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Letter to Shareholders
DR. THOMAS KAPLAN CHAIRMAN, BOARD OF DIRECTORS
I have been exceptionally fortunate over the past couple of decades to have been able to follow my strongest passions in life: among others, establishing with my wife the most effective organization devoted to the conservation of big cats and the vast landscapes in which they coexist with their human
neighbors; reinforcing an abiding love for history and philosophy that comes from an immersion in the wisdom of the Old Masters; and discovering, acquiring and exploring the “category-killer” assets in silver, zinc, platinum, natural gas and gold that, in truth, allowed us to create the wealth to indulge these passions.
Gleaning from our experiences within the natural resources sector, I believe that my team has reaped the biggest rewards
taking the following steps: After engaging in a thorough review
of the fundamentals, creating a blueprint with multiple scenarios; identifying with conviction and enthusiasm the high-quality assets that would give us the best upside leverage to a successful strategy; forging the best team to execute an ambitious business plan; moving the needle radically for all stakeholders by taking these assets up the value chain; and waiting for events to unfold as we felt they would. The game plan usually requires a bit of patience and sangfroid. Some years, the experience might best be described as a roller coaster. Other years can be akin to watching paint dry. Nonetheless, an estimated 80% annual compounded internal rate of return over the 24 years since I entered the world of natural resources suggests that it is a strategy that can work.
To the extent that I have a relative advantage, it has been an ability to see markets through the prism of history and visualize what the target market (and targeted asset) will look like years hence, as well as what needs to happen to our thesis for us to get there. As this relates to raw materials, the key is finding resources where the supply- demand equation is improving markedly, and yet where pessimism is
the prevailing sentiment. In today’s world, my favorite among those resources would most assuredly be the monetary metals. The “dean” of these metals would be gold.
As we often say, gold is the asset that people love to hate and hate to love. Perhaps this is because gold is considered by many to be a refuge for the fearful. I for one, however, believe that, despite spying more black swans circling the macro environment than I can count, fear is the least of the reasons to own gold. Indeed, while gold bulls are often painted as emotional, I usually find that it is those who malign it most who are prone to a cognitive dissonance that can only be described as irrational. If someone as famously “hyper-rational”
as Ray Dalio can argue gold’s merits, those with far less successful investment pedigrees should perhaps ask themselves whether or not they might be missing something. Just sayin’.
In fact, gold’s proponents do not need the wider world’s unhappiness to trigger or buttress our good fortune. There are plenty of rational and positive reasons for owning some gold. Simply put, both supply as well as demand trends – Economics 101 – are arguing for higher prices. After a forty-year period of “demonetization,” central banks have shifted from sellers to net buyers of gold. This comes
at precisely the moment when the miners are finding that their business model is under most stress and production is set to decline. I cannot emphasize this point enough: the seeds of higher gold prices, extrinsic of favorable macro conditions, are found within the industry itself. That the fundamental headwinds of plunging reserves, looming production declines, collapsing grades (and the rising costs that follow) are posing grave challenges to the gold mining industry itself is more than sufficiently determinative in our view. That these uncertainties exist in an environment of very few gold discoveries, low exploration spending (2016 was the lowest in 10 years), and an ever-increasing time frame for project advancement from discovery to production (currently averaging approximately 20 years – yes, 20 years) means for us that a tipping point has now not merely been reached but passed.
Myths are beautiful things. I read them to my children. On a more adult level, seeing through myths is a proven way to do extremely well in the markets, particularly if you are long the best assets in
the space. I know first-hand what that looks like. Among the most common myths about gold are that it is a commodity and that it needs a weaker dollar to thrive. I dispute those assertions. When we sold our energy company in 2007, oil was over a $100 a barrel. Gold was in the $600s per ounce. As I write this, oil is a few dollars north of $50 a barrel. More interestingly, this outperformance as a commodity was similarly matched in its outperformance as a currency. The dollar
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