Letter to Investors

By John Hathaway, Tocqueville Asset Management L.P.

January 11 (King World News)

2011 was a good year for gold bullion, up 11.3%, but a tough year for gold stocks which declined 18.3% based on the XAU index of gold and silver stocks.  We addressed the reasons for the disparity between the performance of gold bullion and gold mining stocks at length in our web site article (The Golden Mulligan-September 2011).  We concluded then, and still maintain, that gold mining equities represent a compelling investment strategy to participate in the secular bull market in gold bullion, and conversely, the secular bear market in paper currencies.


Since its peak price of $1,921/ounce on September 6 of this year, the metal has corrected 18.6% to its current price of $1,564.  The four month pullback has taken its toll on gold mining shares, which declined 20.4% during the same period.  For reasons to be elaborated in the following paragraphs, we believe that the decline in both the metal and the shares has run its course.  We also believe that this painful correction has set the stage for significant new highs in both the metal and the shares in 2012.


Since the global credit meltdown of 2008, governments in the Western democracies have stepped in to stabilize the financial and economic system.  Their strategy has been to substitute sovereign for private credit. Unfortunately, changing the wrapping does not alter the contents.  This approach bought time, but now time is running out as sovereign credit itself is under attack.  Stress is most visible in Europe, but the U.S. is implicated because the Fed is complicit in measures to shore up the European banking system through dollar swap arrangements.  The contagion is not limited to a few peripheral states in Europe that have spent beyond their means.  In our opinion it is a fundamental ailment common to democratic societies, reversible only through a financial and economic crisis sufficient to galvanize public will.


What this portends for 2012, we believe, is unfortunately, further turbulence in the financial markets, anemic economic conditions, and ultimately, overt and undisguised monetary debasement.  The flashpoint for gold and related equities will, in all likelihood, occur when central bankers and political leaders cave in to market stress.  In the absence of economic growth, mob clamor for money printing to ease the burden of debt that is destabilizing markets and economic activity seems likely.  Therefore, maintaining precious metals exposure while this painful correction winds down would appear to be the most advisable course of action.  When the policy dilemma becomes so obvious that central banks begin dumping dollars for gold, it may be too late to replace positions.  Gold has a history of shaking out all but its staunchest holders and making losers out of sold out bulls.


This letter is appended by numerous charts and tables, divided into three sections, macro, gold, and mining equities.  Each section conveys an important aspect of the fundamental case for gold and gold mining shares more efficiently than a lengthy number of paragraphs....

In summary, a strategic investment commitment to gold and gold shares continues to make sense based on the prospect for continued monetary debasement.  The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set up for advances to new all- time highs in the coming year.


With deep appreciation for your continued support and best wishes for the New Year,

John Hathaway

Portfolio Manager and Senior Managing Director

© Tocqueville Asset Management L.P.

January 11, 2012

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.  

For Tocqueville clients, they were able to view all 50 charts in his entire piece.  To learn more about John Hathaway and his management services CLICK HERE.

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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