Tocqueville Gold Strategy: First Quarter 2014 Investor Letter

Gold and gold mining shares recovered during the first quarter with the metal rising 6.5% and precious metals shares (basis XAU) 8.7% through March 31st. It appears to us that the precious metals complex has bottomed and is attempting to gain footing following the grueling two-plus year correction that started in August of 2011.  It is impossible to say whether prices will continue to chop indecisively as part of this process of bottoming, or whether they will spike suddenly higher should some exogenous event spark the pile of tinder representing unresolved systemic risk that has been steadily accumulating since the financial crisis of 2008.  

We observe that many investors who understand, and may well have been deeply committed to the investment rationale for gaining exposure to potential currency debasement, have been scarred by two extremely difficult years of negative performance and are therefore on the sidelines looking for a comfortable point to reenter the sector. In the meantime, we have witnessed the entry of contrarian value investors whose rationale can be summed up as viewing gold mining shares as an inexpensive way to protect capital in the event of a broad correction in equity and capital markets. It seems highly certain to us that the positive returns generated by equity markets over the past two years have represented a substantial barrier for capital to reenter precious metals. We therefore believe that a bear market in equities would constitute a catalyst to drive gold and precious metals equities sharply higher.

In terms of supply and demand flows, the stage is set in our opinion for higher gold prices. No mining company management in its right mind would commit to a program of mine construction at current prices. Therefore, we believe that mine supply...

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