Why Every Investor Should Own Gold December 19, 2016 by Robert Huebscher John Hathaway, CFA, is chairman of Tocqueville Management Corporation, the general partner of Tocqueville Management L.P. Mr. Hathaway joined Tocqueville in 1997. He co-manages the Tocqueville Gold Fund (TGLDX). In addition, he manages separate accounts with a gold-equity mandate including the Falcon Gold Fund, the Falcon Gold UCITS Fund, Tocqueville Gold Amerique (FCP), a sovereign wealth fund, and various separate accounts for family offices and government entities. Prior to joining Tocqueville, Mr. Hathaway co-founded and managed Hudson Capital Advisors followed by seven years with Oak Hall Advisors as the chief investment officer in 1986. Before that, he joined the investment advisory firm David J. Greene and Company, where he became a partner. Mr. Hathaway began his investment career in 1970 as a research analyst with Spencer Trask & Co. Mr. Hathaway graduated from Harvard College in 1963 (B.A.) and from the University of Virginia Business School in 1967 (M.B.A). He also holds the CFA designation. I spoke with John on December 9. How does one value an asset that produces no income? You could ask the same thing about a dollar bill. Gold is a form of purchasing power and optionality. Think about it like a euro, a dollar bill or a yen. It can be used however the holder wants to use it; think of it in terms of purchasing power. It offers complete flexibility. You can sell gold 24 hours a day, seven days a week, anywhere in the world. It’s a form of currency. How do you value one currency versus another? What makes gold different than any other currency is that it hasn’t lost purchasing power over centuries and centuries. That may not sound particularly exciting because nobody thinks that way. But if you’re a wealthy family, if you’re an endowment, if you’re a pension fund, gold has a role just as a way to protect capital and purchasing power over long periods of time. Forget the day-to-day fluctuations. If you look at what gold has done since 2000, for example, it has outperformed every other asset class, whether it’s bonds or stocks. The unifying thread throughout those years, going back to 2000, is bad, radical monetary policy.

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The appeal to maybe your readership is that gold represents reserved purchasing power and a form of financial wealth insurance. Which precious metal is most attractive to you now, and why? They all have their attributes. But we’re only talking about four: gold, silver, platinum and palladium. Platinum and palladium are heavily influenced by the automotive cycle because of their use in that industry. Silver has a lot of industrial usage, so its analysis is obviously going to be affected by its use in many different industries. But it also has a precious metals component. It’s accepted as money in most parts of the world. Gold is the king of the hill as far as precious metals. It is the one where the influence of industrial usage has the least impact, and it is mainly a store value all over the world. You can’t talk about the appeal of any of the others without first taking into account gold. If you could own just one mining asset, what would it be? Hypothetically, it would be a long-lived, mine producing gold or gold and silver at very competitive costs. I can’t identify specific companies that have all of those attributes, but there are single mines that have that. Do any in particular come to mind? The Detour Lake mine in Canada has a 23-year mine life; that’s very important because that means you’re going to capture price in different parts of the cycles. Detour doesn’t quite fit the definition of being low-cost. It’s a higher-cost mine, but it’s not a marginal mine. It’s just not the lowest-cost mine that would come to mind, but it does have all the other aspects that one would look for. Your largest position is approximately a 10% position in gold bullion. What are the relative merits of owning bullion versus gold miners? It’s a stabilizer in terms of our returns. It’s less volatile than the mining stocks. Thinking about the merits of physical metal versus mining stocks, physical metal is financial insurance that’s not in the banking system. If you buy insurance from J.P. Morgan or Chubb, for example, they’re part of the financial system. Physical metal has no counterparty risk, which most of us in this country don’t appreciate. But it is really important. Think about what’s happened in India, Cypress or Britain, with Brexit; people who had physical metal really did well. But if they owned a structured note from Barclays, or whatever the Indian reserve bank would be, they didn’t do as well. How do you handicap the risk that a gold mine can be expropriated by the host government? We spend a lot of time doing that. We have a research team consisting of myself and three others. We travel the world nonstop. We visit mines and different countries where they’re located. We perform an in-depth analysis to assess political risk. We tend to be more partial to companies whose assets are in Page 2, ©2017 Advisor Perspectives, Inc. All rights reserved.

countries with rule of law; that would include most of North America and Australia, but then it starts to get dicey. There are other countries, for example Ghana, that have a rule of law; it’s not the best rule of law but it is a rule of law, and mining is important there. Then you can go all the way to a place like Venezuela, where you’d be nuts if you ever set foot there. The blue-ribbon standard is Anglo-Saxon legal systems. Then there’s a huge degree of variation among everything else. Is your bullion position a physical ownership or a paper ownership? What is your view on gold bullion ETFs? Our ownership is physical, and it’s not held in a bank; it’s held at Brink’s, which is not a bank, which is, I think, extremely important. Why so? Banks are part of the financial system. If you want reserve purchasing power, should the S&P – and this may never happen in our lifetime – trade at a real value, to buy it by backing up the truck, you want gold as a way of mobilizing that liquidity. You may not be able to do that. Think about what happened in India. Eighty-five percent of the notes in circulation were deemed illegal overnight. There was no warning; it just happened. You asked about risks in mines that are located in different countries. Everybody who holds a dollar bill, a pound sterling or a euro, needs to know that their counterparty is the government. They don’t think of it that way. You only have to look at Brexit and what happened in India to show why you would want some portion of your liquid net worth outside of the banking system. I can’t stress that enough. In this country, we just don’t get it. But I’ll guarantee you the people in India know it. People in England, where I’ve been twice in the last month, are acutely aware of the fact that their currency has less purchasing power today than it did at the beginning of the summer. Gold is up something like 30% in sterling since Brexit. Why would you hold it in a bank? Banks are becoming agencies of the Treasury. In this country we have four big banks. There’s a movement afoot in many countries including this one to eliminate cash. Lawrence Summers, the great guru, has said, “Let’s kill the hundred-dollar bill.” It’s going to happen. How does that extend to gold bullion ETFs? Bullion ETFs basically track the gold price. The ETF GLD, which is the one everyone knows, is backed by physical metal and it does track the gold price. If that’s all you want, and that’s all a lot of people care about, then it’s more like a trading position. It’s not a strategic store of value because every day they take a little bit of gold out of the vault to pay the fees of the trust. There are advisors and different parties that they have to pay. You cannot get physical metal out of most of these ETFs. If you want physical metal, you should not own an ETF. If you want something that tracks the gold price, they’re just fine, but they are fraught

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with counterparty risk. A key reason for holding some portion of one’s liquid net worth in physical metal is to have a reserve of purchasing power outside of the financial system, in essence financial wealth insurance. ETFs and other financialized products that track gold do not provide this safety net. Most investors do not know how to buy and hold physical metal in a cost efficient manner. We at Tocqueville see this as a need and have created a vehicle to do so but that is a different discussion which I would be happy to revert to if you so wish. What is your opinion of miners that hedge all or a part of their production? It depends on why they’re hedging. Twenty years ago when I started doing this, the industry was so caught up in hedging, they were doing it on a speculative basis. I know of one company that went bankrupt. They would write calls theoretically against the gold in the ground that they hadn’t mined in order to meet the payroll. That’s absolute insanity and that particular company is down the tubes. If a company is hedging in order to build a new mine and they need financing, the banking syndicate could say, “In order to make us feel more comfortable with our credit, you must deliver in some percentage of production over a period of time.” That could be the only way it can build the mind. What can you say? It’s a way to finance a productive investment. It depends on the purpose of the hedging. I’m going to read a statement by Warren Buffett to get your feedback on it. “Gold is a way of going long on fear and has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two than they are now. And if they become more afraid, you make money. If they become less afraid, you lose money. But the gold itself doesn’t produce anything.” Neither does a Treasury bill. He has his point of view on why gold moves one way or the other. Frankly, I would just call Warren’s attention to the fact that gold has been the best performing asset class for the last 15-16 years. Did fear drive it every single step of the way? No, it didn’t. Warren has his opinions, but if you look at the facts, it is not necessarily a fear-driven trade. How are supply and demand driving the price of gold? It is a very important component of one’s view of where the gold price is going. The mining industry has not invested in exploration for many years. They’re not finding new ore bodies. We along with others are predicting a significant decline in future production. Forget Buffett – you can argue a bull case for gold just based on supply and demand. The structure of the gold trading markets is undergoing significant change. For example, the price of gold is a New York price. In Shanghai it is $30 higher. In India it may be $20 higher. The price that we see in New York is not necessarily the price that a mining company or a seller of gold would get. It would not necessarily be the best price. Why is that?

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Most of the gold, in fact, all of the gold that we see trading on the Bloomberg or whatever system you have, is not gold; it’s synthetic. It’s based on gold that has been re-hypothecated over and over again. When gold broke after the Trump election, something like 6,000 tons traded hands in three days. That means nothing to anybody except that we only produce 3,000 tons a year. It’s absolutely absurd to think that people could actually get their hands on that amount of gold and sell it. It’s only the fact that gold has been securitized through the CME or Comex that allows this thing to take place. I am beginning to see more and more electronic platforms, and there are a number of them, which are trading gold based on warehouse receipts. Instead of being 100:1 synthetic versus the underlying metal, it’s 1:1. The more this happens, the more you’re going to see the influence of the physical market, which doesn’t exist in New York, converge with the synthetic market. That means that the concerns of people in India, China, or another country where the currency has been going down the tubes, will be reflected in the gold price; that’s why people are buying gold there. That’s going to have more of an impact on the thought process on the Comex than it does now. That’s another big deal that’s going to happen, not overnight, but it’s an evolution in the structure of the gold trading market. Many analysts are predicting that we’re heading into a period of rising interest rates. How have gold and other precious metals performed under those conditions? From 1970 to 1980, gold went from $40 to approximately $800. That’s a number everyone thinks about. Interest rates rose steadily throughout the decade. Under those circumstances, which was another period of really bad monetary policy and rising interest rates, gold was just fine. But if the real rate in 90-day terms were to go to, say, 3-4% which is where it was throughout a lot of the 1990s, and it was there in a lot of the 1980s, that would not be good for gold because why would you need gold if you could get 3 or 4% risk-free in a 90-day T-bill? There are a couple of concerns that I hear often from advisors with respect to gold. Let me run them by you for your feedback. One is that only the very wealthy clients have sufficient assets to allocate even a small part of their wealth to gold. The other is that clients already have a stake in gold through a diversified portfolio of S&P 500 stocks. How do you respond to those? Gold is divisible. If I have $100,000 or $10,000 or a $1 billion, gold is very divisible. With $10,000 I could have a $500 position in the Tocqueville Gold Fund. I could do the same thing all the way up the scale. You could say the same thing about a share of Berkshire Hathaway. If you have $10,000 we’ll just own one share of the baby Berkshire. As far as the S&P being a stake in metal, I don’t think this way. I don’t even know what gold mining stock is in the S&P. But believe me, if gold would have a big move one way or the other, you would either want to be long or short gold in a more direct way than being long or short the S&P. There are gold ETFs and funds. You can’t necessarily short them; that’s a long-always strategy. If you Page 5, ©2017 Advisor Perspectives, Inc. All rights reserved.

wanted to be bearish on gold, you just buy something like DUST which is a triple-leverage-short idea. Or if you were bullish you could buy NUGT which is a triple-leverage-long idea. Not that I’m in favor of them, but if you have a point of view on gold, and you want to express it, I would not express it through ownership in the S&P. In a different sense, if we are going to go through a period of rising inflation, which means that prices for industrial companies will be moving higher, margins will be better. That’s like a second derivative or a third derivative way of betting on inflation. That probably works for a while until we get into a 1970sscenario where rising rates destroy equity valuations. If you like gold, you should be long the metal, through the various ways you can do it or in a goldmining fund like Tocqueville. What is the right exposure to gold? It’s based on the risk profile of the individual. If you’re kind of a bear, you probably would want more than 2%. You might want 10% or 15%. Not that I would advocate that, but I’m saying that would be a way to reflect a bearish stance. If you’re a super-bull, and you just want gold there in the background as a just-in-case rainy-day scenario, just like you’d buy casualty insurance on your house or a business, you’re not going to bet the ranch on that. You’re going to just have enough in case things come out of the blue. You could have a damaging period to financial assets, but you’re covered if you have even a 2% exposure in gold through GLD or physical metal, which would be my preference.

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