Gold Bullion International

The Golden Mean - Barron’s

AN INTERVIEW WITH JOHN HATHAWAY: The yellow metal will continue to shine, as investors seek shelter from deflationary and inflationary pressures.

THE INVESTMENT LANDSCAPE WAS RADICALLY DIFFERENT in the autumn of 2007, the last time we caught up with John Hathaway, manager of the $1.4 billion Tocqueville Gold Fund.

For one thing, the price of the metal was tipping the scales at $738 an ounce, some 40% below where it's trading today.

Hathaway, a thoughtful manager whose Manhattan-based fund (ticker: TGLDX) has surged 49% in a year -- more than double the Morningstar precious-metals category -- and has risen 11% year-to-date, was convinced in 2007 that bullion would easily get to $1,000 an ounce in a year. Moreover, he rightly identified gold's upward climb to be predicting a widening of credit spreads and lower asset valuations, a view that back then couldn't be underestimated.

Although gold last month set a record of $1,243 an ounce, and inflows into SPDR Gold Shares (GLD), the gold ETF, achieved a record of $1.8 billion in the last week in May. Hathaway remains decidedly bullish, both on the metal and even more on gold-mining and royalty stocks. For more on why he thinks gold's still got plenty of room to shine, read on:

Barron's: You've said "Gold is a bubble only for those who maintain faith in the ability of politicians and financial authorities to swim against the tide of deflation." Explain, please.

Hathaway: There's an intellectual debate about whether we are going to have inflation or deflation, and, in my mind, we have both at the same time. We have market forces that are deflationary and policy response that is inflationary. The deflationary market forces brought down the housing bubble. And the policy response to that was inflationary. I can't even keep track of the trillions anymore.

Yet gold is the bubble du jour, at least in the media. You are a almost a contrarian.

I love it when the media, which never told you to get into gold in the first place, is now telling you to get out. It is just classic. But [investor George] Soros has said that gold is in a bubble, and that statement has to be understood. I didn't speak to him personally. But I think what he is saying is, "This thing can really get out of hand and therefore I'm positioning my investments to reflect that, because I think people are going to go nuts about it." I don't think he was being dismissive; his funds own gold stocks and they probably own physical. But the media has taken it like that.

What do you mean by the bipolar nature of gold?

When the gold price is expressed in dollars, let's say, it is simply a ratio of the number of dollars it takes to buy an ounce of gold, and if you measure it in euros, it would be a different number. If any observer says the price of gold has gone too high, what a high rate of change in gold could reflect is the money creation that is driving it -- either current or anticipated.

So it is discounting?

Yes. The price of gold as quoted in dollars -- or in Zimbabwe dollars, to make it a really absurd example -- can look like a ridiculous chart. In terms of bubble analysis, it might look very dangerous. But then you look at what is driving it and you say, well, what is the real bubble? It really has been money creation.

Is this is why we are seeing gold up at the same time as the dollar?

Right. There was a fallacy from the last couple of years, which is that when the dollar was weak against the euro that was a signal for gold to go up, the idea being that the euro was a strong currency. But now the euro has been exposed as -- to put it mildly -- a huge disappointment to anybody who thought it was a safe haven. The fact that the euro has fallen against the dollar is good news for gold.

Because it goes back to the sovereign debt?

Yes, you come back to this idea that you are running out of safe havens. What's left?

How do you see the European debt crisis?

The next bubble -- and this is the lesson of what this Greek drama was all about -- is sovereign debt. It is the financial model of the nation-state, which depends on deficit finance to fund promises that have been made in the past and promises that are still being made to the voters -- and the market is starting to say it is unsustainable.

Gold has gone up nicely, but do you see a significant trajectory -- and what would trigger it?

More damage to the monetary unit. The government's official stance is that these deficits are just temporary. And the Fed says we have an exit strategy to reduce the liquidity on the U.S.' s balance sheet. If the notion becomes widespread that this is permanent and that they have to do even more in terms of more of this bad medicine, that's the kind of thing that could lead gold to go up dramatically from here.

In the near term, do you think we are going to have a significant pullback?

Backing and filling is in order. We look at various things that flashed a yellow flag recently. But you are always going to get that in a bull-market trend. You are always going to get overbought.

Should people wait before they start investing? Can you time it?

It is very hard to say. Diversification into some form of gold exposure strategically still makes sense. If this were a football game, we would be at the beginning of the third quarter. The first two quarters lasted about 10 years. The first quarter you had this stealthy accumulation. Second quarter, gold became more fashionable to talk about, and you began to see some very high-profile, smart investors coming in. The third phase will be more people jumping on the bandwagon, and the fourth quarter is just silly season. It's just Greenspan's irrational exuberance.

Where is gold in relative measures?

The previous bull market in gold peaked when gold and the Dow were roughly the same. So 800 and $800; and then in the '30s it was in the mid $30s. It could be anywhere from $15,000 if we have the superinflation, or $5,000 if it is as bad as some people worry about. We also use gold as a percentage of financial assets. Gold worldwide is at 6%, versus 22% in 1980, and 20% in the mid '30s. We use a number of metrics, and the message of most of them is that this still has upside.

You have said that gold stocks are comparatively cheap. How do you measure that?

We have lots of ways. But the easiest one is taking our benchmark, the Philadelphia Stock Exchange's gold and silver-stock exchange-traded fund, the P HLX Gold/Silver Sector [XAU], as a fraction of the gold price. This index has almost a 30-year history, and was as high as 35% or more of the gold price. In the Crash of '08 it got down to 10%. Right now, it is around 15%. But the norm was somewhere between 20% or 30%, until the ETF was launched in 2004. The ETF in a way raised the bar of gold stocks. I don't think they will ever get back to 35% of the gold price, because if you believe that, the benchmark would triple from here. That could happen, based on the gold price. But based on a change in valuation, that's a stretch. If we are at 15% now, gold stocks could easily trade in the low 20s as a fraction of the gold price. The way they get there is a slow process.

They have underperformed the metal.

Shares of gold companies have fallen into the doghouse, because there has been excessive issuance of stock, so the connection between a share and an ounce of gold has been diluted, in some cases egregiously. But why is that? It is partly because that is the culture of the industry, particularly Canadian finance, and partly because the industry didn't do a good job of capital allocation. They advanced projects that were [not economical]. And until '08, the costs of producing gold were going up almost as fast, if not faster, than the gold price. So they didn't really benefit from the margin expansion that you would normally expect. Now, that has changed dramatically -- because gold relative to other commodities has outstripped everything. Those cost pressures have begun to disappear, so the margins of gold-mining businesses have started to expand. People have forgotten that.

Talk about asset allocation. Has the fund's percentage of bullion changed dramatically?

It is roughly 10% right now, and we've added modestly to the position....We have never reduced it. But it is also going to be a factor of how gold has done relative to the rest of the portfolio. So when we got really badly hit in '08, gold got up to something like 17% or 18%. But that was because gold was going up and the stocks were going down. I like 10% for what we are doing.

Clients of our firm also recently invested in Gold Bullion International, or GBI, similar to Goldmoney.com, where people can buy physical gold online. With GBI you can have it stored in the Brink's warehouse in one of four locations: two in the U.S. and two overseas.

You have a spectrum for asset-allocation choices. You have gold stocks, you have an ETF of stocks, you have an ETF of gold, you have closed-end gold trusts, and then you have physical gold. The gold ETF, which is backed by physical gold, was very important in making gold more accessible to people, who, before, had to buy coins at a premium to the bullion content. And you have the Sprott Physical Gold Trust [PHYS], which was trading at a 20% premium to the net asset value. Some people want physical gold, and GBI is another way to buy it. But based on what I'm saying, I would rather put new money flows in stocks.

Large-caps or small?

We are right across the board, and our weighted average market cap is about $3.5 billion, well below our peer group. And the reason for that is that we invest in companies in an earlier stage of their development. We have, besides myself, three very good analysts who go all over the world. I've stopped doing it, but there is no substitute for it. You see local management. You see local political issues in the way you never get here, where you get a varnished view. Our extensive research effort gives us the confidence to invest in names that are a bit more speculative.

What are your favorites?

Before we get into that, let me add that for a conservative investor who simply wants protection and is risk-averse, whatever allocation he has to gold should be more heavily weighted to the metal, because that's safer. The only risk with gold is the price you pay. But for the investor who is more of a risk-taker, and sees gold as a strategy to get positive returns in the current macro environment, then that exposure should be more weighted to the stocks.

Understood. To the names.

Osisko Mining [OSK.Canada] is a company that we have been invested in for at least six years. We first financed them at 50 cents a share; now it is 10 bucks, and we like the management. Sean Roosen owns a lot of stock personally in the company. He had a vision that we believed in six years ago, which is that a large, low-grade ore body in a politically safe jurisdiction could be economic. It is in Quebec, which is nirvana for gold. They have hydro power and they love mining and the codes are great. They are building a mine that is backed by resources of 12 million ounces. We've financed them at every step along the way, which is why our position has become large, in addition to the appreciation. This is what every little gold company should aspire to -- they either aspire to a takeover or what these guys have
done. They will be pouring gold within the year.

What is their market cap?

It is about 3.8 billion Canadian.

Go ahead.

Randgold Resources is the next one. The ticker is GOLD; the market cap is $7.7 billion. Terrific management, who also own a lot of the stock in the company. The mines are mainly in West Africa, which is a very good place to be doing business if you are mining gold. The governments tend to like it. Basically, gold mining is a force for good in the developing world. The companies create jobs. They educate the workforce, build hospitals and schools. This is a large company with a growth profile that's been pretty much organically driven by their own exploration.

They know what they are doing, they are finding gold.

CEO Mark Bristow is a very impressive and forceful guy, and his leadership and vision are important parts the Randgold story. This company has gone from a couple of hundred thousand ounces when we first invested in it, and they're on track to be producing, I think it is 1.2 million in a couple more years. There is enormous value creation independent of the gold price from that whole process, if it is done correctly. The return on capital is good, and again, the proviso is that they don't overissue stock; these guys have done a good job of keeping the share count tight. Bristow's a shareholder, so he understands that. It is a growth story.

Another name?

Newmont Mining [NEM], where we have been very patient holders. It has been an underperformer and they would be the first to admit it.

Dick O'Brien came in as CEO about three years ago. He is not from the industry. He is very keen on financial analysis and all the things that I think the industry has to do. It is just terrible how bad a job the industry has done. So when you see a guy like Dick come in, you say, well, that is an uptick, because that is what has to happen. Newmont isn't a growth story. They have very high-quality assets. It is more about upgrading the returns on capital, which they are doing, and that's kind of the mandate that he has given to them.

Would they be buying more reserves?

They could be an acquirer, and they certainly have made acquisitions. But I think the acquisitions they make going forward will make sense. It's a very diversified portfolio. They are in Indonesia, which isn't great. But they are in Australia, Nevada and West Africa -- those are the core operations. They have things elsewhere, too. Here is a company which has assets in place to take advantage of a rise in the gold price.

They don't have to do anything, in other words?

They're there; all they have to do is do a better job of what they already have in place, which I think they are doing. And you are already seeing it in their earnings reports; they are producing a lot of earnings and cash flow. They should be able to start paying really handsome dividends.

One of the things I think needs to happen is for the industry to commit to giving shareholders back their capital, which some of them are on board with. Then they'll go from the doghouse to more mainstream investments, maybe even trust department core holdings. That's how the valuation goes from 15% to somewhere in the 20% ratio of the XAU to gold.

And it can even be more as long as the gold price keeps going up?

Right. The 15% to 20% is just relative. So you get 30% if the gold price is the same, and everything that we talked about takes place. But if the gold price goes up 50%, let's say, that compounds into something a lot more than 50% that you could expect from owning shares versus the metal.

Give us another name.

People should look at the gold-royalty companies. Royal Gold [RGLD] and Franco- Nevada [FNV.Canada] are terrific business models, because they just capture revenue streams from the process of mining gold. Franco-Nevada was a royalty company spun out of Newmont Mining. Both are very high quality operations. Both have the same business model, and what's to like is that 85% of the revenues are free cash, because they are royalties. On the surface, they may look expensive, but they provide growth capital to finance new mines. They get a slice of the revenue stream, which can be defined in many different ways. They could have a very diversified portfolio, with maybe 35 to 40 assets. They give you long-dated options on the gold price. What you get with the royalty companies is the joy of optionality without the pain and suffering of mine construction and all the stress.

Sounds good. Thanks, John.

For Gold Investors Who Want It ‘To Go’ - Wall Street Journal

For Gold Investors Who Want It 'To Go'
Wall Street Journal
25 June
By: Liam Pleven and Carolyn Cui

The bull market in gold has sparked a new growth industry: providing a venue for investors to buy and store their personal stash.

Individual investors are increasingly demanding to take possession of their gold holdings, rather than just owning shares in a mining company or a gold-related fund.

That has garnered the attention of major players in the gold industry and start-up firms, which see an opportunity catering to this breed of gold enthusiast. Banks and others are scrambling to find vault space to meet mounting demand.

The firms typically let clients buy gold through them and squirrel it away in the U.S. or abroad, while also allowing investors to demand actual delivery.

The developments reflect the years-long gold rally, which has pushed prices to record highs. On Thursday, gold for June delivery settled at $1,245.50 per troy ounce in New York trading, up $11.40, or 0.92%. This year, gold has risen 13.72% and reached a record $1,257.20 an ounce on June 18.

Traders in the futures market are also increasingly opting to take delivery of the metal, rather than simply buying and selling contracts for paper profits. At CME Group's Comex, the largest precious-metals exchange, investors took delivery of 39% more gold so far this year, compared with a year ago. At the same time, the exchange says its vaults now are holding a record 10.9 million troy ounces, up 11% this year.

But many investors don't trade in the futures market, and have traditionally kept their gold coins and bars in safe-deposit boxes or private vaults, or even stashed under mattresses. Some are skeptical of storing gold with major banks in the wake of the global financial crisis, presenting a business opportunity for smaller investment firms.

The World Gold Council, a trade group backed by gold miners, has joined the throng. This week, the council announced an investment of more than $9 million in BullionVault, a five-year-old, London-based firm that stores about $800 million of gold on behalf of clients.

The council already runs the largest gold exchange-traded fund, SPDR Gold Shares, which is backed by bullion but doesn't let average investors take physical possession of their share.

Another firm, Gold Bullion International, is officially launching Friday with the aim of selling gold and vaulting services through financial advisers. Among the main financial backers is a major player in the gold market: Tocqueville Asset Management, which managed about $1.6 billion in gold-focused investments as of March 31.

Funds that give investors direct ownership of gold also are flourishing. Sprott Physical Gold Trust, run by Sprott Asset Management in Toronto, recently added about 250,000 ounces to its holdings at the Royal Canadian Mint. The fund allows investors to redeem shares and take possession of bullion.

Firms serving this niche often offer to keep the gold in so-called allocated accounts, which means that investors own a specific chunk of gold.

In concept, it is similar to having money in a safety-deposit box at a bank, rather than a checking account.

Vaulting firms, such as Via Mat International of Switzerland and Argentina-based Ocasa, are considering expansion. Ocasa is planning to open a 165,000 square-foot vault in New York this summer, one of the largest in the country.

Big banks also are beefing up their gold storage space, with J.P. Morgan Chase & Co. saying it will open a new vault in Singapore and Barclays Capital seeking to expand its space in London.

"There's much more demand from gold investors for allocated gold," said Jonathan Spall, product manager of precious metals at Barclays. "People are attracted to hard assets outside the banking system which do not represent a credit risk to anyone."

Nonbanks have arrangements with vault operators, such as Via Mat and FideliTrade Inc., of Wilmington, Del., to store gold in various places. The choices can include countries such as Switzerland and Canada, seen by some as posing fewer geopolitical risks.

The option appeals to some investors who fear their holdings would be at risk if a bank encounters financial troubles.

"They want it in a vault somewhere," said John Hathaway, senior managing director of New York-based Tocqueville. "That's just a sign of the level of distrust that people have with the banking system."

The ownership of gold stored in regulated banks also can be subject to disclosure between governments, which makes some people uncomfortable, even if their holdings are legitimate, said Jeffrey Christian, founder of CPM Group, a gold consultant.

Other storage options also carry risks. In the early 1980s, investors with a firm called International Gold Bullion Exchange lost tens of millions of dollars after it was discovered that the company's vault contained wood bars painted gold.

Firms try to contend with those fears by having their gold audited by outside monitors. Gold Bullion International, for instance, says its holdings will be checked quarterly.

But owning a personal piece of gold can come at a cost.

Colbert Narcisse, a Merrill Lynch veteran who heads Gold Bullion International, says the gold it sells will cost "nominally more" than shares in SPDR Gold Shares.

And, while investors can take delivery of their gold, Mr. Narcisse doesn't recommend it. He says it's "most prudent" to keep it with the company because private insurance could cost more and investors would have to have the gold reauthenticated if they wanted to sell it later.

Write to Liam Pleven at .(JavaScript must be enabled to view this email address) and Carolyn Cui at .(JavaScript must be enabled to view this email address)

DJ Ex-Merrill Lynch Executive Launches Physical Bullion Service - Tradingmarkets.com

DJ Ex-Merrill Lynch Executive Launches Physical Bullion Service
TradingMarkets.com
June 25
By: Rhiannon Hoyle

Former Merrill Lynch & Co. Inc. (MER) executive Colbert Narcisse on Friday launched Gold Bullion International, a New York-based physical precious metals service, to take advantage of growing demand for physical gold bullion, as well as silver, platinum and palladium.

Narcisse said demand for physical gold ownership had "exploded."

GBI can be used by investors to acquire and store physical precious metals.

The company purchases precious metals from a global network of London Bullion Market Association dealers, which it will then store for its customers in secured vaults around the globe.

Narcisse--who spent 17 years at Merrill Lynch, where he held several executive positions including chief operating officer for investment banking Americas--will lead the new company as chief executive officer.

Narcisse will be supported by an advisory board that includes Tocqueville Gold Fund Portfolio Manager John Hathaway and former Securities and Exchange Commission chairman Arthur Levitt.

Tocqueville Asset Management is among the new company's main financial backers.

"There will always be a need for allocation to physical assets, and with its long-term intrinsic value gold offers investors an important core component for portfolio diversification," Hathaway said.

At 1518 GMT, spot gold was trading at $1,254 a troy ounce, up $10 on Thursday's close.

-By Rhiannon Hoyle, Dow Jones Newswires; +44 (0)20 7842 9405; .(JavaScript must be enabled to view this email address)

Exclusive, a new company called Gold Bullion International - Fox Business News

Exclusive, a new company called Gold Bullion International and Former Merrill Lynch CEO of Banking Investment Division
Fox Business News
June 25

View Clip: http://mms.tveyes.com/ExpandGuest.asp?ln=448868

Brian: Joining us in ""Fox Business"" exclusive, a new company called Gold Bullion International, former Merrill Lynch CEO of banking investment division.

Colbert: Thanks for having me.

Brian: You just launched yesterday.

Colbert: That's correct.

Brian: So you're new, new.

Colbert: We're at this for a while. experienced team of financial services executives. we have illustrious Advisory Board, General Clark, Arthur Levitt. Gephardt. John Hathaway, congressman they have unique perspectives that helped develop this company.

Brian: We know how popular these things are. Paulson probably buying millions of dollars worth of Gold. what exactly do you do and who is your target market?

Colbert: What with do we create a way for retail investors to efficiently acquire and manage gold bullion and other physical precious metals. Historically this market has been fairly opaque. It hasn't been accessible to everyone, to main street, if you will. Some of the brokerage firms that offer gold bullion very high minimums. Some as high as $20 million. Our goal to democratize the process so mainstream investors acquire precious metals. like mutual funds enhanced ownership 30 years ago.

Brian: we tell people go to the gold you say physical gold is best?

Colbert: We think physical gold is best. It is a paper asset. what we think is best is that actually own the real asset. ETF you own a share after that actually owns Bullion. so if that ETF were to go into receivership, you would just become a general creditor of the firm.

Brian: So you make deals with financial advisors. somebody goes into the financial advisor. I have x-amount of money I want to buy gold and physical. They would deal with you. Do you deal directly with the client or only through financial advisor?

Colbert: We have the ability to deal directly with, clients that is one of the elements of our business, but I think the core part of our business is ability to work with wealth management firms and their financial advisors. So in effect the advisor working with their client will be able to just put in the ticker which symbolizes the type of metal call and where they want it stored and of course the amount of gold or metal that they want to purchase. That order gets routed to our system, we go out into the marketplace because we have extensive network of precious metals. Notoriously hard to find these days, they see an opportunity as well working with us. We're creating more of a opportunity than they had in the pasting with retail investors.

Brian: are you working with Gold today?

Brian: Gold Bullion International. Let us know how it is going. Everybody has gold fever these days.

Colbert: Thank you.

Gold investment services for U.S. individual investors, ETF investors aim to capture market - Nikkei

Gold investment services for U.S. individual investors, ETF investors aim to capture market
Nikkei (translated from Japanese via Google - rough translation)
June 26
By: Yoko Noge

Gold Bullion International investment services company (GBI is New York-based) was launched on June 25 for retail investors to buy bullion. In the U.S., sovereign inflation concerns (confidence in financial issues) have made investments in physical gold increasingly popular. GBI developed a system that one can easily trade bullion like stocks and bonds, and will expand to retail investors through financial advisors. Typically, individual investors seeking to invest money in gold use ETFs (exchange-traded fund) in many cases to buy "physical demand." Purchases are expected remain strong, gold is said to be USD 600 billion total ETF (exchange-traded fund) and aims to capture individual investors to invest in the market.

The company's chief executive officer (CEO), the former U.S. investment banking chief operating officer of Merrill Lynch (COO), Colbert Narcisse said a target customer will hold more than $250,000 dollars in investment accounts. Until now, gold investment has been limited to the wealthy with some of the costs and procedures of storage and insurance, and quality certification being cumbersome "to change the general investment products like mutual funds" (Narcisse CEO) said. Gold ETF investment is set to cost about the same from the company's investor partners, London Bullion Market Association and the destination storage in New York was chosen for one of the storage systems. "Buy gold bars and 10 percent of the cost of personal, institutional investors 1% would suffice. We can offer to individual investors and institutional investors buy low-cost average," he said.

The company was established last May in emerging companies. Arthur Levitt, former chairman to the SEC (U.S. Securities and Exchange Commission) and former congressman Gephardt have been appointed as Advisory Board members.

Movers & shakers - The Daily Deal

Movers & shakers
The Daily Deal
June 28

A Merrill Lynch & Co. veteran wants to cash in on the gold craze. Colbert Narcisse (pictured), who spent 17 years at Merrill, launched New York-based Gold Bullion International LLC, a business services company that enables investors to acquire, manage and store physical precious metals, including gold, silver, platinum and palladium. The company said it makes acquiring precious metals cost-effective and as seamless as purchasing a stock or bond.

Narcisse, CEO of the company, previously worked in investment banking and global wealth management at Merrill. During his time there, he had been an investment banker in the financial institutions group; chief operating officer for investment banking, Americas; and COO of global wealth management.

Savneet Singh is a founder and chief operating officer of GBI. He was an investment analyst at Chilton Investment Co., covering technology, alternative energy and infrastructure investments. Prior to that, Singh was at Morgan Stanley in the investment banking division, working on financial sponsor and strategic company transactions. The advisory board includes retired U.S. Army general Wesley Clark, former House Majority Leader Richard Gephardt, Tocqueville Gold Fund portfolio manager John Hathaway and former Securities and Exchange Commission chairman Arthur Levitt.

When It’s Time to Get into Gold - Hedgefund.net

When It’s Time to Get into Gold
Hedgefund.net
By Paula Schaap, Senior Reporter
July 8

A new venture is making it easier for hedge fund managers who want to invest directly in gold.

Gold Bullion International (GBI) said last week that it was launching a new product that will allow investment managers to own the actual physical precious metal.

Some prominent hedge fund managers, such as John Paulson and George Soros, have turned to gold investments as a hedge against inflation. But usually the investment is in mining companies or in ETFs like SPDR Gold Shares.

“Even though demand for physical gold ownership has exploded, there has not been an efficient or cost-effective method to meet that demand,” said GBI Chief Executive Officer Colbert Narcisse.

GBI, however, is bringing investment in the actual raw material as an additional option for managers.

The chief impediments for investors looking to get into the physical market are ease of execution as well as pricing, Narcisse told HedgeFund.net.

“It’s a fairly opaque market,” he said.

For pricing purposes, GBI has a network of eight precious metal dealers who are all members of the London Bullion Market Association.

GBI Chief Operating Officer Savneet Singh says efficiency is what GBI also can bring to hedge funds and other asset managers who want to invest directly.

If a hedge fund, for example, wants to order $1 million in gold and have it stored in Zurich, GBI bids it out to several dealers in the Swiss city, Singh said.

“Within 20 minutes of the trade, the hedge fund will have a confirmation,” he said.

Besides gold, GBI can offer investors silver, platinum and palladium.

The firm’s advisory board includes retired General Wesley Clark, former House majority leader Richard Gephardt, Tocqueville Gold Fund Portfolio Manager John Hathaway and former SEC Chairman Arthur Levitt.

Before starting up GBI, Narcisse was with Merrill Lynch for 17 years, most notably as COO for Investment Banking, Americas.

Cofounder Singh was most recently an investment analyst with Chilton Investment Co. where he covered investments in the technology, alternative energy and infrastructure space.

Do Gold and Silver ETFs Make Good Investments? - TheStreet

Alix Steel
10/05/10 - 09:14 AM EDT

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Alix Steel will appear on NBR Tuesday (check local listings) to discuss what you should know before investing in gold or silver ETFs.

NEW YORK (TheStreet) -- Silver and gold prices are hitting record highs, making physically backed exchange-traded funds very tempting investments. Before you buy, here's what you need to know.

There are five physically backed ETFs traded in the U.S.: The biggest, SPDR Gold Shares(GLD); the cheapest, iShares Comex Gold Trust(IAU); the newest ETFS Physical Gold Shares(SGOL) and the two silvers, iShares Silver Trust(SLV) and ETFS Physical Silver Shares(SIVR).

When you buy gold and silver physically backed ETFs, you do not own the physical metal, you own a paper representation. With respect to the gold ETFs, for every share you buy, you "own" one tenth of an ounce of gold; for silver, it's one ounce.

The actual metal is stored by a custodian, usually one of the large banks like JPMorgan(JPM) or HSBC. The share-to-metal correlation erodes the longer you hold the shares. The fund must sell gold, for example, periodically to pay for expenses which decreases the amount of gold allocated to each share.

If investor demand outpaces available shares then the issuer/trustee must buy more physical metal to convert it into stock. Conversely, when investors sell, if there are no buyers, then the metal is redeemed, the trustee must then sell the metal equivalent. Precious metal ETFs are not owned for leverage, but simply as a vehicle to track the spot price.

Investors are not typically encouraged to redeem their shares for the metal although it is possible. With respect to the SGOL, for example, an investor would have to redeem in whole lots of 50,000 shares (5,000 ounces, or $6.65 million) but only through an authorized participant. This is more feasible for high net worth individuals and funds but not really for retail investors.

Because you own shares and not the physical metal, precious metal ETFs may be sold short, so two people can own the same "gold" -- the original owner and the investor who is borrowing the shares. Although baskets of shares are allocated to specific gold bars, which can be found in the ETF's prospectus, an investor must share ownership.

Owning a precious metal ETF can also be more expensive than owning and storing the physical metal. Expense ratios can range from 0.25% to 0.50%, while storage fees at GoldMoney.com, according to founder James Turk, for example, cost 0.15% to 0.18%.

Profits made on investments in physically backed ETFs are taxed like collectables, at a maximum of 28%, if the investment is held for more than a year. If an investor sells before the year is up, he is taxed at his regular income rate. Basically an investor gets taxed as if he owned bullion, when in reality he just owns paper.

There are also two types of gold stored in the ETFs, allocated and unallocated. Allocated gold is the bullion held by the custodian. Custodians provide a bar list of all the individual allocated bars daily and are typically audited twice a year, paid for by the sponsor, by an independent party like Inspector International.

Unallocated gold relates to authorized participants like JPMorgan or Goldman Sachs who trade gold futures. Futures contracts are often bought if the trustee needs to create new shares fast and doesn't have the time to buy and deliver the bullion. Typically allocated gold far outweighs the unallocated gold and the amounts are tallied each day by the custodian.

Those are the facts around silver and gold ETFs, now for the controversy.. For examples, I will use the GLD's prospectus as a proxy as it is the second largest ETF in the world.

First off, there are questions as to the quality of the gold and silver in ETFs. Page 11 of the GLD's prospectus reads, "neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket." Basically you don't know the grade of the gold you "own."

Secondly, the trustee does not insure the gold, the custodian does and their liability is very limited. The custodian is only made responsible for damages to the gold they directly inflict, but if the gold isn't good or is in fact wooden bars painted gold (but they didn't do it), then most likely the custodian would be protected and the trustee wouldn't be liable.

Also hidden in the prospectus is the fact that a custodian is free to store the gold with sub-custodians until the gold is delivered to the custodian's main vault. In other words, the gold can be in various places at once. When the gold is with the sub-custodians, it's on its own. The prospectus says "failure by the sub-custodians to exercise due care in the safekeeping of the Trust's gold bars could result in a loss to the Trust."

The sub-custodians are not accountable for the gold they store and are also free to appoint other sub-custodians to hold the gold. The trustee also has no right to visit the sub-custodians to examine the gold or check out its records. The trustee may visit the gold in the custodian's vault but only on a limited basis. There is usually one independent audit at the end of the year and one surprise audit.

Also, since most custodians are banks, if they fail, the trust becomes an unsecured creditor. There might be a substantial delay or fees associated with obtaining the allocated gold. Granted the custodians are reputable large investment banks, but as we saw in 2008, any of them can become insolvent.

Another big issue some analysts have with the ETFs is the fact that JPMorgan and HSBC, both custodians, have short positions in the gold market. Chris Powell, secretary and treasurer of the Gold Anti-Trust Action Committee, which argues that governments manipulate the gold price, says "[We] doubt the reliability of the major gold and silver ETFs ... [because] their metal can be borrowed by parties seeking to drive previous metal prices down, against the interest of ETF investors ... [these short] positions are not disclosed in the ETF prospectuses."

Nevertheless, the GLD has rallied 17% this year in tandem with the gold price.

Another worry is that because the ETFs can have unallocated futures contracts, they might have to roll over their futures positions and get caught out of the money, namely that the contract they hold would become worthless.. In that scenario, the ETFs would not be as closely correlated to the spot price of their underlying metal but to options expirations instead.

Don Dion, portfolio manager of ETF Action, argues that the rollover issue is more of a problem with gold exchange-traded-notes that are entirely based on futures contracts. "Since physically backed ETFs don't rely on futures contracts for their strategy, price dislocation is not an issue ... [Investors] don't have to worry about the rolling of futures impacting the price of their fund."

These issues have led many gold bugs and conspiracy theorists to shout warnings about the safety of precious metal ETFs: Does the gold you think you own really exist and in what form?

However, despite these risks, for an investor looking for pure exposure to the gold price, ETFs are an attractive option to trade, speculate and hedge.. Here are the facts you need to know about the five physically backed silver and gold ETFs available in the U.S.

GLD, SPDR Gold Shares

The GLD is almost 6 years old, born Nov. 18, 2004, and is now the second biggest ETF in existence. The GLD is worth $55 billion and holds 41.8 million ounces or 1,301.91 tons. Currently its fee is 0.40% but that might rise in 2011.

The trustee for the GLD is Bank of New York Mellon(BK) and the custodian is HSBC. According to the Web site, all the gold is held at HSBC's London vault. HSBC's sub-custodians are Bank of England and London Bullion Market Association.

As of October 4th, the GLD's total allocated bar count was 104,647 and its unallocated balance was 56. The vault was last inspected by Inspectorate International in February 2010 . The inspection randomly examined 12,650 bars of which were recorded at 99.50% to 99.99% purity. "No anomalies were identified on the gold count."

The GLD is by far the most popular gold ETF in existence. It attracted strong investment demand over the last few years by enticing some big named investors. Paulson & Co. is the largest shareholder with 31.5 million shares. Northern Trust(NTRS) and Bank of America(BAC) own 11.6 and 8.9 million shares respectively. Soros Fund Management, founded by George Soros, is the seventh largest holder with 5.2 million shares.

Video: How to Buy the GLD >>

The GLD's sponsor is the World Gold Trust Services, a subsidiary of the World Gold Council whose sole purpose is to "stimulate and sustain the demand for gold" and whose members are the largest gold producers in the world including Barrick Gold(ABX), Goldcorp(GG) and Newmont Mining(NEM).

IAU, iShares Comex Gold Trust

IAU has been around since January 2005 and its claim to fame is that it's the cheapest gold ETF. The fund has $4.2 billion in assets and holds 3.2 million ounces, or 99.70 tons of gold. The trustee recently lowered the expense ratio from 0.40% to 0.25%. According to the prospectus, there can be no unallocated gold held at the end of each business day. The trustee is allowed to request up to 430 ounces of unallocated gold for delivery from the custodian.

The trustee is Bank of New York Mellon and the custodian is JPMorgan. The gold is held in New York City, London and Toronto by the Bank of Nova Scotia(BNS). According to the Web site, the vault was last inspected in December 2009 by Inspectorate American Corporation. At that time the 8,553 gold bars in both Toronto and NYC all had purity of 99.50% to 99.99%. There has not been an audit since that date.

According to its most recent 13-F filing, Schroder Investments initiated a position in IAU with 1.74 million shares. Blackrock Institute holds the most shares at 12.2 million followed by Wells Fargo(WFC) and Bank of America with 8.6 million and 7.4 million shares respectively.

SGOL, ETFS Physical Gold Shares

SGOL is the newest gold ETF and was launched in September 2009. The fund has $955 million in assets and 752,017 ounces with an expense ratio of 0.39%. Although the ETF is small, year-to-date it has grown 146% in terms of ounces. There is unallocated gold but according to the prospectus not enough to make up a whole bar of gold.

The trustee is Bank of New York Mellon, the custodian is JPMorgan and the gold is held in Zurich, Switzerland. The Zurich sub-custodian is UBS.. The last audit was by Inspectorate International in December 2009 . The 757 gold bars examined, at that point, were of 99.50% to 99.99% purity. The inspection was at the sub-custodian's vault and there were no anomalies found.

In the second quarter, Goldman Sachs(GS) bought 102,195 shares of the SGOL, making it the second largest investor behind JPMorgan, which holds 398,153 shares. Morgan Stanley(MS) comes in third with 85,093 shares.

SLV, iShares Comex Silver Trust

The SLV was launched in April 2006 and currently has $6.9 billion in assets with 314 million ounces or 9,782.88 tons. Its expense ratio is 0.50%. Reportedly no more than 1,100 ounces can be unallocated at the end of each business day.

Bank of New York Mellon is the trustee and JPMorgan is the custodian, no sub-custodians were listed. The silver is located in 5 vaults around London.. The last inspection by Inspectorate International reported was in February 2010. The existing 308, 542 silver bars were of 99.90% to 99.99% purity. About 1% of the bars checked had a few branding and serial number issues but reportedly those have been rectified.

Bank of America is the largest holder with 7.7 million shares followed by Aletheia Research and Morgan Stanley with 6 and 5.7 million, respectively.

SIVR, ETFS Physical Silver Shares

SIVR was born July 2009. The ETF has about $229 million and 10.7 million ounces of silver, which is up 17% this year. Its expense ratio it 0.30% but will rise to 0.45% in 2011. There is unallocated silver but according to the prospectus not enough to make up a whole bar of gold.

The trustee is Bank of New York Mellon, the custodian is HSBC and the silver is stored at HSBC's vaults in London. The last inspection by Inspectorate International was in December 2009 and at that time there were 9,583 silver bars of high purity, 99.90% to 99.99% and there were no problems found.

Portola Group owns 413,300 shares and is the largest holder followed by Goldman Sachs and Pekin Singer Strauss Asset Management with 243,347 and 173,725 shares, respectively.

Silver and gold ETFs can be a smart way to diversify your portfolio including giving you an easy way to hedge risk or short the precious metal. They also allow you to track the spot price with limited hassle, but before you invest know the risks. If you want the physical metal, go buy it and store it yourself for limited downside.

Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway - Bloomberg

2010-10-29 01:00:00.1 GMT

Commentary by John Hathaway

Oct. 29 (Bloomberg) -- The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.

Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.

Risky Targets

And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.
     
This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to
prosperity.

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean-Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

No Freak Occurrence

The consensus investment view seems to be that the credit crisis of 2008 was a freak occurrence, unlikely to repeat. That is wishful thinking. Monetary policy has painted itself into a corner. Based on our present course, there will be more bubbles and more meltdowns.

Financial markets and institutions sense trouble, as reflected in the flight to supposedly safe assets such as Treasuries and corporate-debt instruments with paltry yields, as well as the reluctance to lend by commercial banks. We are stuck in an epic liquidity trap. The irony is, if global central banks succeed in creating inflation, the value of these safe assets will be destroyed. It is a slaughter waiting to happen.

In the pedantic mentality of central bankers, their playbook creates just the right amount of inflation. As inflation accelerates, consumers will spend to get rid of their dollars of diminishing value and spur the economy. Once consumers start spending, it will be time to raise interest rates because a solid foundation for prosperity will have been established, they say.

Slender Thread

But whatever the playbook promises, the capacity of financial markets to overshoot can’t be overestimated. The belief among policy makers and financial markets in the possibility of this sort of fine-tuning is preposterous, but it is the slender thread on which remaining investment and business confidence rests.

The breakdown of the monetary system will be chaotic. When inflation commences, it will be highly disruptive. The damage to fixed-income assets will seem instantaneous. Foreign-exchange markets will become dysfunctional. The economy will become even more fragile and unpredictable.

Gold is an imperfect, but comparatively reliable, market gauge for the extent of current and future monetary destruction. The recent acceleration in the dollar price of the metal to $1,381, a record high in nominal terms, coincided with talk of a new round of quantitative easing and highly visible discord among major nations on trade and currency-valuation issues.

Naysayers’ Bubble

Naysayers point to gold’s price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency. The Fed is organizing an attack on the dollar’s value, believing that this is the most expedient way to defuse deflationary market forces. The man in the street is unaware, a perfect setup. Inflation can only be successful when the public doesn’t see it coming.

The sudden torrent of commentary on gold isn’t the sign of a bubble. Anti-gold pundits provide a great service to those who grasp this historical moment: They facilitate the advantageous positioning of the one asset most likely to be left standing when the dust settles.

(John Hathaway is a managing director of Tocqueville AssetManagement LP in New York. The opinions expressed are his own.)

--Editors: David Henry, James Greiff.

To contact the writer of this column:
John Hathaway at .(JavaScript must be enabled to view this email address)

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James Greiff at +1-212-617-5801 or .(JavaScript must be enabled to view this email address)

‘The World Does Not Need to End’ - Wall Street Journal

A Gold Bull and His Prediction: $10,000 an Ounce

By SUSAN PULLIAM

There are gold bulls. And then there is Shayne McGuire.

The 44-year-old pension-fund manager from Texas, who spoke recently at a gold conference in Berlin, caused a stir among the roomful of gold aficionados. His provocation: A book that predicts the price of the precious metal could soar to $10,000 an ounce, more than seven times its current price.

AU-DACIOUS? Shayne McGuire, at the Texas Capitol in Austin, says of his gold bet for the Teacher Retirement System: 'It's a return to normal.'

Like those who once boldly predicted $1,000 Internet stocks and a 36000 Dow Jones Industrial Average, Mr. McGuire is a lone voice among mainstream investors suggesting such an outsize price jump in gold's price.

Mr. McGuire's view isn't idle prognostication. He runs a $330 million gold portfolio at the Teacher Retirement System of Texas. Mr. McGuire's forecast, which he made in the recently released book, "Hard Money," makes him a very far outlier. Most on Wall Street consider the prediction outlandish.

"If you missed" gold's recent run-up "you have to come up with some pretty sophisticated reasons to buy" now, says Andy Smith, metals analyst with Bache Commodities, a unit of Prudential Financial Inc.

Mr. McGuire was early to the gold trade. In 2007, he and a colleague persuaded the $100 billion Texas fund, the nation's eighth largest, to move into the metal. It was a novel strategy that made it one of the few large U..S. pension funds to have a fund solely devoted to gold.

At the time, gold was trading at around $650, less than half its current price.

In his 2007 pitch, Mr. McGuire argued that gold was "the most underowned major asset, widely seen as an eccentric, anachronistic leftover from the pre-information age that is best for 'end of world' types."

Not everyone at the Texas fund felt the same way. In one meeting, a pension executive sarcastically asked if anyone else in the room thought "the world was going to end?"

Indeed, most pension funds still steer clear of gold, investing just a fraction of 1% on average of their assets in the yellow metal, according to Alan Kosan, of Rogerscasey, an investment-consulting firm. Most pension funds consider gold too volatile and therefore too risky.

So far, however, Mr. McGuire is in the money. With gold prices surging this year, his fund is up about 25% since its inception a year ago. For its fiscal year ended in June, the Texas pension fund was up 15.6% overall. The gold fund has half its assets invested in a gold exchange-traded fund, SPDR Gold Trust, and the rest invested in gold stocks.

Gold's historic run-up was spurred by uncertainty about currencies, fears of inflation and continued monetary easing by the Federal Reserve. Like dot-com stocks in that bubble, which were difficult to value because many companies generated no earnings, gold is hard to value because it produces no earnings or revenue and costs money to store.

"It doesn't do anything but cost you charges and stare at you," billionaire investor Warren Buffett said in a recent interview.

There are other gold bulls, of course, including prominent hedge-fund manager John Paulson, who has predicted gold could go to $4,000 an ounce by as early as 2013.

For his part, Mr. McGuire says gold is no longer only for those who think financial Armageddon is near. He expects gold to soar amid rising inflation, among other things. "The world does not need to end for gold to go hyperbolic," he says.

In his book, Mr. McGuire reasons that $10,000 gold is possible if enough other pension funds and big investors jump-start buying and move as little as 1% of total global stocks and bonds holdings into the metal. Such a migration into gold would equal enough demand to push prices up tenfold from their current level, he calculates.

Of course, the same argument would be true for nearly every other investment class. Mr. McGuire has confidence in his argument, however, because he believes inflation will return, which typically pushes gold prices higher.

He said he expects a series of fiscal crises to hit around the world. And then there is China, where he says that gold is "widely regarded as a basic savings asset."

Gold prices also are rising because of the ascendancy of exchange-traded funds, which are funds that track an index but are be traded like a stock. The largest ETF, under the trading symbol GLD, now invests $50 billion, an amount that Mr. McGuire believes could grow far higher if investors shift a small percentage of their investment funds into gold. At its current level, the stock-market capitalization of all gold ETFs is about $80 billion, roughly that of McDonald's Corp.

"Now that the value of modern money is becoming highly questionable, more and more people are turning to gold. It's not the new thing; it's a return to normal," he says.

The son of a foreign correspondent for Newsweek, Mr. McGuire grew up in Mexico and spends leisure time playing chess and reading history books.

He is a fan of the financial history of the 1930s, and quotes from Franklin Delano Roosevelt's first inaugural speech in 1933 about the importance of not overspending. Before joining the Texas pension fund in 2001, he was an analyst at Deutsche Bank and ING Barings.

His gold prediction is by far the most aggressive call he has made in his career, he says, but he says he ignores his doubters. "It seems like an aggressive call," Mr. McGuire says, "but it's really a comment on what governments have been doing to the monetary system."

Of course, the risks of such a big prediction can affect one's entire career, much as it did former stock analyst Henry Blodget, whose bullish call on Amazon.com was lambasted after shares plunged in the dot-com bust. "There are enough nutty-sounding gold targets out there that this one probably won't shock anyone," Mr. Blodget wrote in an email. "But it's certainly a nice big headline-friendly number."

Tocqueville Gold 2010 Year-End Investor Letter - Tocqueville

Tocqueville Gold 2010 Year-End Investor Letter
December 2010
Tocqueville Asset Management L.P.

Two significant developments boosted the gold price in 2010. First the Greek debt crisis in the spring contributed to doubts as to the safety of the euro. In our opinion, many investors who took refuge in the euro to escape from the U.S. dollar learned a tough lesson----that no paper currency deserves safe haven status. As investors dumped their euro holdings, the dollar appreciated and gave the appearance of strength. Dollar strength has usually been associated with a weak gold price. However, in this instance, the gold price rallied in both in U.S. dollar and euro terms. More important, gold broke out to an all time high in euro terms. As a side note, it is remarkable but unsurprising that the European sovereign debt crisis remains unresolved. At the moment, finance ministers in Europe are scrambling to rescue Ireland, while spreads for Greek sovereign debt have widened to levels that exceed those when Greece was front page news in May. In our opinion, permanent resolution of the credit woes afflicting the weaker European economies (PIIGS-Portugal, Italy, Ireland, Greece, and Spain) will remain elusive. Bailouts and rescues resolve nothing and have only bought time while potentially fueling inflation by further undermining confidence in the euro.

The second key development was the launch of a second round of quantitative easing (QE2) by the Federal Reserve. While economists debate whether additional money printing by the Fed was necessary or will have a positive effect on economic activity, the rationale put forth by Chairman Bernanke and other Fed officials was quite disturbing to foreign holders of U.S. dollars. That rationale unequivocally stated that the purpose of QE2 was to create inflation. Such statements coincided with a new upward leg in the gold price, which rose from $1,308.35 at the end of September to an all time high of $1,431.25 on December 7, 2010. On the day after the Fed officially announced that it would proceed with QE2, the gold price rallied 3% in a single day. The action was met with a storm of criticism from academia, former Fed officials, and ministries of our trading partners claiming Fed actions would result in dollar debasement.

While many observers feel that the gold rally has been overdone, is too crowded, resembles a bubble or whatever, the simple fact remains that central banks of the Western democracies appear on course to debase paper currencies. On the one hand, currency debasement is the path of least resistance to grapple with the seemingly intractable fiscal issues of record deficits and unchecked growth in entitlements. On the other hand, persistent economic weakness translates into political pressure for central banks to pursue extremely lax monetary policies. Under these circumstances, it is hard to argue against the notion that some exposure to gold offers protection against monetary damage still to come.

Our Tocqueville Gold investment strategy remains consistent with practices since the inception date of June 1998. Our research team has travelled over 500,000 miles since 2003, to remote sites around the world to visit the mining and exploration activities of smaller companies. We seek to invest in companies at an early stage of development which can generate growth through exploration success or new mine construction. In this way, we have invested earlier than most of our peers and well before investment banks and brokerage firms commenced research coverage. This strategy is reflected in the fact that our average market cap is 60% of our peer group average. It is also exhibited in our low turnover of less than 10% in 2010. The success of our approach is manifest in having numerous acquisitions of our positions by large cap mining companies. Two notable examples of this in the past year were the acquisition of Red Back by Kinross and the acquisition of Andean Resources by Goldcorp.

We believe that mining stocks remain cheap relative to gold bullion. As evidence, we point to the chart below which depicts our benchmark, the XAU Index, as a fraction of the gold price. At its current level of 16%, it remains well below its historical norm of 20%-25%. What investors seem to be forgetting is that the business of producing gold has suddenly become quite healthy, unlike the lean years leading up to 2008. This is reflected in strong earnings reports, much improved returns on capital, and a multitude of dividend increases. Unlike gold bullion, successful gold mining companies are capable of generating internal growth, returning capital to shareholders in the form of dividends, and participating in potentially accretive merger activity. We believe that investment in gold mining shares, given the current level of profitability, is capable of producing acceptable investment returns even if the price of gold were to hypothetically remain range bound for a period of a few years.

Finally, I am pleased to report that the Tocqueville Equity Gold Strategy was named as the top performing strategy over the past one and five years by Pensions & Investments magazine. This
designation was not only in comparison to other precious metals funds, but applied to the entire universe of Morningstar’s Separate Accounts’ Composite U.S. stock.

John Hathaway
Portfolio Manager and Senior Managing Director
© Tocqueville Asset Management L.P.
December 16, 2010

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.

Another Volcker Moment at Hand? An Appraisal of $1500 Gold - Tocqueville

Another Volcker Moment at Hand? An Appraisal of $1500 Gold
May 2011
Tocqueville Asset Management L.P.

In any given market, it is essential to ask “what is reflected in the price?” This admonition is as true for gold as it would be for any particular stock, interest rate, credit default swap, junk bond, or farm acreage. Market prices are the sum total of known facts, opinions, sentiment, and expectations. The point of investing on the basis of contrary opinion is to take advantage of unexpected change.

With respect to gold, the question of unexpected change is far more complex and controversial than it was over ten years ago, when the metal was the object of universal derision. The only observation necessary then was that this high quality asset had fallen into intense disfavor, a classic low risk entry point. There was no need to forecast the successive busts in the dot com, housing, and credit sectors. The revealed truth in 1999 was that the metal had been in a twenty year bear market and that returns in financial assets had been compelling over the same period. How could the gold price ever rise when central banks were divesting their bullion as fast as possible, and the major mining companies were piling on by hedging production as far as ten years into the future?

The ridicule once reserved for gold at the bottom of its twenty year march downward has recently moved on to paper currencies of all stripes. At $1500 gold, one must ask how many investors harbor expectations that redemption lies ahead for the likes of the euro, yen and dollar. Do the downgrade of U.S. debt by S&P and short sales of U.S. treasuries by PIMCO sound like the pealing of bells for dollar bears? When it comes to bull and bear market cycles, the characteristics of incipient and terminal stages are identifiable to contrarian scrutiny based on sentiment, sponsorship, participation and valuation. The middle innings, however, tend to be muddled affairs. Sentiment vacillates but never seems decisive. Sponsorship is broader but not unanimous. Ownership, the acid test in our opinion, is more widespread but not universal. That seems to be the case for gold right now.

The best assets in bull markets always seem too expensive. One can never say in advance how overpriced or underpriced an asset can become at its peak or nadir. With respect to gold, normal valuation exercises offer no help since the metal lacks intrinsic worth. For gold, price is simply the exchange rate expressed in a specific currency, which says more about the valuation of the currency in which it is quoted than it does about the metal itself. Gold does not become more expensive. Instead, the paper needed to buy it has been cheapened.

The middle innings of a bull market can be prone to scary shakeouts. Investor enthusiasm must be punctured from time to time to extend the cycle. Despite several shakeouts since 1999, gold has appreciated more than six fold over the past twelve years, and has managed to advance in each and every year in dollar terms. Gold’s progress reflects cumulative damage to the dollar and other paper currencies since the turn of the century inflicted by central bankers and the fiscal policies they have felt compelled to finance.

It is readily apparent that investor disenchantment with paper money also extends broadly to financial assets. The chart of the DJII in terms of gold (below) measures the devaluation of paper money not captured by conventional measures of inflation. Nominal investment returns, disappointing as they have been over the past ten years, do not begin to tell the story. The causes for the general deflation of paper assets are widely known: money printing by central banks, possible sovereign debt defaults, and vexing fiscal issues in Western democracies. In that sense, much news that was unimagined twelve years ago seems widely disseminated and priced into $1500 gold, good or bad, depending on one’s viewpoint.

A superficial glance suggests that the contrarian argument for gold has been played out. Front page proclamations of the dangers of paper currency and the incompetence of politicians are the norm. Ten years ago, Federal Reserve Chairman Greenspan was anointed “maestro” of the financial universe. Today, monetary cognoscenti snicker at the mention of his successor. Still, there are two reasons to think that $1500 gold represents a mid-point and not a final destination for the gold price in this bull market. First is the tendency of fiat currency hostage to the democratic process to self-destruct. Second, and equally important, economic vitality is incompatible with a flawed and chronically failing medium of exchange. The prognosis for the dollar is terminal, in our opinion, short of political sea change. In that sense, our view, right or wrong, is at odds with the consensus view. Hope that the political battles over the debt ceiling and the future of government spending will result in fiscal sanity and that, pending such an outcome, normal economic progress will resume, to us seems misplaced.

Welfare state democracy is incompatible with sound money, in our opinion. As just one example, we refer to a recent research study flagged by Pimco: “The Liquidation of Government Debt”, by Carmen Reinhart and M. Belen Sbrancia. It concludes that “the annual liquidation of debt via negative real interest rates amounted on average to 3% or 4% of GDP per year ...which quickly accumulated (without compounding) to 30% to 40% of GDP debt reduction in the course of a decade.” In other words, an essential mechanism for servicing sovereign debt has been the devaluation of investor claims by capping interest rates. That amounts to outright theft of wealth by government from its citizens and more recently non-U.S. investors. Negative real interest rates, less obvious than CPI inflation, are the stealthy pillar of welfare state finance. Gold prices correlate inversely with real interest rates, as we have been suggesting for the past decade. This relationship is one of the most reliable indicators of the macro climate for gold. Negative real rates ought to be a flashing green light for capital to seek out gold.

Proposals for a return to the gold standard are gaining support. Steven Forbes predicts that this will happen by mid-decade. Other noteworthy and influential proponents include James Grant and Lewis Lehrman. In our opinion gold based currency would be a vast improvement over a dollar anchored only to a political agenda. Resumption of the gold standard would require a significant re-pricing of the metal upwards. However, the small but elite constituency for a gold backed dollar is embryonic, and, so far, politically marginal. That seems likely to change with the next financial crisis. Only then would the merits of a sound currency become apparent to the most ignorant of politicians.

What of the current struggle between Republicans and Democrats to craft a credible fiscal policy? A plan demonstrating political resolve to shrivel federal deficits, even over a multi-year span, is most likely not reflected in $1500 gold. The existential question for gold versus paper currency is whether or not the political will can be summoned to take the necessary actions.

The budgetary nuts and bolts of tax policy, entitlements, and discretionary items in our opinion are secondary to the ideological question of the proper and desired scope of government in contemporary democratic society. 175 years ago, Alexis de Tocqueville warned that democracy would eventually demise into a “soft tyranny” in which the primary purpose of government would be to provide for the welfare of its citizens. He observed that the power of such a government is

...absolute, minute, regular, provident, and mild. It would be like the authority of a parent, if, like that authority, its object was to prepare men for manhood; but it seeks on the contrary to keep them in perpetual childhood: it is well content that the people should rejoice, provided that they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness......It is in vain to summon a people, which has been rendered so dependent on the central power, to choose from time to time the representatives of that power; this rare and brief exercise of their free choice (voting to choose their leaders), however important it may be, will not prevent them from gradually losing the faculties of thinking, feeling, and acting for themselves ....    (from Democracy in America)

According to the Tax Foundation, in 2008 the bottom 50% of Federal tax returns accounted for less than 3% of income tax receipts. Transfer payments plus income of government employees at all levels represent about 26% (37% including health benefits) of all consumer spending (BEA). In other words, the constituency for smaller government and restraints on entitlements fights an uphill and ever steepening battle. Paper money is an instrument of state policy having no life or utility external to the financial system in the way that gold does. Likewise, the dollar seems destined for the financial tar pit of the welfare state, being permeated with the DNA of democracy so presciently identified by Tocqueville.

The Reagan revolution interrupted, but did not reverse, the downward march of the dollar. Paul Volcker’s attack on inflation began when he was appointed as Federal Reserve Chairman in 1979. His policy of super high interest rates and tight credit resulted in a three year recession and double digit unemployment. This harsh medicine enjoyed the tacit support of the Reagan administration. Despite the usual backbiting by political underlings in the administration, Reagan himself did not publicly criticize the stance of the Fed. The popularity of Reagan, elected by landslide in 1980, fell to G.W. Bush-like approval ratings by the 1982 mid-term elections. Whenever asked to describe the final act of the bull market in gold, we invariably respond: “The second coming of Paul Volcker.” Fed policies in those first few years of Volcker’s leadership restored credibility to the U.S. dollar, which was universally scorned in the late 1970’s. The result for gold was a nearly two decade long bear market, lasting from 1980 to 1999. The dollar became respectable, financial assets of all descriptions commenced a historic bull market, and the economy prospered.

It is understandable that the eleven year advance in the U.S. dollar gold price has momentarily hesitated, marking time as investors attempt to discern whether coherent long term fiscal measures will be implemented. As to the timing of this interlude, we would be surprised if the upcoming debate over raising the debt limit will yield decisive answers. That debate seems more likely to be a preliminary skirmish leading into the 2012 election. The presidential campaign could well turn into a national referendum on opposing world views: those who believe that shrinking government outweighs all else, and those who believe the purpose of government is to insure social welfare. History would suggest that there is little in the way of middle ground for sound money.

Still, in theory, the institutions of the American government and its political inhabitants could surprise all skeptics and provide solutions of substance that would restore credibility to the dollar and provide footing for sustained economic growth. We strongly doubt the likelihood of such an outcome. The predicament of the 2011 dollar seems more onerous than that of 1980. The pain the electorate would have to endure from an application of “Volckerian” austerity could be measured in decades rather than years. The implication of austerity in a setting where the economic well-being of so many depends on government seems starkly deflationary. American government is dominated by a generation of politicians who have made careers of redistributing wealth and battling austerity. An outcome against long odds that turns into another “Volcker moment” would be bad for gold. On the other hand, anything less will in all likelihood send gold to dramatic new highs.

John Hathaway
Portfolio Manager and Senior Managing Director
© Tocqueville Asset Management L.P.
May 20, 2011

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.

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Utah and other states push gold as legal tender, prepares for US dollar collapse

Utah and other states push gold as legal tender, prepares for US dollar collapse
Monday, May 30, 2011 12:22 PM EDT
International Business Times

Utah just became the first US state to recognize gold as legal tender. Its Legal Tender Act of 2011 allows U.S. minted gold and silver coins to be recognized as legal tender in the value that reflects the market price for gold and silver.

Currently, the one-dollar US American Eagle silver coins would be worth $38 each, using an example provided by the NYTimes.

People in Utah are not compelled to accept gold and silver coins at market value, but they’re now able to, according to the law.

“If the federal government isn’t going to do it, then we here in Utah ought to be able to establish a monetary system that would survive a crash if and when that happens,” Lowell Nelson, interim coordinator for the Campaign for Liberty in Utah, told NYTimes.

Craig Franco, a coin dealer south of Salt Lake City, said he’s preparing to create a Visa credit card based on gold depositories that would allow people to more conveniently use gold as tender.

Utah isn’t the only place to distrust the US dollar and push for precious metals as legal tender.

Minnesota introduced (but not passed) a bill to “designate gold and silver coin as official ‘legal tender’ in payment of debts under certain circumstances.”

The bill said “the currency emitted by the Federal Reserve System [i.e. the US dollar] has created and threatens to create increasing instability in the governmental finances and private economy of the state of Minnesota.”

North Carolina introduced (but not passed) a bill that would have the state issue its own legal tender backed by the gold and silver in the state’s treasury.

“I think we're in the process of inflating a dollar bubble that could be very devastating,” said the legislator who introduced the bill, reported the News & Observer.

South Carolina introduced (but not passed) a bill that would replace the US dollar with gold and silver in as legal tender in the state.

"The Germans felt their system wouldn't collapse, but it took a wheelbarrow of money to buy a loaf of bread in the 1930s. The Soviet Union didn't think their system would collapse, but it did. Ours is capable of collapsing also,” said the legislator who introduced the bill, reported CBS.

Idaho introduced (but not passed) a bill that would allow people require only gold or silver as payment.

Georgia introduced (but not passed) a bill that would have the state government only accept US minted gold and silver coins for payment (i.e. tax payments).

Meanwhile, the world is also slowly pushing to diminish the role of the US dollar.

China and Russia have already formed an agreement to use their respective currencies for bilateral trade. Previously, these countries used the US dollar for bilateral trade.

Russia, in fact, was already pushing for the denomination of its energy exports in the Russian ruble back in 2006.

Countries with big foreign exchange reserves – like China and Arab oil producers – are also frantically trying to prop up the euro currency as a dollar- alternative for their investments. Besides the euro, they’ve diversified to assets denominated in other major currencies like the Australian dollar and Canadian dollar.

Gold May Rise as Slowing U.S. Economy, Weaker Dollar Fuel Investor Demand

Gold May Rise as Slowing U.S. Economy, Weaker Dollar Fuel Investor Demand
By Nicholas Larkin - Jun 7, 2011 8:23 AM ET
Bloomberg

Gold may gain for a third day in New York as concern about Europe’s debt crisis, signs that the U.S. economy is slowing and a weakening dollar spurs demand for the metal as an alternative investment. Palladium climbed.

U.S. payrolls grew at the slowest pace in eight months in May and manufacturing expanded at its slowest pace in more than a year, reports showed last week. The European Union needs to reach an accord on Greece’s debts before finance ministers meet on June 20, EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday. The dollar slid to a one-month low against six currencies. Gold typically moves counter to the greenback.

“Speculation U.S. economic growth is losing pace and the Greek debt crisis is worsening” is supporting gold, John Meyer, an analyst at Fairfax IS in London, wrote in a report today. “The dollar is off this morning, helping support prices as they push toward the record.”

Gold for August delivery fell 40 cents to $1,546.80 an ounce by 7:59 a.m. on the Comex in New York. It yesterday reached $1,555, the highest price since May 2. Immediate- delivery gold was 0.1 percent higher at $1,546.05 in London.

Concern about faster inflation, Europe’s debt crisis, a weakening dollar and fighting in Libya boosted gold to a record $1,577.40 on May 2. Prices are up 8.8 percent in 2011 after climbing the past 10 years, the longest run of gains in at least nine decades in London. Federal Reserve Chairman Ben S. Bernanke is scheduled to speak today at the International Monetary Conference in Atlanta as the bank’s second round of bond buying, called quantitative easing or QE2, ends this month.

Debt Crisis

European Central Bank President Jean-Claude Trichet signaled for the first time he may support encouraging investors to buy new Greek bonds to replace maturing securities as officials seek to stem the nation’s debt crisis. ECB policy makers have opposed any measure that could be classed as a default to avoid what Rehn described yesterday as a “Lehman Brothers catastrophe.”

“The market’s still very sensitive to what’s happening in Greece and Europe, and at the same time sensitive to U.S. data,” Darren Heathcote, head of trading at Investec Bank (Australia) Ltd., said by phone. “There doesn’t seem to be many reasons to be selling gold at this present moment.”

Gold Fund

China Universal Asset Management Co. received approval from the nation’s financial-market regulator to start a fund that will invest holdings in overseas exchange-traded products backed by precious metals. Liu Ming, a spokesperson for China Universal, didn’t give details of when the fund would start raising money, nor how the extent of the holdings in each metal will be set. 

“All the market participants we met with in China last week expect a slowdown in physical demand before buying picks up again in September,” Edel Tully, a London-based analyst at UBS AG said today in a report. While there may be “summer headwinds” for gold, “this would be viewed by most as a short- term correction within a bullish market. It’s very difficult to leave Asia, and in particular China, without feeling bullish about gold.”

Silver for July delivery rose 1.4 percent to $37.285 an ounce in New York. Palladium for September delivery climbed as much as 1.6 percent to a three-month high of $811.80 an ounce and was last at $806. Platinum for July delivery was 0.1 percent higher at $1,823.40 an ounce.

To contact the reporters for this story: Nicholas Larkin in London at .(JavaScript must be enabled to view this email address) 

To contact the editor responsible for this story: Claudia Carpenter at .(JavaScript must be enabled to view this email address)

Bullion Vaults Run Out of Space as Gold Rallies: Commodities

Bullion Vaults Run Out of Space as Gold Rallies: Commodities
By Chanyaporn Chanjaroen, Nicholas Larkin and Debarati Roy
Businessweek

Sept. 21 (Bloomberg) -- Deep in the 7.4-acre Singapore FreePort next to Changi International Airport’s runways is the bullion vault of Swiss Precious Metals, behind seven-metric-ton steel doors built to survive a plane crash or earthquake.

The rooms are almost full after demand rose fivefold in the year since the Geneva-based company opened the facility. The firm plans an extension, and relocated Chief Executive Officer Jean-Francois Pages to Singapore last month to cope with the surge of investors willing to pay as much as 1 percent of the value of their holdings each year to keep them secure.

“The European debt crisis and its impact on the solvency of European financial players are driving European customers to find refuge in tangible values like physical gold and other precious metals,” Pages said. Demand “is totally compatible with the current financial and political global turmoil.”

Barclays Capital is building a new vault, The Brink’s Co. and Deutsche Bank AG may add more space, and the Perth Mint may expand for the first time since 2003, a sign they expect demand to keep increasing after the 11-year rally during which prices increased sevenfold. Investors in exchange-traded products backed by gold bought 2,236 tons of bullion since 2003, exceeding all except four countries’ official stockpiles.

Gold climbed to a record $1,921.15 an ounce on Sept. 6. Prices more than doubled since the end of 2007 as stock markets slumped, economies contracted and central banks and governments pumped more than $2 trillion into the global financial system.

Dollar Index

The metal rose 27 percent to $1,803.32 this year as the MSCI All-Country World Index of equities retreated 11 percent, led by financial stocks. Treasuries returned 8.5 percent, a Bank of America Corp. index shows. The U.S. Dollar Index, a gauge of the world’s reserve currency against six major trading partners, slumped 10 percent in the past 15 months.

Gold will exceed $2,000 this year, according to the average estimate of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s conference in Montreal. The metal will peak at $2,268 next year, the survey showed.

Storage companies are responding. The 112-year-old Perth Mint, which refines more than 8 percent of all supply and is owned by the Western Australian state government, may add a new vault within the next year, according to Treasurer Nigel Moffatt. The mint sells everything from gold coins to 400-ounce (12.4-kilogram) bars.

Bullion Carrier

Brink’s, the largest bullion carrier in the U.K., is considering adding more storage after opening a new London vault earlier this year. Barclays, based in London, is building a vault in the city that will open next year, the bank said in a statement last week.

Deutsche Bank, based in Frankfurt, is considering expanding existing facilities and developing new ones to meet demand, Matthew Keen, a director at the bank, said earlier this month. JPMorgan Chase & Co. started a vault at the Singapore FreePort location last year and opened another in the financial district of New York.

“With gold prices where they are, we encourage people to keep it in safety-deposit boxes at banks or vaults, which gives that sense of security,” said Scott Carter, chief executive officer of Goldline International Inc., a Santa Monica, California-based precious-metals retailer established a half- century ago.

ETF Trust

Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates. Holdings in gold- backed ETPs are equal to more than nine years of U.S. mine production. The SPDR Gold Trust, the biggest bullion ETP, exceeded the market capitalization of the SPDR S&P 500 ETF Trust in August, beating what had been the industry’s largest exchange-traded fund since 1993.

The Brink’s vault business is part of the Richmond, Virginia-based company’s value-added global services unit, which accounts for about 35 percent of total revenue, according to Bradley Safalow, chief executive officer of New York-based PAA Research. The shares will rise about 62 percent to $40 in the next 12 months, he estimates.

The company operates its storage business on long-term contracts that guarantee revenue, Chairman and Chief Executive Officer Michael T. Dan said in a conference call with investors in July. Brink’s benefits when prices appreciate, he said.

‘Ultimate Asset Bubble’

Malca-Amit Global Ltd., owner of two gold vaults at the Singapore FreePort and looking to add another, may see revenue from precious-metals storage in the city state climb by 30 percent next year, said Ariel Kohelet, executive director of Malca-Amit Singapore Pte.

The surge in demand is a warning to some investors. George Soros called gold “the ultimate asset bubble” in 2010. Soros Fund Management LLC, founded by the 81-year-old billionaire, sold 99 percent of its stake in the SPDR Gold Trust and all shares in the iShares Gold Trust in the first quarter, a U.S. Securities and Exchange Commission filing in May showed.

“We are now in the final, overheated phase of gold’s protracted bull market,” Chris Eibl, a partner at Zug, Switzerland-based Tiberius Asset Management AG, which has $2.8 billion in assets, wrote in a report distributed Sept. 15. Gold “is already so overbought in the wake of panic selling of bank stocks that a calming of the European financial markets could well trigger a tactical pullback by about $200 to $300.”

Warren Buffett, the world’s most successful investor, says the metal has no utility.

Private Investment

“They take it out of the ground in South Africa, ship it to the Federal Reserve, where they put it back in the ground,” Buffett said on April 30 at Berkshire Hathaway Inc.’s annual meeting in Omaha, Nebraska. “If you were watching from Mars, you might think it’s a little peculiar.”

All gold ever mined totaled about 168,300 tons by 2010 and would fit inside a cube measuring about 21 meters (69 feet) in length, according to the World Gold Council. Private investment in the metal reached about 31,100 tons by the end of last year, according to the council.

The gold stored in vaults typically meets the LBMA’s so- called good delivery standard, where bars are of at least 99.5 percent purity and include a serial number, the year of manufacture and the refiner’s assay mark.

“The days where a secure vault in a basement was sufficient are long gone and in today’s operating environment, the expertise required in order to manage the substantial, and expensive, quantities of bullion are far reaching,” said Orit Eyal-Fibeesh, managing director for Brink’s in the U.K.

Silver Surges

Brink’s, the third-biggest provider of vaults in the U.K. behind New York-based JPMorgan and HSBC Holdings Plc, is considering building another facility in London, said Eyal- Fibeesh. The company’s clients include banks, trading houses, institutions, individuals, governments and sponsors of ETPs.

As gold surged 27 percent and silver 31 percent this year, so did the cost of insurance. Fees charged by Lloyd’s of London members are pegged to the value, not volume, of the metals. Individuals preferring to hoard bullion under their own names in private vaults pay about 1 percent or more of the total value a year, compared with about 0.4 percent for investors in metal held through some ETPs.

Insurers typically set maximum values for the metals they are willing to insure.

“Many vaults are hitting the insurance limit as prices of gold have surged and even if space is available, the full replacement insurance may not be available,” said Savneet Singh, the CEO of New-York based Gold Bullion International, which offers precious-metals storage to wealthy individuals, hedge funds and financial institutions. “The smaller customers are already getting squeezed.”

Singapore Vaults

Swiss Precious Metals, whose Singapore vault will be 80 percent full by December, charges as much as 1 percent of the market value of gold and silver stored, depending on the quantity, Pages said. The charge covers storage, insurance and related documentation, he said. The company has already arranged for more space for expansion.

If insurance costs rise by more than 50 percent, then the firm may ask for higher fees, according to Pages, who predicts gold may reach $2,500 by the end of the year. Swiss Precious Metals is owned by Geneva-based Palaedino Group SA and Euroasia Investment SA. Euroasia Investment is an investor in the Singapore FreePort through affiliates, according to Pages.

Lloyd’s of London, which offers so-called specie insurance, declined to provide information on rates or demand. Brink’s declined to elaborate on storage and insurance costs. JPMorgan, which also rents space at the Singapore FreePort for its gold vault, declined to comment.

Bullion Depository

Sometimes the secrecy needed at vaults backfires. Ron Paul, a Republican congressman for Texas and three-time presidential candidate who has called for a return to linking the dollar to gold, isn’t sure there’s any metal at the U.S. Bullion Depository at Fort Knox in Kentucky.

Paul told Bloomberg Businessweek’s June 20 edition that the government “is asking the American people to trust that all the gold is there, while not allowing site visits and not publishing all the data.” Eric M. Thorson, the inspector general of the Treasury, said he has seen and accounted for it all.

The U.S. has the world’s largest gold reserves, 8,133.5 tons, according to World Gold Council data. The Kentucky vault, opened in 1937, stores more than 4,500 tons at a book value of $42.22 an ounce, according to the U.S. Mint’s website. The facility admits no visitors.

“Gold is simply a mirror of economic and political failure, of all the uncertainties that make people worry,” said Gerry Schubert, the head of precious metals at Emirates NBD in Dubai, who has traded the metal since 1979. “If you have $50 million, what would you do with that money? You buy gold. Hedge funds, central banks, sovereign funds: all are buying gold.”

--With assistance from Joe Richter in Montreal. Editors: Philip Revzin, Stuart Wallace, James Poole

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at .(JavaScript must be enabled to view this email address); Nicholas Larkin in London at .(JavaScript must be enabled to view this email address); Debarati Roy in New York at .(JavaScript must be enabled to view this email address).

To contact the editors responsible for this story: James Poole at .(JavaScript must be enabled to view this email address); Claudia Carpenter at .(JavaScript must be enabled to view this email address); Steve Stroth at .(JavaScript must be enabled to view this email address)

Speech by Dan Tapiero – CAIS Funds

Why gold? 

Most of the countries in the developed and emerging world have zero or negative real interest rates. What this means is that if one has deposited one's cash in an American bank at zero percent interest, and assuming that the current rate of CPI growth is 2% per annum, one is actually losing 2% of one's capital per year on a real basis. In many places around the world, the situation is much worse. In Russia for instance, the overnight rate is 3.5%  and the inflation rate about 8%; this means Russians are losing 5.5% per year on a real basis every year. Other countries with negative or zero real rates include China, India, Germany, Korea, Canada, Mexico and there are many more. Gold is not losing its value every year.

The growth rate of Emerging market wealth is the greatest that it has been in centuries. Historically, many of these countries, which have experienced default, devaluation and financial turmoil, consider gold equivalent to money. Gold already makes up a certain percentage of most individuals wealth in these countries. It is noteworthy that 50% of gold demand in the 1h2011 came from China and India. These new high net worth and retail investors will continue to allocate a certain percent of their assets to gold. Whether or not Western countries investors decide to follow suit is less relevant to the prospects for gold. Many such investors will be left behind as they continue to think about gold in traditional and historical terms.

In the past 20 years, many countries, which did not exist in an economic and financial sense have now become the world's growth engine. Many of these emerging countries have newly formed central banks. China's PBOC, for instance, was hardly an economically relevant entity in 1990, or for that matter even in 1999. All of these central banks, in aggregate, have created a large amount of paper money to grease their own growth engines. The total supply of available world currency and liquidity has increased hundreds of times in the past 20 years. The world money stock is so large that there has never been a proper accounting of it. This fact is, in stark contrast to the supply and stock of gold, which has hardly changed in the past 20 years. It is not difficult to say that one should own something that is in less supply rather than something that is oversupplied. Emerging market central banks already consider gold as a currency. We have seen massive gold purchases by them in the past two years, turning net buyers of gold for the first time in ten years.

For the first time since the 1970s, there is also a strong possibility of sovereign default--with Greece the most likely country and several others could follow suit. The reneging on sovereign obligations is the worst sort of credit failure as it confirms the moral, political and social failure of an entire economic system. The acceptance and existence of this sort of failure reduces the stigma of corporate and individual rejection of claims owed and sets a bad precedent for other debtors. The huge buildup of the total world debt stock in the past 20 years, and especially among sovereigns, leads investors to question the serviceability of that outstanding debt. If the largest and most important countries in the world cannot meet their obligations, the viability of the entire world financial and economic system will be called into question. The possibility that there is no risk free rate, that there is no guaranteed issuer, changes the pre-existing value relationships that have existed for many years. Without strong financial architecture and monetary framework, financial markets thrash about, as they are now, in an attempt to value assets that have lost their anchor. The inherent value of gold stands in contrast to the world of paper assets, whose value is unknowable. Gold is what you think it is; it has never changed what it is: it cannot default nor cannot it be devalued by an existing government for political purposes.

Most importantly gold is not an obligation but an asset. It is instructive to read the words on the US currency.  It says, that "this note is legal tender for all debts, public and private." The dollar is an obligation. It is not an asset. It is also interesting to note that before Nixon ended the convertibility of the dollar into gold, that the paper bills used to read, "This note is legal tender for all debt, public and private and is redeemable in lawful money at the United Stated Treasury or at any Federal Reserve Bank. Even the United States Treasury as recently as 1971 considered gold as lawful money. Lawful money or legal tender does not have the ability to be debased. The supply of lawful money cannot be increased enough to impact the underlying value of the asset; it is a pure reflection of the demand over the supply for that monetary asset.

In most of the emerging world and some of the developed world, gold is used as and believed to be a true currency. Although this is not currently the case in the United States, the perception of gold is in its early stage of changing. A few months ago the Utah state legislature passed the Legal Tender act, which makes gold legal tender in that state. Given the rules laid out in the Constitution of the United States, no legal tender is allowed to be taxed. The state capital gains tax in Utah has been reduced from 5% to zero on all purchases and sales of gold. Currently there are 12 other state legislatures which have similar bills being discussed. In fact, three United States congressmen, Rand Paul, Jim DeMint and Mike Lee introduced legislation in June that would eliminate all taxes on gold and silver, elevating them from the status of collectibles to legal tender, of the same status as Federal Reserve notes. Although this is unlikely to become law, there is a growing chorus of Americans who are beginning to consider gold as a viable alternative currency, not to replace the US dollar but as a currency to sit alongside the paper currencies of the world.

Choosing the dollar and not the pound, yen, ringgit or zloty in which to hold one's assets, is not, in a certain sense, a choice with that much difference. In each case, the respective governments and treasuries can greatly influence the value of its own currency. Some governments make good choices and some make bad choices. Gold is simply an alternative currency with macroeconomic fundamentals just like any of the world's currencies, except that those fundamentals do not rely on the human decision making process or political influence. Gold should become a currency, just as Alan Greenspan suggested two weeks ago, because it is simply another choice. It is not a threat to the current world financial architecture but an option that should be available to people living in a democracy where choice forms the substance of life.

It is interesting that some of the world's financial institutions have already begun to choose gold over certain paper currencies. The central bank of China, the world's largest dollar reserve holding central bank, has decided to increase the percentage of gold in its holdings. Many other of the world's central banks have been doing the same. We are in the first inning of this process as the emerging countries' central banks currently own so little gold that if they were to own the same percentage of gold in their reserves as the United States or European countries central banks, there would not be enough gold in the world to satisfy that demand alone. Currently, the percentage of gold in China's reserves is 2% versus roughly 70% in the US and 50-70% amongst European nations. Russia owns 7%, India 9%, Saudi Arabia 3%, and even Japan only holds 3% of its reserves in gold. If the world's central banks are shifting their preference why would we not expect individuals and other institutions to do the same?

The current great bull market in gold is still in its infancy because it has yet to become an institutional product. Most of the world's wealth is managed by large institutions which have not yet adjusted to the reality that gold is not only an asset that maintains its value over long periods of time but one that will soon become viewed as an alternative currency. The possibilities are staggering. Total global pension assets alone are 30 trillion dollars. The average pension fund is estimated to hold 0.3% in gold or gold mining equities. If they were to increase their exposure to gold and gold stocks to just 3%, that would amount to 1 trillion dollars, which is 13 times the size of the current GLD ETF and 5 times larger than the market cap of the entire sector of gold mining producers. If one includes other institutional capital and wealth holders, such as insurance companies with 18 trillion dollars, sovereign wealth funds with 4 trillion, high net worth individuals estimated at 30 trillion and then add in the remaining world retail assets, one can easily estimate that on top of the 30 trillion in pension assets there is another 100 trillion in investable assets in the world. So, of the 130 trillion in total assets, if managers decided to allocate 3% of their portfolios to gold that would amount to 4 trillion dollars, roughly half of all the gold that has ever been mined since the beginning of time and twice the total amount of what is called investable gold (which is non-jewelry, non central bank holdings of gold). If the world's central banks are increasing the share of gold in their reserves, there is no reason to think that other institutions will not follow their lead at some point. Even a very small increase in allocation could lead to a doubling, tripling or who really knows of the price of gold. The point is that investors can either get ahead of the inevitable institutional allocation decision or they can wait for others to seize the opportunity, as has the University of Texas endowment which recently allocated 5% of its assets to physical gold.

Physical Gold

If one is convinced by the thesis to own gold, now you may ask why is it worthwhile to own gold in its physical form. There are several reasons which I will highlight briefly.

The first is that when you own the physical asset you own something that is yours--like your car, your house and your other worldly possessions. What  you do not own is someone else's obligation that can be defaulted upon. You do not rely on the viability of an exchange, which may or may not be able to deliver on its promises. Furthermore, you do not own a share in a trust, in which the physical gold is not verifiable at the sub-custodian level and that is not insured. You also do not own paper gold which is not required to meet London Good Delivery Bar standards. What you do own is your own asset.

Also, it should be noted that physical gold is not a security and therefore not under the purview of securities laws. It has limited other regulatory risk. Furthermore, you own an asset that has inherent geographic flexibility. Legal and tax standards are also not uniform and are relatively underdeveloped compared with paper and electronic alternatives. Historically, it has been very difficult for individuals and institutions to hold and store physical gold. Most large banks have minimum transaction sizes that are in the tens of millions. There are fewer than 5-10 legitimate avenues for people to own and store their physical gold, regardless of the size of purchase.

GBI

Gold Bullion International-GBI- is the company that I co-founded to make it simple for any individual or institution to own and store physical metal relatively cheaply. I founded the company because I wanted to have a way for myself to own physical gold in the way that I wanted to own it.  Purchasing gold through GBI is the only way to own whole bar allocated physical gold, down to the smallest sizes. I am unaware of any similar company that provides a customized product to so many different types of investors.  When one purchases physical gold through GBI, one truly owns the asset in one's name. It is audited by KPMG and insured by Lloyds of London. The bar or coin meets London Good delivery standards and cannot be lent out or hypothecated as collateral against a loan, as it is when it is sold and owned by the commercial banks and brokers on behalf of clients.

When one buys and stores physical gold through GBI is it vaulted outside the banking system, with Brinks or Viamat, the two largest non-bank vaulters in the world and held in Zurich, London, New York or Salt Lake City. Furthermore, when one buys physical gold through GBI, one can actually go to visit the gold in its vault and even take it home if one chooses. This is a unique feature that few banks or other gold companies allow. I should also highlight that for larger purchases, the price that GBI charges to store metal is less than or equal to the price that the GLD ETF charges for storage.

Another unique feature of GBI is that it has created the technology that allows for greater pricing transparency in the physical gold and other precious metals market.  Our network of 14 bullion dealers and refiners, whom we rely on to submit their best bids and offers electronically, is the most efficient and fair way to serve the needs of our customers. GBI is the first institutional quality firm that gives people the ability to choose whether to hold a certain percentage of their assets in physical metal in a secure way. We allow customers to call us directly to purchase and store physical metals. We hope to become the blue chip standard in the wealth management business and to direct clients throughout the world. 

Thank you for your time.

Thoughts on Davos and Gold

Thoughts on Davos and Gold
By Savneet Singh and Dan Tapiero - January 25, 2012
Co-founders of Gold Bullion International

The most important issue in the world that will not get discussed at Davos is gold.

Its importance has never been as great as it is today, relative to the limited understanding of why it is important. The point of these comments is to place gold within the world economic, political and social context.

World leaders from all walks of life are gathering in Davos this week. It is important for them to realize that the current solutions that have been chosen to deal with the financial systems problems are easy, lazy solutions. The value of gold is rising because owners of capital realize that their capital is being debased by the world’s authorities.

Ultimately, gold is not just a commodity or a currency. It is an asset with links to power, wealth, political control, history, freedom, moral values and even the direction of culture.

We are currently in a period where the world’s monetary and fiscal authorities have chosen to debase their currencies, either by suppressing interest rates artificially (USA) or by actual policies forcing their currencies to weaken (Switzerland). The acknowledgement that debasement is a viable solution to problems that have grown over the past 30 years is now more or less acknowledged as the right and proper course of action. Each of the three main economic players on the stage (the US, Europe and China) currently maintain negative real interest rates and perform some sort of asset purchasing, asset support programs. Free market principles and the discipline that they bring with them are now gone from the scene. Answers to current economic problems, which themselves were brought on by excess and leverage, are now being solved with added leverage, tinkering and ultimately debasement.

The problem today is not that the dollar has fiat status “and can be printed up” as so many suggest. The problem is that the total corps of world economic and financial “leaders,” who get together in remote ski villages, all believe in the same debasement programs. The “everyone is doing it so it must be ok" mentality, in others words “herd think,” has prevented real thought from occurring and killed what might be innovative policy responses to the current problems. Remarkably, even the ECB, the last holdout of the important central banks, in a gesture that is surely the most important in its 12 years of existence, has finally succumbed to the world’s pressure to monetize fiscal deficits. The killing off of the last of the hard money policymakers (Axel Weber and co.) has almost guaranteed that systematic debasement will occur at an increasing rate and will lead to the continued erosion of savers' capital.

Why is this erosion a bad thing? In the long run it encourages a certain type of morality that is inimical to the values upon which America was founded and upon which almost every great fortune was ever built. Hard work, determination, foresight, savvy, and skill are all characteristics of the owners of capital. That is not to say that poor or unsuccessful people do not have such virtues, just that “owners of capital” almost always have them.

Debasement of currency --in essence the slow erosion of the value of capital -- encourages one to think that saving, and in effect, hard work, in the creation of a lasting endeavor is not something that the culture places value upon. In fact, in a country where governmental social giveaways are popular, debasement encourages bad habits such as laziness and irresponsibility. What is the point of working hard when the government will ultimately support you? And -- even if you did work hard -- it wouldn’t matter because the actual money that you would eventually make would be losing its value by 2% a year in real terms (or 4% a year if you lived in the UK.)

Bad personal habits are an unfortunate outgrowth of bad economic policy that usually go unrecognized. However, currency debasement also corrupts the leaders who support such policies. The idea that one can print one's own currency and then use that currency in the way that one likes is too much of a temptation for anyone. Behind such action ultimately lies the need for certain individuals to control the fate and well being of the rest.

The current leadership in the United States clearly espouses a sort of debasement of savers' capital called “reallocation.” As Barack Obama stated in his State of the Union address, it is only fair that an owner of capital share with his less fortunate brethren. However, if he does not want to share he will get debased by the monetary authorities anyhow. The idea, unfortunately propagated by Warren Buffet, that the rich don’t pay enough taxes, is part of the “theme” or “trend” of our time.

This political form of currency debasement eventually leads to socialism and is the road to serfdom. The combination of these two forms of debasement -- economic and political -- occurring at the same time is usually a harbinger of bad things to come. However, few people in leadership circles seem to be concerned that the current path the world has taken to extricate itself from the crisis of 2008 (and really from the 30- year long debt buildup that ended in 2008) could be the wrong one.

Gold, of course, is not the answer to all of these problems. It does, however, have a valuable role to play in limiting the degree of world currency debasement while at the same time placing a check on political leaders who would want to spend money that isn’t theirs on whichever programs they like.

Gold should stand as an alternative to the world’s currencies. It is the only one that cannot be debased, devalued, defaulted upon or over taxed and easily confiscated. Unlike almost any other large forms of cash, it can be held outside the banking system and the purview of the federal authorities.

While the accumulation of gold is hardly a creative or important life endeavor, it stands against the manipulation of central authorities, central banks or central governments. In recent years, odd as it may seem, one of the largest groups of gold buyers has been the central banks of the emerging world. Somehow, these countries, aware of the debasement programs of the US and Europe (and to some degree China as well) are eager to protect the savings they have accumulated, held in dollars and euros, over the past ten years.

It might be going too far to say that these central banks and their sovereign entities are repudiating, in a quiet way, the values propagated by reckless spending and currency debasement. However, as time goes on, and as they allocate more of their savings to gold and hard assets, they will see real wealth increases that are the benefit of their hard work, skill and determination.

Federal Reserve Issues FOMC Statement

Federal Reserve Issues FOMC Statement
FRB: Press Release - January 25, 2012

This is the statement of the minutes of the Federal Open Market Committee meeting released January 25, 2012. Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.  Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.

2012 Monetary Policy Releases

Central Bank Policy is Obscuring Market Values, Warsh Tells Stanford Audience

Central bank policy is obscuring market values, Warsh tells Stanford audience
By Chris Powell - January 26, 2012
The Gata Dispatch

Dear Friend of GATA and Gold:

Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values, former Federal Reserve Board of Governors member Kevin M. Warsh told the Stanford University Institute for Economic Policy Research tonight.

This influence is especially evident, Warsh said, with the Fed's purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.

Warsh, who disclosed during GATA's freedom-of-information litigation with the Fed in 2009 that the central bank has secret gold swap arrangements with foreign banks (http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf), added that the Fed is trying to do too much and the rest of the government not enough to encourage economic growth.

While he said nothing explicitly about gold, Warsh seemed to come pretty close to your secretary/treasurer's observation almost four years ago that there are no markets anymore, just central bank interventions. (See http://www.gata.org/node/6241.)

Warsh was especially critical of the federal government's efforts to stimulate the housing market. "The government-sponsored housing entities remain sources of vulnerability to the U.S. economy," he said, "and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense are deeply counterproductive." Such efforts have not succeeded, he added.

Warsh said higher real incomes are far more important to economic growth than recovery in the housing sector.

He said he opposed pursuing economic recovery through inflating debt away and devaluing the currency.

Warsh was the youngest person ever appointed to the Fed board, resigning eight months ago after five years in office, and is now a distinguished visiting fellow at the Hoover Institution at Stanford and a lecturer in the university's Graduate School of Business. He received his undergraduate degree at Stanford in 1992 and a law degree at Harvard three years later. He was special assistant for economic policy under President George W. Bush and executive secretary of the National Economic Council. He was also a member of the President's Working Group on Financial Markets, commonly known as the Plunge Protection Team.

Warsh spoke tonight from an outline he provided to GATA and then answered questions from his audience, which included Stanford faculty and students. The outline is appended.

Warsh's talk was broadcast live at the Internet site of the Stanford Institute for Economic Policy Research -- http://siepr.stanford.edu/ -- and video of it is expected to be posted there shortly.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.