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Did You Know… Gold can protect your liquid wealth from the cyber threat?

John Hathaway and Simon A. Mikhailovich
April 28, 2015

“From 2013-2015, the Director of National Intelligence named 
the cyber threat as the number one strategic threat to
the United States, placing it ahead of terrorism…”
The DOD Cyber Security Strategy, April 2015
 

Did You Know… Gold can protect your liquid wealth from the cyber threat?

  • The newly released Pentagon’s Cyber Security Strategy  opens thus: “We live in a wired world. Companies and countries rely on cyberspace for everything from financial transactions to the movement of military forces. <…> Organizations of every kind must build business continuity plans and be ready to operate in a degraded cyber environment where access to networks and data is uncertain.”
  •  In early April president Obama signed an executive order aimed at combating cyber attackers, which stated: “…the increasing prevalence and severity of malicious cyber-enabled activities originating from <…> outside the United States constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States. I hereby declare a national emergency to deal with this threat.”
  • Last Friday afternoon, Starbucks’ POS (point of sale system) crashed, instantly shutting down business at all 14,000 North American locations. Unlike the local stores, national chains rely on the centralized systems. Unable to accept payments, many stores gave out free coffee. One should not count on the banks to give out free cash if or when financial networks experience a disruption.
  • Modern financial system cannot function without centralized networks, which, in turn, rely on the electricity and the Internet. In a world where open outcry trading and paper records have gone the way of the Dodo bird, what would happen if critical networks were to become disrupted for a period? Would one be able to transfer funds or access cash? How would financial institutions know who owns what?
  • Cyber threats can be natural or manmade. When lower Manhattan lost power during hurricane Sandy, residents had to walk miles to recharge phones, access the Internet, get cash, food and other essentials.
  • Despite the natural disasters and the well-publicized cyber attacks on Target, JPM, Sony and even on the White House email system, cyber threats remain esoteric for most investors and policymakers. Technology has evolved faster than the awareness - in 20 years the Internet went from an obscure novelty to carrying almost 100% of all telecommunicated information. 
  • The US government has finally woken up to the fact that crippling cyber attacks can be launched from any laptop located anywhere in the world.  Systemic failure can occur without a warning, instantly disrupting critical infrastructure and leaving the population without access to communications, money, food, water, power, fuel, etc.
  • Why all the fuss and why now? We believe that dramatic increase in the level of cyber threats is due to a convergence of technological, geopolitical and macro-economic factors:
  • Reliance on cyberspace has reached critical mass; society can no longer function without it.
  • There are no ready alternatives to the TBTF banks, electronic exchanges or payment networks; all mission-critical financial operations and records rely on cyber infrastructure.
  •  Cyber security lags cyber reliance leaving all critical systems exposed to failure or attack.
  • Cyber threats are asymmetric - any evil genius with a laptop can rob banks or sabotage key infrastructure of advanced economies without leaving home.
  • The US has “weaponized” financial infrastructure and the US$ as key policy tools in pressuring adversaries; this makes financial system a prime target for retaliation in case of an escalation.
  • The escalating US-Russian conflict highlights the asymmetry - if Russia disrupted NYSE, how could we respond, short of launching a real war? Disrupt the Moscow stock exchange? Exactly.
  • By any historical measure, current financial conditions are extreme making the overall system especially vulnerable to negative surprises, including cyber disruptions of the financial system.    

Bottom Line(s):

  • Every prudent investor should have a Plan B. Please consider how far the cash in your wallet and home would go if access to financial assets were to be disrupted for more than a few days. 
  • There is no better way to withstand a crisis than to have ready liquidity when others desperately need it. 
  • Gold offers a unique store of uncorrelated liquid purchasing power. Unlike bank accounts and electronic securities, gold bars kept outside the financial system are fully immune from all cyber threats.
  • When held within a properly structured, legally compliant non-bank vehicle, physical gold can be used to efficiently settle domestic and international payments without involving financial institutions.

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.*

Visit us at www.bullionreserve.com

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. 

TERA Management | 41 West 57th Street, New York, NY 10019 | 212-792-2170

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 (www.tocqueville.com). 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.

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