Upload
others
View
0
Download
0
Embed Size (px)
Citation preview
Tocqueville Asset Management L.P.
40 West 57th Street 19th Floor ● New York ● NY ● 10019-4001
Tel: (212)698-0800 ● Fax: (212)262-0154 ● www.tocqueville.com
Tocqueville Gold Strategy
First Quarter 2013 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 4.5% during the quarter, but the mining shares (basis
XAU) dropped almost 19%. From the September 2011 peak of 227, the XAU had declined -26% to year end 2012
where it stood at 167. Until the end of 2012, the decline was orderly. The decline accelerated sharply in the
first quarter of 2013, almost equaling the percentage decline during the previous 16 months.
The accelerated decline in the first quarter of 2013, 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. Gold, 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 2011. 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 (Goldman 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: Gold, Long a Secure Investment Has Lost 17% of Its Value Since 2011.” A brief quote from the article is a
paean of shallow conventional wisdom:
Tocqueville Asset Management L.P.
40 West 57th Street 19th Floor ● New York ● NY ● 10019-4001
Tel: (212)698-0800 ● Fax: (212)262-0154 ● www.tocqueville.com
“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:
Gold 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 90 days. However, the December 2011 low of $1523 has not
been breached, despite three successive assaults.
The fundamental case for owning gold has improved since year end 2011. 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 Gold: 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.
Tocqueville Asset Management L.P.
40 West 57th Street 19th Floor ● New York ● NY ● 10019-4001
Tel: (212)698-0800 ● Fax: (212)262-0154 ● www.tocqueville.com
Best regards, John Hathaway Portfolio Manager and Senior Managing Director © Tocqueville Asset Management L.P. April 11, 2013
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
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%Fig.1. Gold and US Real Rates
US Real Rates
Gold Price
Source: Bloomberg
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
1995 1999 2003 2007 2011
Fig.2. Fed Balance Sheet ($B)
Source: Bloomberg
-3%
-2%
-1%
0%
1%
2%
3%
4%
2000 2002 2004 2006 2008 2010 2012
€ 0
€ 200
€ 400
€ 600
€ 800
€ 1,000
€ 1,200
€ 1,400
€ 1,600 Fig.3. Gold and ECB Real Rates
Gold
ECB Real Rates
Source: Bloomberg
€ 0
€ 500
€ 1,000
€ 1,500
€ 2,000
€ 2,500
€ 3,000
€ 3,500
1999 2003 2007 2011
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
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%Fig.5. Gold and PBC Real Rates
PBC Real Rates
Gold
Source: Bloomberg
¥0
¥5,000
¥10,000
¥15,000
¥20,000
¥25,000
¥30,000
¥35,000
2003 2005 2007 2009 2011 2013
Fig.6. PBC Balance Sheet (CNY B)
Source: Bloomberg
2
Section I. Macro
$4
$6
$8
$10
$12
$14
$16
2006 2007 2008 2009 2010 2011 2012 2013
Fig.7. The Biggest 6 Central Bank Balance Sheets
US, UK, Japan, China, EU & Switzerland (US$T)
Source: Bloomberg
$0
$20
$40
$60
1999 2003 2007 2011
$0
$500
$1,000
$1,500
$2,000
Tho
usa
nd
s Fig.8. Gold and M2 (US$B; Fed, ECB, PBC)
Gold
M2
Source: Bloomberg
-5%
0%
5%
10%
15%
20%
25%
1970 1980 1990 2000 2010
Fig.9. US M1 YoY%
Source: Bloomberg
0%
5%
10%
15%
1970 1980 1990 2000 2010
Fig.10. US M2 YoY%
Source: Bloomberg
0%
5%
10%
15%
20%
1999 2001 2003 2005 2007 2009 2011 2013
Fig.11. ECB M1 YoY %
Source: Bloomberg
0%
2%
4%
6%
8%
10%
12%
1999 2001 2003 2005 2007 2009 2011 2013
Fig.12. ECB M2 YoY %
Source: Bloomberg
0%
5%
10%
15%
20%
25%
30%
35%
40%
1996 2000 2004 2008 2012
Hu
nd
red
s Fig.13. PBC M1 YoY %
Source: Bloomberg
0%
5%
10%
15%
20%
25%
30%
35%
1996 2000 2004 2008 2012
Fig.14. PBC M2 YoY %
Source: Bloomberg
3
Section I. Macro
Fig.15. Inflation
2/28/13 US Euro Area China
Headline CPI 2.0 1.8 3.2
Core CPI 2.0 1.3 n/a
Shadowstats 9.6 n/a n/a
0%
1%
2%
3%
4%
5%
6%
7%
1999 2001 2003 2005 2007 2009 2011
Fig.19. Average Annual Interest Rate Paid on Debt
Source: Bloomberg; US Treasury
10%
12%
14%
16%
18%
20%
22%
24%
1988 1992 1996 2000 2004 2008 2012
Fig.20. Interest Expense as % of Total Government Outlays
Source: Bloomberg; US Treasury
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
1980 1990 2000 2010
Fig.16. US Public Debt Outstanding ($T)
Source: Bloomberg
120%
170%
220%
270%
320%
370%
1947 1957 1967 1977 1987 1997 2007
Fig.17. US Total Credit market Debt as % of GDP
Source: Bloomberg
$13
$14
$15
$16
$17
2010 2011 2012
Fig.18. The Debt Ceiling ($T)
Source: Bloomberg
Source: Bloomberg; Shadow Government Statistics
4
Section I. Macro
0
50
100
150
200
250
300
350
400
1999 2001 2003 2005 2007 2009 2011 2013
$0
$500
$1,000
$1,500
$2,000Fig.21. Quality Spread and Gold
Gold PriceMoody's Seasoned Corp Aaa vs Baa
Source: Bloomberg
-$20
$20
$60
$100
$140
$180
$220
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Fig.24. China Net purchases Long-Term US Securities (annual US$B)
Source: US Treasury; MacroMavens, LLC
-$100
$400
$900
$1,400
$1,900
2004 2006 2008 2010 2012
Fig.22. Global Forex Accumulation (US$B, 12 month sum)
Source: Bloomberg; MacroMavens, LLC -$100
$100
$300
$500
$700
2000 2002 2004 2006 2008 2010 2012
Fig.23. Foreign Purchase of US Treasuries (US$B, 12 month sum)
Source: US Treasury; MacroMavens, LLC
5
Section II. Gold
Fig.25. Gold Supply and Demand (tonnes)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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
Old gold scrap 835 944 829 886 1,107 956 1,217 1,672 1,723 1,669 1,626
Traditional supply 3,426 3,536 3,307 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) (108) 10 (20)
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
Demand
Jewellery 2,680 2,522 2,673 2,707 2,283 2,405 2,187 1,760 2,017 1,972 1,908
Other 360 385 416 431 458 462 436 373 466 453 428
Total fabrication 3,040 2,907 3,089 3,138 2,741 2,867 2,623 2,134 2,483 2,425 2,336
Bar & coin retail investment 373 314 396 412 421 446 649 743 1,205 1,519 1,256
Official sector purchases - - - - - - - - 77 457 535
ETFs & similar 3 39 133 208 260 253 321 617 382 185 279
Implied net investment 143 614 (259) 254 160 (94) (80) 541 207 (81) 47
Total demand 3,559 3,874 3,359 4,012 3,582 3,472 3,513 4,034 4,355 4,505 4,453 Source: World Gold Council
20% 22%
6%
0%
5%
10%
15%
20%
25%
1934 1982 2012
Fig.26. Market Cap of Above Ground Gold as % of Total US Financial Assets
Source: Federal Reserve, World Gold Council
0
500
1,000
1,500
2,000
2,500
3,000
2004 2006 2008 2010 2012
Fig.27. Gold Held By Gold ETFS (tonnes)
Other GLD
Source: Company Filings, World Gold Council
1,100
1,150
1,200
1,250
1,300
1,350
1,400
1/11 5/11 9/11 1/12 5/12 9/12 1/13
Fig.28. Total Net Asset Value in the SPDR Gold Trust (tonnes)
Source: Company Filings
6
Section II. Gold
Investment Adviser, 19.80%
Broker, 8.70%
Private Banking,
1.10%
Pension Fund, 0.50%
Hedge Fund, 8.30%
Mutual Fund, 3.60%
Insurance Company,
0.20%
Non-Institutional, 57.80%
Fig.30. SPDR Gold Trust Ownership by Type
Source: FactSet
00 01 02 03 04 05 06 07 08 09 10 11 12
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600 Fig.32. Central Banks Net Purchases (tonnes)
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
Fig.33. Central Banks Holdings of Gold (tonnes)
Source: World Gold Council
Fig.31. Notable Transaction in 1Q13
Country Tonnes Transaction
Kazakhstan 1.50 Purchase
Korea 20.00 Purchase
Russia 12.20 Purchase
Turkey 10.30 Addition
8%
9%
10%
11%
12%
13%
14%
2000 2002 2004 2006 2008 2010 2012
Fig.34. Gold as % of Total Reserves
Source: World Gold Council
38
39
40
41
42
43
44
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13
Fig.29. SPDR Gold Trust Net Asset Value (MOz)
Source: Company Filings
7
Section II. Gold
0
20
40
60
80
100
2006 2007 2008 2009 2010 2011 2012 2013
Fig.35. Web searches for "Gold Bubble"
Source: GoogleTrends
0
20
40
60
80
100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Fig.36. 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
Fig.37. Bernstein's Daily Sentiment Index
DSI
Gold
Source Bloomberg, Bernstein's DSI
$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
Fig.38. Market Vane Bullish Consensus
Market Vane
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
1000
1200
1400
1600
1800
2000
2006 2008 2010 2012
Fig.39. Comex Gold Futures Open Interest (tonnes)
Open Interest
Gold
Source: Bloomberg
-20%
80%
180%
280%
380%
480%
2000 2002 2004 2006 2008 2010 2012
Fig.40. Gold vs Continuous Commodity Index
CCI Index
Gold
Source: Bloomberg
$900
$1,100
$1,300
$1,500
$1,700
$1,900
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
7/10 9/10 11/10 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
Fig.42. Commercial Net Shorts as % of Total Open Interest
Net Short/Open Interest
Gold
Source: Bloomberg; The McClellan Market Report
More Net Short
Less Net Short
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
(1,000)
(800)
(600)
(400)
(200)
-
200
400
600
800
2006 2007 2008 2009 2010 2011 2012 2013
Fig.41. Comex Gold Futures Activity (tonnes)
Net Large Speculators
Net Hedgers/Commercials
Gold
Source: CFTC
9
Section III. Gold Mining Equities
0%
10%
20%
30%
40%
50%
60%
70%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Fig.43. XAU and HUI as a Ratio of Gold
HUI/GoldXAU/Gold
Source: FactSet
-$1,500
-$1,000
-$500
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
1H
07
2H
07
1H
08
2H
08
1H
09
2H
09
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
Fig.44. Net Fund Flows For Lipper's Equity Precious Metals Fund Universe ($M)
Source: Morningstar 1H13 - as of 2/28/13
15%
20%
25%
30%
35%
40%
2003 2005 2007 2009 2011
Fig.46. Gold Miners Dividend Payout Ratio
Source: FactSet Universe: ABX, NEM, GG, AU, GFI, KGC, NCM, BVN, HMY, AUY, IAG, CG, EGO, GOLD
$0
$2
$4
$6
$8
$10
$12
$14
$16
2006 2007 2008 2009 2010 2011 2012
Fig.45. Market Cap of Van Eck Gold Equity ETFs ($B)
Source: FactSet
0
20
40
60
80
100
120
140
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2000 2002 2004 2006 2008 2010 2012
Fig.47. Equity Capital Issued by Gold Miners
$B of Equty Issued
# of Transactions
Source: RBC Capital Markets
10
Section III. Gold Mining Equities
-2%
0%
2%
4%
6%
8%
10%
02 03 04 05 06 07 08 09 10 11 12
Fig.48. Senior Producers Return On Capital
Source: FactSet Universe: NEM, ABX, GG, KGC, AUY, NCM, AU, GFI, HMY
15%
20%
25%
30%
35%
40%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Fig.51. Gold Production Costs ($/Oz)
Avg Gold Price
Aft Tax Cash Cost
Margin
Source: Company filings
0%
10%
20%
30%
40%
50%
60%
70%
$0
$100
$200
$300
$400
$500
$600
05 06 07 08 09 10 11 12
Fig.49. Average Cost of Acquisitions in the Gold Sector ($/Oz)
Acquisition Cost As Ratio of Gold Price
Source: RBC Capital Markets
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fig.50. Senior Producers Cash Costs and Margin ($/Oz)
Cash Margin
Cash Costs
Source: Bloomberg
11
Section III. Gold Mining Equities
2007 2008
2009
2010
2011
2012
2013
$500
$700
$900
$1,100
$1,300
$1,500
$1,700
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4
Fig.52. Consensus Forecast Gold Price ($/Oz)
Source: Scotiabank
Source: BMO Capital Markets
Source: BMO Capital Markets
Source: BMO Capital Markets
Fig.53. Gold Price Discounted by Market ($/Oz) Fig.54. NAV Premiums – Senior & Intermediate Producers (N.A.)
Fig.55. P/CF – Senior Producers (N.A.)