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Did You Know…That 16% Of All Sovereign Bonds Guarantee Investors A Loss?

February 6, 2015


  • In the beginning, there were interest rates. Then, after 2008, hyperactive central banks sought to restore growth by adopting Zero Interest Rates Policies (ZIRP) on a premise that zero rates must be better than low rates. Another ZIRP objective was to lift prices of all financial assets, unleashing the “wealth effect.”
  • After six years of ZIRP, assets prices have soared but growth has not. Now, countries are waging currency wars to cheapen their exports and steal market share from the (former) allies.
  • Negative interest rate policies (NIRP) are weapons in the currency wars and, as is true of many weapons, there are collateral damages.
  • The NIRP math is simple: negative yield equates to a guaranteed loss on bonds, cash deposits and  funds where the fees either exceed the puny yields or exacerbate the negative ones.
  • “Some €1.5tn ($1.7tn) of eurozone government bonds with a maturity of more than one year — almost a quarter of the total — yield less than zero, according to JPMorgan’s calculations. Yields are also negative on Swiss and Japanese bonds.” (FT)
  • Negative yields are also spilling into corporate paper - the yield on Nestle’s just issued 4-year bonds has already turned negative.
  • Similarly, with new rules requiring higher reserves on larger uninsured demand deposits, late last year banks started advising large depositors to move their money or face negative rates.
  • Although, in theory, one can get “real” returns if future deflation exceeds the negative yield, no one gets real bonuses for losing “nominal” money. Remember the old Yogi Berra line: “In theory there is no difference between theory and practice. In practice, there is.”
  • One might profit under NIRP by flipping assets if yields get even more negative but, in the end, someone must lose. We believe that allocation preferences are about to undergo changes.                            
  • Merrill Lynch agrees. Its newly published analysis of NIRP implications focuses on gold: ”With 16.1% of all government bonds outstanding delivering a negative yield, there is no end in sight to the global savings glut. Many central banks will thus continue to expand money supply and charge investors to park their money just as cross-asset volatility picks up. Brace for gold singularity.”  - Negative nominal rates are a sure sign that the fiat money is broken.
  • The main objection of to owning gold - storage costs and no income - has now been removed. As more financial assets offer “return-free risk”, a search for viable alternatives is about to bring gold back from its recent “exile.”
  • If one has to pay for holding money, why not use a vehicle that is no one’s liability, cannot default or become worthless? Only physical gold offers these advantages and, we believe, they are about to be rediscovered.

Bottom Line:

  • If cheap money was the path to prosperity, where did Zimbabwe go wrong?
  • NIRP is akin to the Chinese water torture - innocuous at first but give it time… We believe NIRP will grow unbearable because without nominal returns, asset managers lose clients.
  • Unlike bonds, MM funds and bank deposits, physical gold stored outside the financial system has no credit, currency or counter party risk - gold bars do not get “restructured” or impaired. Such has been gold’s track record over several millennia and no evidence suggests otherwise.
  • We believe gold bullion’s attractiveness in the current environment will come into sharp focus as the Western asset allocators seek alternatives to the growing menace of NIRP. Being ahead of the pack should be handsomely rewarded!


TOCQUEVILLE BULLION RESERVE (TBR) is a private vehicle that allows individuals and institutions to take full advantage of gold bullion’s universal liquidity and independence from financial systems and currencies. TBR structure offers safety and utility of liquid financial instruments and payment networks, without exposure to financial institutions and capital markets. Our unique full-service approach ensures security, compliance, transparency, daily liquidity and global deliverability of private bullion holdings.*

This letter was prepared by TERA Management LLC and is for information purposes only. Neither the information nor any opinion contained in this letter or any appendices constitutes a solicitation or offer by TERA Management LLC or any affiliates to buy or sell any securities or other financial instruments or provide any investment advice or service. TERA Management LLC does not undertake to advise of changes in its opinions or information contained in this letter. Any data included in this letter is obtained from sources believed to be reliable but cannot be, and is not guaranteed by TERA Management LLC. Any opinions or projections expressed herein are those of the TERA Management LLC and cannot and should not be relied upon as representations of fact or investment advice. Past returns cannot be relied upon as a predictor of future performance. No material from this letter may be used, reproduced or otherwise disseminated in any form to any person or entity without the explicit attribution to TERA Management LLC or Tocqueville Bullion Reserve.

* Please refer to the offering materials for specific details.

John Hathaway, CFA, Senior Managing Director, Co-Portfolio Manager

Mr. Hathaway is a co-portfolio manager of the Tocqueville Gold Fund, as well as other investment vehicles in the Gold Equity Strategy. Mr. Hathaway also manages separately managed accounts for individual and institutional clients.  He is a member of the Investment Committee and a limited partner of Tocqueville Asset Management ( Mr. Hathaway began his career in 1970 as an Equity Analyst with Spencer Trask & Co. In 1976, he joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, he founded Hudson Capital Advisors and in 1988 became Chief Investment Officer of Oak Hall Advisors. He joined Tocqueville as a Senior Partner in 1998. Mr. Hathaway has a BA degree from Harvard College and an MBA from the University of Virginia.  

Simon A. Mikhailovich, Managing Director

Mr. Mikhailovich is a member of the TERA executive board and lead manager of TBR. Prior to co-founding TBR, Mr. Mikhailovich co-founded Eidesis Capital, a special situations asset management firm formed in 1998. Since inception, Eidesis has raised and deployed over $2.5B of capital through special opportunity funds focused on strategies in high yield corporate bonds and loans, credit derivatives, distressed CDOs and mortgage securitizations, and gold. Between 1985 and 1998, Mr. Mikhailovich was a Portfolio Manager at Falcon Asset Management overseeing private placements and alternative investments in hard assets, including direct investments in oil and gas properties, timberlands and agricultural ventures. During the early 1990s, he headed a global workouts effort responsible for the restructuring and disposition of non-core businesses in North America and Europe. Mr. Mikhailovich received a M.S. in Business (Finance) from the University of Baltimore and a B.S. from Johns Hopkins University.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."
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