Tocqueville Asset Management L.P.

Tocqueville Gold Strategy

Fourth Quarter 2012 Investor Letter
The bull market in gold remains intact. The metal rose approximately 7.14% in 2012 in U.S. dollar terms
and has increased in each of the last 12 years.
Negative real interest rates incentivize capital to move into gold. It is difficult to imagine a world of
positive real interest rates, absent a significant shift in monetary and fiscal policy in the Western democracies.
Gold and gold shares historically have been positively correlated. However, during the past few years,
gold mining stocks have underperformed the metal due a host of issues that we have discussed at length,
including in our website article A Golden Mulligan.(A Golden Mulligan | Tocqueville). Although the article was
published a few years ago, the issues afflicting gold mining stocks mentioned then still hold true.
Gold mining stock valuations are at the low end of the historical range since the introduction of the gold
ETF (GLD) in 2004, or roughly 10% (basis XAU/spot bullion.) This relationship is depicted on page 11 of the
appended data section to this report. Significant rallies in gold mining shares have occurred in the past few
years from this compressed valuation base.
We see evidence of fundamental change within the gold mining industry, which addresses many of the
concerns that have caused negative investor sentiment. For example, cost pressures are leveling off, which
should help margins. Investor pushback against major capital spending projects is leading to better capital
allocation decisions. There have been a number of departures at the CEO level due to investor dissatisfaction,
and this should heighten the sense of accountability to shareholder interests in the ranks of management. On
the other hand, resource nationalism remains a strong headwind. Only the better managed companies will be
able to deal successfully with these pressures.
Despite the steady rise in the gold price over many years, it has failed to exceed the 2011 high of
$1901/oz. achieved during the debt ceiling crisis and U.S. credit downgrade. This lack of direction has hurt gold
mining stocks, which do best when the upward trend of the gold price is clear. We believe that gold stocks will
respond favorably to a new high in the gold price.
Gold needs to rise only 15% to trade at a new high. We believe that this is in the cards for 2013, and that
such a move will be driven by the continuation of negative real interest rates and heightened concerns over the
direction of monetary and fiscal affairs in all western democracies. Such concerns would be exacerbated by the
continuation of extremely weak economic activity in 2013 and quite possibly the resumption of a recession,
anticipated by few.

40 West 57th Street 19th Floor New York NY 10019-4001

Tel: (212)698-0800 Fax: (212)262-0154 www.tocqueville.com

Tocqueville Asset Management L.P.

Most investors seem to expect a gradual acceleration of economic growth in 2013. We disagree and
believe that the recent tax hike, one of the largest in history, will dampen economic activity sufficiently to
widen the deficit and require the extension of debt monetization by the Federal Reserve for years to come.
We also believe that polarization of public opinion and the political process over austerity versus growth
agendas will also serve to paralyze economic activity. Not only will this require continued monetization of fiscal
deficits, but it will affect business and consumer behavior negatively. Intractable fiscal issues such as tax and
entitlement reform, in our opinion, will only be achieved through political consensus. In the absence of
effective political leadership, such a consensus seems achievable only in the aftermath of a financial and
economic meltdown on the order of 2008.
Once gold demonstrates that it can trade sustainably above $2000, or 20% above current levels, we
believe that gold mining stocks could trade at 13%-15% of spot bullion (basis XAU). That would translate into
appreciation of 60%-90% above the current XAU level of 160. Investor sentiment on gold is currently extremely
negative, comparable to the levels of mid-May 2012, when gold was trading approximately $100/oz. below
current levels (see Fig.35 - Fig.38 on pp. 8-9 of the appended data section). Historically, extreme negative
sentiment levels such as these have provided excellent entry points for new positions in bullion and the mining
shares.

Best regards,

John Hathaway
Portfolio Manager and Senior Managing Director
Tocqueville Asset Management L.P.
January 8, 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.

40 West 57th Street 19th Floor New York NY 10019-4001

Tel: (212)698-0800 Fax: (212)262-0154 www.tocqueville.com

Macro charts show bloated and still expanding central bank balance sheets, negative real interest
rates in major currencies, and rapid growth of monetary aggregates. One could argue that these
facts are well known, and that is certainly the case. However, the consequences of these facts are
still unknown, and therefore undiscounted by the markets. This in our opinion is the basis for
further upside in the gold price.
Charts 16 & 17 reveal a potential time bomb for US treasuries. Interest on the public debt is close
to historical lows, due in part to Fed manipulation, the fear trade, and old fashioned
momentum. Think of what 300 or 400 additional basis points across the yield curve would do to
the fiscal deficit. (Hint: what is 4% x $16 trillion as a percent of future fiscal deficits? Answer: it is
very high).
Charts 23 & 24 reflect the declining willingness of foreign investors to invest in US securities. It
may have something to do with the point above.
Charts 28, 32 & 32 indicate that despite all of the talk about gold, it remains very underowned.
Charts 35 & 38 show that sentiment is at, or approaching rock bottom levels from which rallies can
be reliably be expected.
Chart 47 shows that despite all of the sell side whining about rising costs (see Chart 48), profits are
at record levels.
The consequence of Chart 47 is reflected in Chart 51, a steady decline in equity issuance. We
believe declining equity dilution is an important positive fundamental change in the industry that
will help lead to expanding valuation of gold mining equities.

$2,000

-5%

Fig.1. Gold and US Real Rates

$1,800

-4%

Gold Price
US Real Rates

$1,600
$1,400

-3%
-2%

$1,200

-1%

$1,000

0%

$800

1%

$600

2%

$400

3%

$200

4%

$0
2000

Hundreds
Thousands

SECTION I. MACRO

2004

2006

2008

2010

Fig.2. Fed Balance Sheet ($B)

$3,000

$2,500
$2,000
$1,500
$1,000
$500
$0
1994

5%
2002

$3,500

2012

Fig.3. ECB Real Rates and Gold in EUR

-2%

Gold
ECB Real Rates

1,200

-3%

Hundreds

1,400

3,500

2,500

0%

2,000

600

1%

1,500

400

2%

1,000

200

3%

500

800

0
1999

2001

2003

2005

2007

2009

2011

Gold
Chinese Real Rates

-5%
-4%
-3%

10,000
8,000

2010

2003

2005

2007

2009

2011

Fig.6. PBC Balance Sheet (RMB B)

35,000
30,000

-2%

25,000

-1%

20,000

0%
1%

6,000

2%
3%

4,000

4%
2,000
1999 2001
Source: Bloomberg

Hundreds

12,000

Fig.5. Chinese Real Rates and Gold in RMB

2001

Source: Bloomberg

Source: Bloomberg

14,000

2006

Fig.4. ECB Balance Sheet (B)

0
1999

4%

2002

3,000

-1%

1,000

1998

Source: Bloomberg

Source: Bloomberg

5%
2003

2005

2007

2009

2011

15,000
10,000
5,000
0
2003

2005

2007

2009

2011

Source: Bloomberg

SECTION I. MACRO
$16

Fig.7. The Biggest 6 Central Bank Balance

Sheets

$14

Fig. 8. Gold and Combined M2

$40

$2,000

($T; Fed, ECB, PBC)

US, UK, Japan, China, EU & Switzerland (US$T)

$12

$30

$1,500

Gold

$10

M2

$8

$20

$1,000

$10

$500

$6
$4
$2
$0
1999 2001 2003 2005 2007 2009 2011

$0
2006

2007

2008

2009

2010

2011

2012

Source: Bloomberg

Fig. 9. US M1 YoY%

Hundreds

Hundreds

Source: Bloomberg

25%
20%
15%

$0

10%

16%

Fig. 10. US M2 YoY%

12%
8%

5%
4%
0%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010

-5%
1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: Bloomberg

16%

Hundreds

Hundreds

Source: Bloomberg

Fig. 11. ECB M1 YoY %

12%

12%

Fig. 12. ECB M2 YoY %

8%

8%
4%
4%

2001

Hundreds

Source: Bloomberg

40%

2003

2005

2007

2009

0%
1999

2011

Fig.13. PBC M1 YoY %

30%

2001

Source: Bloomberg

Hundreds

0%
1999

2003

2005

2007

2009

2011

Fig.14. PBC M2 YoY %

30%

20%

20%

10%

10%

0%
1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg

0%
1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg

SECTION I. MACRO
Fig.15. Inflation
Dec-12
US
Euro Area
Headline CPI
1.80%
2.20%
Core CPI
1.90%
1.40%
Shadowstats
9.41%
n/a

Fig.16. Average Annual Interest Rate Paid

on US Debt

7%

China
2.00%
n/a
n/a

Source: Bloomberg; Shadow Government Statistics

6%
5%
4%
3%
2%

$18

Fig.17. US Public Debt Outstanding ($T)

$16

1%
0%
2000

$14

2002

2004

2006

Source: Bloomberg; US Treasury

$12
$8

22%

$6

20%

$4

2010

2012

Fig.18 US Interest Expense as % of Total

Government Outlays

24%

$10

2008

18%

$2
$0
1980

16%
1990

Source: Bloomberg

2000

2010

14%
12%
10%
1988

Fig 19. Total credit Market Debt as % of GDP

1992

1996

2000

2004

2008

2012

Source: Bloomberg; US Treasury

Source: Ned Davis Research with permission

SECTION I. MACRO
400

$2,000

Fig. 20. Quality Spread and Gold

350

300

$1,500
Gold Price
Moody's Seasoned Corp Aaa vs Baa

250
200

$1,000

150
100

$500

50
0
1999

$0
2001

2003

2005

2007

2009

2011

Source: Bloomberg

Fig.21. The Debt Ceiling ($T)

Fig.22. Global Forex Accumulation. 12 months sum

Source: MacroMavens, LLC

Source: Bianco Research

Fig.23. China Net Purchases of LT US Securities (annual $B)

Source: MacroMavens, LLC

Fig.24. Share of Global Forex Accumulation Recycled

into US Securities

Source: MacroMavens, LLC

SECTION II. GOLD

Fig. 25. Gold Supply and Demand(tonnes)
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Supply
Mine production
Old gold scrap
Traditional supply
Net producer hedging
Official sector sales
Total supply

Q32012

2,591
835
3,426
(412)
545
3,559

2,592
944
3,536
(279)
617
3,874

2,478
829
3,307
(445)
497
3,359

2,550
886
3,436
(86)
662
4,012

2,481
1,107
3,588
(373)
367
3,582

2,476
956
3,432
(444)
484
3,472

2,409
1,217
3,626
(349)
236
3,513

2,584
1,672
4,257
(252)
30
4,034

2,739
1,723
4,463
(108)
4,355

2,827
1,669
4,495
10
4,505

2,101
1,237
3,337
(12)
3,326

Demand
Jewellery
Other
Total fabrication
Bar & coin retail investment
Official sector purchases
ETFs & Similar
Implied net investment
Total demand

2,680
360
3,040
373
3
143
3,559

2,522
385
2,907
314
39
614
3,874

2,673
416
3,089
396
133
(259)
3,359

2,707
431
3,138
412
208
254
4,012

2,283
458
2,741
421
260
160
3,582

2,405
462
2,867
446
253
(94)
3,472

2,187
436
2,623
649
321
(80)
3,513

1,760
373
2,134
743
617
541
4,034

2,017
466
2,483
1,205
77
382
207
4,355

1,972
453
2,425
1,519
457
185
(81)
4,505

1,410
327
1,738
942
374
189
83
3,326

Source: World Gold Council

Fig. 26. Market Cap of Above Ground Gold as % of Total US

Financial Assets

25%

22%
20%

20%
15%

10%

6%

5%
0%
1934

Source: Federal Reserve, World Gold Council

2500

1982

Q3'2012

Fig. 27. Gold Held By Gold ETFS (tonnes)

2000
1500

Other
GLD

1000
500
0
2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Company Filings, World Gold Council

SECTION II. GOLD

Fig. 28. GLD Ownership by Type
Investment
Adviser,
19.3%
Broker, 7.4%
NonInstitutional,
57.9%

Private
Banking, 0.9%
Pension Fund,
0.5%
Insurance
Hedge Fund,
Company, Mutual Fund,
10.2%
3.6%
0.2%

Source: Factset

600
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600

Fig.29. Central Banks Net Purchases (tonnes)

00

01

02

03

04

05

06

08

07

Fig.30. Notable Transactions in 3Q12

Country Tonnes
Transaction
Kazakhstan
2.45 Purchase
Korea
16.00 Purchase
Russia
16.48 Purchase
Turkey
58.13
Addition
09

10

Source: World Gold Council

11 3Q12

Source: World Gold Council

34,000

Fig. 31. Central banks Holdings of Gold (tonnes)

33,500

1.6%

Fig. 32. Gold as % of Total Reserves

1.5%

33,000
32,500

1.4%

32,000
1.3%

31,500
31,000

1.2%

30,500

1.1%

30,000
29,500
2000

2002

2004

Source: World Gold Council

2006

2008

2010

2012

1.0%
2000

2002

2004

2006

2008

2010

2012

Source: World Gold Council

SECTION II. GOLD

100

Fig.33. Web searches for "Gold Bubble"

80
60
40
20
0
Aug-05

Aug-06

Source: GoogleTrends

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

100

Fig.34. Web searches for "Gold Investment"

80
60
40
20
0
2004 Source: GoogleTrends 2006

2008

2010

2012

Fig. 35. Bernstein's Daily Sentiment Index

100

$2,000

80

$1,500

60
$1,000
40
$500

20

0
2006

100

DSI

Gold

$0
2007

Source Bloomberg, Bernstein's DSI

2008

2009

2010

2011

2012

Fig. 36. Market Vane Bullish Consensus

80
60

40
Market Vane

Gold

20
0
2006

2007
2008
Source: Bloomberg; Market Vane

2009

2010

2011

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

2012

SECTION II. GOLD

Fig.37. Hulbert Newsletter Gold Sentiment Index

Source: Ned Davis Research with permission

Fig.38. Ned Davis Research Gold Sentiment Composite

Source: Ned Davis Research with permission

SECTION II. GOLD

2000

Fig. 39. Comex Gold Futures Open Interest

(tonnes)

1800
1600
1400
1200

Open
Interest

1000
800

$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0

2006 2007 2008 2009 2010 2011 2012

Fig.40. Gold vs Continuous Commodity Index

480%
CCI Index
380%

Gold

280%
180%
80%
-20%
2000

2002

2004

Source: Bloomberg

Source: Bloomberg

2006

2008

Fig. 41. Comex Gold Futures Activity (tonnes)

$1,800

600

$1,600

400

$1,400

200

$1,200

0
2006
-200

2007

2008

2009

2010

2011

2012

$1,000
$800

Net Large Speculators

Net Hedgers/Commercials
Gold

-400
-600
-800

1.00%

2012

$2,000

800

-1000

2010

$600
$400
$200
$0

Source: CFTC

Fig.42. Commercial Net Shorts as % of Total Open Interest

0.90%

Net Short/Open Interest

0.80%

Gold

$1,900
$1,700
$1,500

0.70%
More Net Short

0.60%

$1,300

0.50%
$1,100

0.40%
Less Net Short

0.30%
07-10 09-10 11-10 01-11 03-11 05-11 07-11 09-11 11-11 01-12 03-12 05-12 07-12 09-12 11-12

$900

Source: Bloomberg; The McClellan Market Report

10

SECTION III. MINING EQUITIES

70%

Fig.43. XAU and HUI as a Ratio of Gold

60%

HUI/Gold
XAU/Gold

50%
40%
30%
20%
10%

0%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Millions

Source: Factset

$3,500
$3,000

Fig.44. Net Fund Flows For Lipper's Equity

Precious Metals Fund Universe ($M)

Fig.45. Market Cap of Van Eck Gold

$14

Equity ETFs ($B)

$2,500

$12

$2,000

$10

$1,500

$8

$1,000

$6

$500

$4

-$1,500

2H12

1H12

2H11

1H11

2H10

1H10

2H09

1H09

2H08

1H08

-$1,000

2H07

-$500

1H07

$0

Hundreds

$16

Source: Morningstar
2H12 - as of 11/30/12

$0
2006

2007

2008

Source: Factset

$1,800

Fig.46. Gold Miners Dividend Payout Ratio

40%

$2

$1,600

35%

$1,400
$1,200

30%

$1,000

2009

2010

2011

2012

Fig.47. Senior Producers Cash Costs and

Margin
Cash Margin
Cash Costs

$800

25%

$600
$400

20%

$200
15%

$0
03

04

05

06

07

08

09

10

11

Source: Factset
Universe: ABX, NEM, GG, AU, GFI, KGC, NCM, BVN, HMY, AUY, IAG, CG,
EGO, GOLD

12
Source: Bloomberg

11

SECTION III. MINING EQUITIES

Fig. 48. Total Cash Outflow ($/oz)

$600

Fig. 49. Average Cost of Acquisitions in the 70%

Gold Sector ($/Oz)

$500

60%
50%

$400

40%
$300
30%
$200

20%

$100

10%

$0

0%
2005 2006 2007 2008 2009 2010 2011 2012

Note: Operating = Operating costs + Exploration costs + Royalties;

Capital= Ongoing+Expansion capital; Other = Finance costs + Other costs
Source: Gold Fields

10%

Acquisition Cost

As Ratio of Gold Price

Source: RBC Capital Markets

Fig. 50. Senior Producers Return On Capital

8%
6%
4%
2%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Est

-2%
Source: Factset
Universe: NEM, ABX, GG, KGC, AUY, NCM, AU, GFI, HMY

$18

Fig.51. Equity Capital Issued by Gold Miners

$16

140
120

$14

$B of Equty Issued

$12

# of Transactions

100

$10

80

$8

60

$6

40

$4

20

$2
$0

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: RBC Capital Markets

12

SECTION III. MINING EQUITIES

Fig. 52. Gold Price Discounted by Market

Fig.53. Consensus Forecast Gold Price ($/Oz)

$1,700
2013
$1,500

2012

$1,300
2011

$1,100

2010

$900

2009
$700
$500
Yr 0

Source: Scotiabank

Yr 1

Yr 2

Yr 3

2008
2007
Yr 4

Source: BMO Capital Markets

Fig. 54. NAV Premiums - Senior & Intermediate producers (N.A.)

Source: BMO Capital Markets

Fig. 55. P/CF - Senior producers (N.A.)

Source: BMO Capital Markets

13