the golden opportunity
DESCRIPTION
Gold is still a core assetTRANSCRIPT
The Golden Opportunity: Beginning of the End or the End of the Beginning?
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TERA MANAGEMENT LLC – TOCQUEVILLE BULLION RESERVE
• Tocqueville Asset Management is a New York-based, SEC registered investment advisor formed in 1985.
– Contrarian, fundamental investor that specializes in undervalued assets; – $11B of client assets under management as of 11/30/12, of which – $3B is invested in gold-related strategies.
• Eidesis Capital is a New York-based specialty asset manager formed in 1998.
– Expertise in macro and systemic risks and special situations; – Since inception, principals have raised and deployed over $2.5B of capital; – Launched an institutional partnership for holding physical gold in 2011.
TOCQUEVILLE BULLION RESERVE,
INSTITUTIONAL-‐GRADE VEHICLE TO OWN GOLD GLOBALLY, OUTSIDE THE FINANCIAL SYSTEM
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PROSPERITY THROUGH “WEALTH EFFECT” – NEW AND IMPROVED APPROACH
ARE THINGS EVER REALLY “DIFFERENT THIS TIME?”
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CORPORATE DEBT OUTSTANDING IS AT ALL-‐TIME HIGH
Leverage feels great while debt service is cheap and earnings strong.
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RETURN-‐FREE RISK -‐ YIELDS ON THE SUB-‐CAA BONDS ARE AT ALL-‐TIME LOW
BETWEEN 17% AND 43% OF SUB-‐CAA BONDS DEFAULT WITHIN 12 MONTHS. BETWEEN 57% AND 83% OF SUB-‐CAA RATED BONDS DEFAULT WITHIN 60 MONTHS.
2011 Moody’s Default Study
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US DEBT TO GDP IS AT THE POST-‐WW II HIGH; INTEREST TO GDP IS NEAR THE LOW
Since 1975 US Debt to GDP tripled but Interest to GDP is UNCHANGED.
Feels like a free lunch… for now.
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MANIPULATED DATA ARE NO MORE INSIGHTFUL THAN RORSCHACH TEST CARDS
Rorschach is based on biases, not facts driving data interpretacon.
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Age-‐old wisdom is universal because it disclls common sense
He who laughs last, laughs best
Wer zuletzt lacht, lacht am besten!
Rira bien qui rira le dernier
Ride bene chi ride l'ultimo
Хорошо смеется тот кто смеется последний
SOMETHING THAT DOES NOT MAKE SENSE… DOES NOT MAKE SENSE
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WHAT DOES COMMON SENSE TELL US ABOUT CURRENT SYSTEMIC RISKS?
• TBTF banks geeng bigger since 2008 cannot mean the risk got smaller.
• Princng currencies without limits cannot be good for their value over cme.
• It is a fact that historical record of financial engineering is very poor.
• In history, unrestrained debt accumulacon has never led to a posicve outcome.
• Cash flows at the lowest discount rates possible cannot be a good deal.
• Mispriced risk has never NOT resulted in misallocacon of capital.
• If interconnectedness=systemic risk, and it does; risk has never been higher.
• EU pushing to expropriate Cyprus deposits means “bail-‐in” is a new policy tool.
Whatever happens, structural systemic risks must be addressed by all prudent investors.
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Convenconal Market Wisdom Circa April-‐May 2013:
Central Banks are firmly in control and will succeed.
European systemic risk has been taken off the table.
The Fed is nearing an “EXIT” as recovery takes hold.
“Inflacon” has been and will concnue to remain low.
The “Safe Haven Trade” has run its course.
Gold prices dropped sharply = gold is not a safe haven.
Convenconal wisdom drives momentum but is notoriously wrong at seeing change.
Regardless of Inconsistencies, Bullish Bias is Driving the Markets
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• Supply and demand are driven by expectacons and need/want.
• In the absence of need, expectacons drive demand.
• When confidence rises, demand for safe havens should decline.
• Gold’s price declined as confidence rose, which is what should happen.
• The quescon is whether confidence is misplaced. and needs
Insights From the Gold’s Selloff – Price Accon Made Sense
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• As the Safe Haven Trade(rs) rushed to sell, Safe Haven seekers rushed to buy.
• Traders proved to be “weak hands”; physical buyers – “strong hands.”
• Physical gold inventory for immediate delivery was again proved cght.
• Many products were quickly sold out; the same happened in the fall of 2008. • Whereas liquidity of financial assets dries up in crashes, gold’s surged.
• Absence of liquidity risk is the hallmark of a genuine Safe Haven.
Key Insights: Weak vs Strong Hands; Physical Scarcity; Liquidity
Price of a Safe Haven asset can be volacle but it is always liquid.
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If Physical Demand Surged, Why did the Prices not Recover?
• drivers of supply and demand are expectaPons and needs
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Futures and “Paper Gold” Data:
• LBMA Daily Volume (2011) $241 B • CME Daily Volume Record (2012) $84 B • ETP Annual Demand/Outstanding (2012) $15 B/$140 B • GLD -‐ Average Daily Volume (2013) $2 B
Physical Gold Data:
• Global Annual Demand for Bars and Coins (2012) $67 B • US Annual Demand for Bars and Coins (2012) $3 B
CME Group, World Gold Council, LBME
To date, the gold bull has been driven by the paper traders:
Volumes of the paper markets overwhelm the physical market.
WHAT DROVE THE GOLD BULL – A PAPER CHASE OR A GOLD RUSH?
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What is a “Safe Haven Trade”?
What are Safe Havens?
What qualifies as a Safe Haven in the current environment?
Choice of a proper Safe Haven depends on the risks.
Parsing the Safe Haven Fundamentals
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“SAFE HAVEN TRADE” AIMS TO PROFIT FROM MOMENTUM AND VOLATILITY
Tools of the Safe Haven Trade – ETPs, “paper gold” and derivacves.
Momentum follows expectacons:
As expectacons of inflacon declined, so did gold prices.
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Hedges: • Private or exchange traded financial instruments whose value is expected to move in
the opposite direcPon of the overall porcolio. Insurance: • Agreement in which you pay a company money and the company pays the cost if you
have an accident, injury or loss.
Convenconal hedges rely on counterparces and funcconing markets.
Tools For Managing Convenconal, Idiosyncracc Risks
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Structural Risks Can Impair Value Realizacon When Most Needed
■ Crisis of 2007-‐2009 confirmed that all “structural” risks are highly correlated:
– Financial counterparPes could not perform without
government bailouts. – Liquidity of derivaPves and ETPs mirrored financial
markets, not the physical markets. – Whenever custodians failed, custodial assets were
lost -‐ Lehman, MF Global, Refco.
– Prices of numerous derivaPves and ETPs diverged from the underlying assets.
– Listed securiPes were subjected to sovereign fiat: margin rules, shorPng bans, trading limits.
– Complexity, opacity and limited exit opPons exacerbated the losses.
“Structural” risks exacerbate the “risk-off”
dynamic prevalent in times of stress.
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High Correlacon is the key driver of Catastrophic, Uninsurable Risks: • War, Riots, InsurrecPon, Floods, Earthquakes
• Sovereign Debt Crises, Currency Reforms, Depressions, Market Crashes, etc. “Jump Risk” is the hallmark of High Correlacon: • Most catastrophic events occur suddenly, before the market has priced in the risk.
CORRELATION AND UNCONVENTIONAL, CATASTROPHIC RISKS
Level of interconnectedness, especially in finance, has never been higher.
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Only real assets offer proteccon when convenconal financial arrangements fail. Reserves: • Cash, or assets readily converPble into cash, held aside to meet expected or
unexpected demands; resources not normally called upon but available if needed.
• Gold bullion is the ideal reserve asset – it is the only real asset that is always liquid. Safe Havens: • A safe or peaceful place in an otherwise dangerous area, e.g. financial system.
Gold is the only liquid asset that can be pracccally held outside the banks.
Financial instruments are concngent promises to perform in the future.
Reserves and Safe Havens are REAL and ready for use at all cmes.
TOOLS FOR OF Managing Unconvenconal, Correlated Risks:
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Higher cost of invescng in Safe Haven Assets is the cost of Systemic Proteccon.
“SAFE HAVEN TRADE” CANNOT OFFER AN EFFECTIVE SAFE HAVEN
Safe Haven Trade – Profits from fear but loses if event occurs.
§ Complete reliance on funcPoning capital markets and counterparPes’ performing; § High sovereign risks; § Low execuPon costs, high liquidity (so long as financial markets funcPon).
Safe Haven Assets – Profits from fear AND if event occurs.
§ No reliance on funcPoning capital markets or on counterparPes’ performing; § Low sovereign risks; § Higher execuPon costs; lower liquidity but not dependent on financial markets.
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How they do it:
Warning: None.
Timing: Over a weekend.
ObjecPve: Stem the Pde by expropriaPng value.
Stated RaPonale: Protect the public against speculators, hoarders, etc.
MY SLIDE ON SYSTEMIC RISK FROM THE APRIL 2012 GRANT’S CONFERENCE
Cyprus events were predictably “unpredictable” and caught most people unprepared.
Vast majority gets caught due to complacency – “It can’t happen here; it won’t happen to me.”
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• Since 2008, bailout-‐based policies miPgated tradiPonal structural risks:
• Depositors, counterparPes and stakeholders were made whole and expected future bailouts.
• Cyprus was not a “one-‐off” but a preview of the new resoluPon policy:
• “Resolving Globally Accve, Systemically Important, Financial Insctucons” – a 12/2012 joint paper by the FDIC and the Bank of England laid out principles for handling future failures:
• “…losses of any financial company placed into receivership will not be borne by taxpayers, but by
common and preferred stockholders, debt holders, and other unsecured creditors…” • “Uninsured deposits would be treated in line with other similarly ranked liabiliPes in the resoluPon
process, with the expectaPon that they might be wrilen down.” • “In the U.S., these powers had already become available under the Dodd-‐Frank Act.”
• All customer assets held within financial insPtuPons will be exposed to losses in case of failure.
What Happened in Cyprus Won’t Stay in Cyprus
Prudence calls for a “safe haven” liquid reserve outside of financial insctucons and markets.
Gold bullion is the only non-‐financial asset that is liquid and pracccal to hold outside the banks.
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Tocqueville Bullion Reserve n n n
Unencumbered Ownership of Physical Gold No Direct Correlation to “Structural” and Financial Risks
Choice of Vaults – East Asia, US, Switzerland Expert Management and Institutional Controls
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Investors
Broker Dealer
Stock Exchange
Authorized Participants
ETF Trust
Bank
Investors
TBR
Non-Bank Vaults
ETF vs TBR = Complexity vs Simplicity
The ETF Model Exchange-traded indirect claims against an allocated gold bank account.
The TBR Model Directly redeemable “warehouse receipts” fully backed by gold held in non-bank vaults.
TOCQUEVILLE BULLION RESERVE – PROTECTION AGAINST SYSTEMIC RISK
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• No dependence on financial counterparPes or infrastructure: – TBR does not use leverage, derivaPves or any other financial instruments. – TBR uses secure, fully insured storage within non-‐financial vaults around the globe. – Direct subscripPon process eliminates the risks of custodial accounts.
• No price or liquidity divergence between L.P. interests and physical gold: – TBR account value directly Pes to the NAV of the underlying gold bullion. – L.P. interests always represent pass-‐through ownership of fully-‐allocated bullion. – Liquidity of the L.P. interests depends on the global bullion markets, not financial markets.
• Flexible exit opPons, full transparency and global diversificaPon: – TBR offers daily liquidity (24-‐hour noPce) either in cash or in gold bullion. – Transparency, robust insPtuPonal controls, reporPng and customer service. – Choice of mulPple storage jurisdicPons in close proximity to acPve bullion markets. – Ease of execuPon, costs and liquidity terms are compePPve with the ETPs.
TBR Offers Pure Gold Exposure Without the Structural Risks
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A Global Team of Premier Service Providers
Cash Custody Secure Gold Custody Administration, Accounting, Reporting
Legal Financial Audit
Full Value Insurance Inventory Audit
TBR – Adding Value Through Global, Insctuconal Relaconships
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TBR GLD
Vehicle Type Open-ended Private Partnership ETF
Trading Commissions 0% YES
Share Bid/Ask Spread 0% YES
NAV Premium/Discount 0% YES
Mgt Fees/Gross Expenses 0.35%/0.50% (>$1mm) 0.30%/0.40%
Gold Transaction Costs 0% - 0.20% N/A
Redemptions in Gold Unrestricted Via Auth. Participants; 100k shares minimum
Purchase/Sale Directly via TBR Secondary Market
Liquidity Daily, 24 hr Notice Market Hours
Evidence of Ownership Physical Electronic/DTC
Gold Custodians Brinks, ViaMat, Malca-Amit HSBC
Storage Jurisdictions US, Switzerland, Singapore, Hong Kong UK
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TBR – INSTITUTIONAL FIDUCIARY CONTROLS AND PROCEDURES
• Storage providers perform daily, weekly and monthly inventory checks and email daily inventory reports reflecting any changes.
• Credit Suisse Administration Services (“CSAS”), TBR’s administrator, maintains independent real-time access to the vaults’ inventory systems and receives daily inventory reports independently from the manager.
• CSAS maintains each investor's capital account, calculates daily Net Asset Value (“NAV”) and prepares and distributes monthly NAV statements indicating the level of gold backing.
• Inspectorate International Limited, an independent global provider of inventory control services, performs quarterly inspections and full bullion count.
• Annual audits are performed by Rothstein Kass and Co., one of the largest U.S. providers of audit and tax services to the financial industry.
• The manager conducts on-going monitoring and reconciliation of the inventory reports and performs on-site due diligence visits and inventory counts.
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Those who establish reserves can withstand a range of outcomes.
Those without reserves can only afford a happy ending.
Successful Wealth Preservation Requires Resiliency
Human history is not a Hollywood film; it is the story of the ebbs and flows of great civilizacons and fortunes.
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TacPcs without strategy is the longest path to victory. Strategy without tacPcs is the noise before defeat.
Sun Tzu
Q: Why do we not remember great fortunes made in the 1920? A: Because majority of them were lost in the 1930s.
Wealth Preservation Project is a Not a Momentum Trade
Only 32% of the 459 families listed in the Hamptons Blue Book in 1927 were scll listed in 1940.
Nick Colas, CovergeX (via Zero Hedge)
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PROTECTION Is cheap whenever consensus under-‐escmates Probability.
GETTING TECHNICAL: HOW MUCH SHOULD ONE PAY FOR PROTECTION
Price of Proteccon = Expected Loss Expected Loss = Event Probability X Potencal Loss Severity Since Potencal Loss Severity in systemic events is catastrophic, Consensus about Event Probability is the key determinant of cost.
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• Price of lifeboat seats to cruise passengers is irrelevant.
• Value of lifeboat seats on Titanic was immeasurable. • In an environment perceived safe, gold price is debatable. • In the 1978 Vietnam, 7oz of gold bought a ccket to freedom. of supply and demand are expectaPons and needs
What is the value of a gold hoard vs an expropriated Cyprus account?
Safe Haven’s Price Should Not be Confused with Value
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AS UNSOUND POLICIES FAIL TO DELIVER RECOVERY,
SYSTEMIC RISK WILL MANIFEST ITSELF WITH A VENGEANCE
DRIVING INVESTORS TOWARDS REAL SAFE HAVENS.
THEN, WHAT HAS BEEN A SPECULATIVE “PAPER CHASE”
WILL TURN INTO A REAL GOLD RUSH.
What about the Golden Opportunity?
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This presentation was prepared by TERA Management LLC and is for information purposes only. Neither the information nor any opinion contained in this presentation or any appendices constitutes a solicitation or offer by TERA Management LLC or any affiliates to buy or sell any securities or other financial instruments or provide any investment advice or service. TERA Management LLC does not undertake to advise of changes in its opinions or information contained in this presentation. Any data included in this presentation is obtained from sources believed to be reliable but cannot be, and is not guaranteed by TERA Management LLC. Any opinions or projections expressed herein are those of the TERA Management LLC and cannot and should not be relied upon as representations of fact or investment advice. Past returns cannot be relied upon as a predictor of future performance. No material from this presentation may be used, reproduced or otherwise disseminated in any form to any person or entity without the explicit prior written consent of TERA Management LLC.
TERA Management LLC 1221 Avenue of the Americas
Suite 4200 New York, NY 10020
Telephone: (212) 792-2170 Facsimile: (212) 792-2171
Simon A. Mikhailovich
[email protected] Telephone: (212) 792-2172
Joseph A. Zock
[email protected] Telephone: (212) 903-0300