011, peak gold price of $1,895 by 57%, which represents one minus the 43% average gold price decline during gold bear markets between 1972 and This calculation suggests a buy price of $1,080. In addition to gold, we have also analyzed how other commodities behave in periods of decline. As shown on Chart 9, the maximum decline for the average of these 16 commodities is 67% versus a maximum decline of 65% for gold as shown on Chart 7. The average decline for these 16 commodities is 42% versus an average decline of 43% for gold. We believe these results provide support for this method of quantifying a buy point and a worst case price for gold. Source: Factset and Century Management. *We define a gold bear market as a minimum 25% decline from peak gold prices. Continued on page 5

5 For those of you interested in seeing what the price of gold would be in our worst case and buy case scenarios by reviewing the change in oil prices to gold, please see Exhibit 1. Note, adding these figures to our gold framework would not cause our summary gold worst case or buy zones to vary by more than 4%. Method 3: The Price of Gold Compared to the Price of Oil, Housing, and Commodities Gold vs. West Texas Intermediate Crude Oil (WTI) Chart 10 shows the relationship between gold and West Texas Intermediate Crude Oil (i.e. Gold/WTI). The higher the ratio, the more barrels of oil needed to buy an ounce of gold. Over the past 40 years, it has taken, on average, barrels of oil to buy one ounce of gold (or times Gold/WTI). The ratio of Gold-to-WTI Chart 8: Worst Case and Buy Price Using Gold Bear Market Analysis Buy Point Attractive Investment $1,080 Worst Case Very Attractive Investment $663 Note, we excluded the gold bear market that began in 2011 from this specific analysis as there is a debate as to whether it has officially ended. Numbers above have been rounded. Chart 9: Periods of Commodity Declines from 1960 through 2013 Periods of Commodity Declines From 1960 through 2013 Commodity Max Decline Max Decline Period Average Decline Number of Declines Measured Metals Nickel ($/MT) -73% 03/07/08 12/05/08-39% 11 Copper ($/LB) -68% 04/04/08 12/26/08-38% 10 Platinum ($/OZ) -65% 12/06/08 01/29/71-34% 12 Aluminum (LME $/T) -62% 07/11/08 02/20/09-41% 9 Average Metals -67% -38% Energy NY Harbor ULSD (Heating Oil) Futures (Cents/Gal) -71% 07/04/08 02/20/09-41% 13 NYMEX RBOB Gasoline Futures (Cents/Gal) -76% 07/04/08 12/26/08-48% 3 U.S. Central Appalachian Coal Future Contracts ($/T) -69% 06/27/08 04/24/09-49% 4 Natural Gas (NYM $/BTU) -80% 07/03/08 09/04/09-42% 26 Crude Oil (NYM $/BTU) -74% 07/03/08 12/26/08-42% 13 Average Energy -74% -44% Agriculture Corn Futures (Cents/BU) -65% 07/12/96 05/11/01-41% 12 Soybean Futures (Cents/BU) -55% 07/20/73 11/02/73-40% 17 Live Cattle Futures (Cents/BU) -36% 08/10/73 12/07/73-31% 6 Sugar Futures (Cents/BU) -86% 10/10/80 09/17/82-49% 30 Cotton Futures (Cents/LB) -68% 03/04/11 06/01/12-44% 17 Arabica Coffee Futures (Cents/LB) -70% 12/03/99 11/30/01-47% 17 Cocoa ($/MT) -61% 12/27/63 07/16/65-44% 18 Average Agriculture -63% -42% Average Total Commodities -67% -42% Gold (by itself) -65% -43% These numbers have been rounded. Source: Factset and Bloomberg Finance, LP typically troughs at 7.5 times, and it generally peaks between 25 and 27 times. We believe 12 times Gold-to-WTI represents a good buy point. The Gold-to-WTI trading range of 12 to 13 times during the first two months of 2014 suggests that gold looks attractive relative to oil. Continued on page 6

6 Chart 10: Gold-to-West Texas Intermediate Crude Oil Ratio 12/31/71-12/31/ Dec-71 Dec-73 Dec-75 Dec-77 Dec-79 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Gold/WTI Ratio Average Normal Sell Bull Sell Buy Worst Case Source: Century Management and Bloomberg Finance, LP Chart 11: Gold-to-West Texas Intermediate Oil Ratio $6000 $5000 $4000 $3000 $2000 (INDEX) Gold, London PM Fixing ($/ozt) - Close (INDEX) WTI Crude Oil ($/bbl) - Price Recession Periods - United States 12/31/2013 $2, /31/2013 $2, Chart 11 shows the results of $100 invested in gold and $100 invested in oil from December 31, 1971 (when gold started trading freely) through December 31, As you can see, despite the short-term volatility, gold and oil trade very close to each other over the long run. $1000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $90 '75 '80 '85 '90 '95 '00 '05 '10 Source: Thomson Reuters FactSet Research Systems The WTI price as of December 31, 2013, multiplied by the Gold/WTI ratio suggests the following gold prices as shown on Chart 12. We have also analyzed the supply and demand of oil to determine reasonable oil price ranges. By using the average Gold/WTI ratio and multiplying it by our reasonable range of WTI, we estimate the following gold prices as shown on Chart 13. Continued on page 7

7 Chart 12: Gold-to-Current WTI: Implied Gold Prices Expensive Zone Time To Sell $2,461-$2,657 Fair Value Reasonable price $1,513 Buy Point Attractive Investment $1,169 Worst Case Very Attractive Investment $738 The first expensive zone number represents a sell point we would expect in normal times. The second (i.e. higher) expensive zone number represents a gold price potentially achieved during high inflation. Chart 13: Average Gold-to-WTI Ratio: Implied Gold Prices Gold Price Forecasted Oil Price Expensive Zone Time To Sell $1,691-$2,400 $110-$120 Fair Value Reasonable price $1,384 $90 Buy Point Attractive Investment $1,153 $75 Worst Case Very Attractive Investment $769 $50 The first expensive zone number represents a sell point we would expect in normal times. The second (i.e. higher) expensive zone number represents a gold price potentially achieved during high inflation. Gold-to-US Existing Home Median Price Chart 14 shows the percentage of a house that one ounce of gold can buy. The rationale in comparing this relationship is that gold and home prices are competing for investment dollars. Gold appeared relatively attractive during the housing bubble in the earlyto-mid 2000s. During , gold became relatively expensive compared to the existing home median price as investors worried about future inflation. As of January 31, 2014, the relationship of gold priced at $1,251 per ounce to the US existing home median price of $188,900 (as reported by the National Association of Realtors) is 0.66%. This 0.66% figure is well above the past 42-year average. Thus, gold is relatively expensive versus the US median home price despite the recent housing recovery. Chart 14: Percentage of a Median Priced US Existing Home You Can Buy With One Ounce of Gold 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Mar-72 Mar-73 Mar-74 Mar-75 Mar-76 Mar-77 Mar-78 Mar-79 Mar-80 Mar-81 Mar-82 Mar-83 Mar-84 Mar-85 Mar-86 Mar-87 Mar-88 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Average Worst Case Buy Normal Sell Bull Sell % Of A US Existing Home You Can Buy With an Oz of Gold Source: Factset and the National Association of Realtors Continued on page 8

8 Chart 15: Gold-to-US Existing Home Median Price: Implied Gold Prices Expensive Zone Time To Sell $1,570-$1,766 Fair Value Reasonable price $840 Buy Point Attractive Investment $687 Worst Case Very Attractive Investment $392 The first expensive zone number represents a sell point we would expect in normal times. The second (i.e. higher) expensive zone number represents a gold price potentially achieved during high inflation. The current US existing home median price divided by the percentage of a US existing home you can buy with an ounce of gold suggests the following gold prices as shown on Chart 15. Gold-to-Commodity Research Bureau (CRB) Metals Index Chart 16 shows gold prices versus the Commodity Research Bureau (CRB) Metals Index. This index consists of copper scrap, lead scrap, steel scrap, tin and zinc. CRB Metals data became available in late 1984, so we began our analysis on that date. The approach is based on the premise that gold should trade like other metals over time, as gold investor demand will ebb and flow. The relationship between 1.7 Chart 16: Gold-to-CRB Metals Since December Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Gold/CRB Metals Average Normal Sell Bull Sell Buy Worst Case (Note: we have started the vertical axis at 0.8 so the ratio is easier to review) Source: Factset Continued on page 9

9 Chart 17: Gold-to-CRB Metals Index: Implied Gold Prices Expensive Zone Time To Sell $1,283-$1,374 Fair Value Reasonable price $1,154 Buy Point Attractive Investment $1,008 Worst Case Very Attractive Investment $916 The first expensive zone number represents a sell point we would expect in normal times. The second (i.e. higher) expensive zone number represents a gold price potentially achieved during high inflation. gold and the CRB Metals Index is fairly tight over time and the ratio is currently near its historical average as shown on Chart 16. The current CRB Metals Index multiplied by the Gold/CRB Metals Index ratio suggests the following gold price ranges as shown on Chart 17. Method 4: The Price of Gold Compared to the U.S. Consumer Price Index (CPI) We compared gold against the basket of goods used in calculating the United States Consumer Price Index (CPI). We used this approach because gold is periodically purchased by investors as a way to protect against inflation and deflation. Today s Gold-to-CPI ratio suggests gold looks relatively expensive versus the basket of goods. One reason that gold looks more expensive than this basket of goods is because, in our opinion, the CPI is currently understating inflation. We believe a better measure of inflation can be found in the Everyday Pricing Index produced by the American Institute for Economic Research (AIER). Nevertheless, we will use the official inflation statistic, CPI, since it is commonly used by investors and government officials. 9 8 Chart 18: Gold-to-CPI Ratio Since January Dec-71 Dec-73 Dec-75 Dec-77 Dec-79 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Source: Factset Gold/CPI Average Normal Sell Bull Sell Buy Worst Case Continued on page 10

10 Chart 19: Gold-to-CPI: Implied Gold Prices Expensive Zone Time To Sell $1,328-$1,631 The current U.S. Consumer Price Index multiplied by the Gold-to-CPI ratio suggests the following gold prices as shown on Chart 19. Fair Value Buy Point Worst Case Reasonable price Attractive Investment Very Attractive Investment $770 $629 $396 Method 5: The Actual Cost to Produce One Ounce of Gold We tracked how gold prices compare to marginal production costs over time. While some people believe that gold prices follow costs, others believe costs The first expensive zone number represents a sell point we would expect in normal times. The second (i.e. higher) expensive zone number represents a gold price follow gold prices. Regardless of which potentially achieved during high inflation. theory you subscribe to, history suggests gold costs and prices track one another over time. Therefore, it is our contention there is utility to using a marginal production cost approach. Marginal production costs refer to the incremental costs incurred to produce an ounce of gold. This approach suggests that if gold prices fall significantly and are sustained over a period of time, operators will shut down higher cost mines, causing marginal costs to fall. Miners have used many definitions of cost over time. We focused our analysis on two of the most commonly understood definitions that we believe offer the best visibility into incremental costs: cash costs and all-in sustaining costs Chart 20: Gold versus Cash Costs Cash Costs Cash costs highlight the on-site cash costs involved in producing an ounce of gold. Cash costs include operating-site mining expenses, general and administrative expenses, stripping costs, smelting costs, refining and transportation costs, royalties and production taxes, mine community costs, mine permitting costs, realized gains/losses on hedges related to mine operations, and byproduct credits Gold High Price/Cash Cost Gold Low Price/Cash Cost Gold Average Price/Cash Cost Source: Century Management and Factset Cash costs have increased significantly since 2000 due to lower grades being mined, increased energy costs, as well as consumables and labor costs. Gold has typically traded between 1.6 and 2.1 times cash costs over time. See Chart 20. Continued on page 11

11 The current cash costs multiplied by the Goldto-Cash Costs ratio suggests the following gold prices as shown on Chart 21. All-In Sustainable Costs We also incorporated all-in sustainable costs into our gold valuation framework. We used this particular calculation because all-in sustainable costs include support activities and non-cash expenses that are required to maintain production. The World Gold Council provided a detailed framework on this cost measure in Chart 21: Gold-to-Cash Costs: Implied Gold Price Values Expensive Zone Time To Sell $1,470-$3,220 Fair Value Reasonable price $1,260 Buy Point Attractive Investment $1,120 Worst Case Very Attractive Investment $770 The first expensive zone number represents a sell point we would expect in normal times. The second (i.e. higher) expensive zone number represents a gold price potentially achieved during high inflation. Chart 22: Gold Valuation Summary Analysis Valuation Method Downside Buy Fair Value Normal High Bull High 1) Inflation Adjusted Since January 1980 Peak $2,546 $2,546 Since September 1980 Peak $1,971 $1,971 Since June 1982 Trough $713 Since February 1983 $1,210 Since February 1985 Trough $628 Since April 2001 Trough $337 Since November 2008 Start of Quantitative Easing $900 Since September 2011 Peak $1,946 $1,946 Since October 2012 Peak $1,805 $1,805 2) Gold Price Decline Analysis $663 $1,080 3) Gold Relative To Other Assets Oil $738 $1,169 $1,513 $2,461 $2,657 CRB Metals $916 $1,008 $1,154 $1,283 $1,374 US Median Home Prices $392 $687 $840 $1,570 $1,766 Forecasted WTI Oil x Gold/WTI Multiple $769 $1,153 $1,384 $1,691 $2,400 4) Gold Relative to CPI $396 $629 $770 $1,328 $1,631 5) Gold-To-Cash Costs $770 $1,120 $1,260 $1,470 $3,220 All-In Sustaining Cost of Production $1,300 Average of Above Calculations $632 $968 $1,179 $1,807 $2,132 Source: Century Management, Bloomberg Finance, LP, Factset, Commodities Research Bureau, National Association of Realtors, World Gold Council. Continued on page 12

12 All-in sustainable costs recognize site cash costs, site based non-cash compensation, and stock pile and inventory write-downs. All-in sustainable costs also include reclamation, remediation, corporate overhead, exploration, stripping and underground mine development costs (both capitalized and expensed), and capital expenditures necessary to maintain the same level of production volume. Today, we believe the industry all-in sustaining cost of production to be $1,300 per ounce. We used this figure in our fair value estimate for gold. Chart 22 summarizes the line-item details of all five valuation methods. Chart 23: Century Management Valuation Zones For Gold Expensive Zone Time To Sell $1,800-$2,200 Fair Value Zone Reasonable Price $1,100-$1,300 Buy Point Zone Attractive Investment $800-$1,000 Worst Case Zone Very Attractive Investment $600-$700 The dollar amounts above represent gold prices per ounce in U.S. dollars, based on the London PM Fixing closing price. On January 31, 2014, gold closed at $1,251 per ounce. The numbers in this table have been rounded and are based on the average of Century Management s five different methods used to value gold. On Chart 23, we have taken the summary results shown on Chart 22 and created valuation zones for the price of gold. We believe it is more instructive to rely on a valuation price zone rather than just one number for each of our valuation categories. Chart 23 is the same as Chart 1 that was shown at the beginning of the report. We believe that in order to achieve attractive investment returns, we must stick to our investment discipline and only buy when the security or commodity is at the right price. As Benjamin Graham said, price determines return. For example, if you had bought gold on January 3, 1972, when gold traded freely, and held it through December 31, 2013, you would have earned an 8.2% annualized rate of return. On the other hand, if you had bought gold on January 21, 1980, when gold was at a peak and held it through December 31, 2013, you would have only earned a 0.7% annualized rate of return. Having witnessed one gold bear market decline of 65% and numerous gold bear market declines of 43% over the past 45 years, we are confident that exercising patience and buying gold in the buy point zone should provide good returns into the future. See Exhibit 2 at the end of this report to see the returns by major asset classes compared to gold. Written By: Arnold Van Den Berg, CEO, Co-Chief Investment Officer Bill Hawes, CFA, Portfolio Manager, Senior Analyst Contributions By: Scott Van Den Berg, CFP, President Jim Brilliant, CFA, Co-Chief Investment Officer, Portfolio Manager Stephen Shipman, CFA, Portfolio Manager Casey Vaught, Equity Analyst Lisa Stroud, CMFC, Assistant Editor Kara Bell, Assistant Editor Continued on page 13

13 Exhibit 1: CM Worst Case and Buy Point Gold From Examining Gold and WTI During Gold Bear Markets Review of Four Notable Gold Price Declines From 1972 Through 2013 Implied Gold Price During significant gold price declines, the most West Texas Intermediate Crude Oil (WTI) fell over these same periods was 36.5%. During these periods when gold was in a major decline, the average gold bear market Gold/WTI multiple was To calculate our downside oil price estimate, we used the September 8, 2011 price of $ and $737 multiplied it by 63.5% (i.e. 1 minus 36.5% which again is the most WTI fell during major gold declines) = $ To convert this downside oil price of $66.59 to a gold price estimate, we then multiplied it by 11.1 average gold bear market Gold/WTI multiple which implies a gold price of: During significant gold price declines, West Texas Intermediate Crude Oil (WTI) decreased 2% on average. The lowest gold bear market Gold/WTI multiple experienced during these gold downturns was 8.5. To calculate our downside oil price estimate, we used the September 8, $ price of $ and multiplied it by 98% (i.e. 1 minus the 2% average downturns experienced by WTI when gold is in a significant price decline) = $ To convert this average downside oil price of $ to a gold price estimate, we then multiplied it by 8.5 times the lowest gold bear market Gold/WTI multiple which implies a gold price of: Average Worst Case $805 Numbers have been rounded. Source: Century Management, Bloomberg Financial, LP Review of Four Notable Gold Price Declines From 1972 Through 2013 Implied Gold Price West Texas Intermediate Oil (WTI) drops 2% on average when gold prices fall significantly (i.e. greater than 25%). During these gold price declines, the gold bear market Gold/WTI ratio averages To calculate our downside oil price estimate, we used the September 8, 2011 price of $ and multiplied it by 98% (i.e. 1 minus the 2% $1,141 average that oil fell during major gold declines) = $ To convert this downside oil price of $ to a gold price estimate, we then multiplied it by 11.1 average gold bear market Gold/WTI multiple which implies a gold price of: Average Buy Point $1,141 Numbers have been rounded. Source: Century Management, Bloomberg Financial, LP Continued on page 14

14 Exhibit 2: Historical Returns by Asset Class Returns by Major Asset Class Compounded Annual Returns Cumulative Value In 2012 of a $100 Investment In 1972 $ $ $ $ Large Company Stocks 9.9% 4,875 Small Company Stocks 13.0% 15,121 Long Term Corporate Bonds 8.9% 3,241 Long Term Gov. Bonds 8.8% 3,140 Inflation 4.3% $ 559 Gold 9.3% $ 3,768 Source: Ibbotson and FactSet, Start is 1/3/1972, End is 12/31/12 Returns by Major Asset Class Compounded Annual Returns Cumulative Value In 2002 of a $100 Investment In 1972 Large Company Stocks 10.9% $ 2,456 Small Company Stocks 13.9% $ 5,612 Long Term Corporate Bonds 8.7% $ 1,320 Long Term Gov. Bonds 9.2% $ 1,522 Inflation 4.9% $ 440 Gold 6.8% $ 779 Source: Ibbotson and FactSet, Start is 1/3/1972, End is 12/31/12 Returns by Major Asset Class Compounded Annual Returns Cumulative Value in 2000 of a $100 Investment In 1980 Large Company Stocks 16.34% $ 2,402 Small Company Stocks 14.47% $ 1,709 Long Term Corporate Bonds 10.8% $ 856 Long Term Gov. Bonds 11.2% $ 925 Inflation 4.0% $ 227 Gold 3.1% $ 52 Source: Ibbotson and FactSet, Start is 1/1/1980 through 12/31/2000 Returns by Major Asset Class Compounded Annual Returns Cumulative Value In 2012 of a $100 Investment In 2001 Large Company Stocks 2.6% $ 136 Small Company Stocks 9.2% $ 287 Long Term Corporate Bonds 8.7% $ 272 Long Term Gov. Bonds 8.0% $ 252 Inflation 2.3% $ 132 Gold 16.2% $ 607 Source: Ibbotson and FactSet, From 1/1/01 through 12/31/12 Continued on page 15

15 Disclosures: The gold pricing in this report is measured using the London PM Fixing price, quoted in U.S. dollars per ounce. Past performance is not indicative of future results. Century Management reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The content of this report/letter should not be deemed, nor is it intended to be considered an investment recommendation to purchase or sell any particular security or an offer to sell any product. Certain statements included herein contain forward-looking statements, comments, beliefs, assumptions, and opinions that are based on Century Management s current expectations, estimates, projections, assumptions and beliefs. Words such as expects, anticipates, believes, estimates, and any variations of such words or other similar expressions are intended to identify such forward-looking statements. These statements, beliefs, comments, opinions and assumptions are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Viewers are cautioned not to place undue reliance on these forward-looking statements, which reflect Century Management s judgment only as of the date of this report/letter. Century Management disclaims any responsibility to update its views, as well as any of these forward-looking statements, to reflect new information, future events or otherwise. Factual material referenced in this report/letter is obtained from sources believed to be reliable and is provided without warranties of any kind, including, without limitation, no warranties regarding the accuracy or completeness of the material. Century Management is a registered investment adviser. More information about Century Management, including its advisory services and fee schedules, can be found in its Form ADV Part 2 which is available upon request or you can download from our website at Continued on page 16

16 Corporate Office Century Management 805 Las Cimas Parkway, Suite 430 Austin, Texas Toll Free (800) Phone (512) Fax (512)