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Investor Letter, the dean of institutional gold investing, John Hathaway, Tocqueville’s Senior Portfolio Manager, outlined a compelling case for investing in gold now by looking at the following nine fundamental factors which obviously don’t include any of the bevy of black swans that might alight upon our current geo-political reality:
1. The Extreme Valuations of Financial Market Assets That gold should be viewed “as cheap insurance on a possible signi cant retreat from current valuation extremes.”
2. The Worsening U.S. Fiscal Position With the implementation of the new tax bill, according to the Tax Foundation, “the average annual loss of revenue over 10 years would be $147 billion on a static basis and $45 billion on a dynamic basis,” an environment highly conducive to Quantitative Easing.
3. Rising In ation The addition of stimuli, such as tax cuts, when the economy is already running at full steam, creates an environment for rising labor costs and a consequent rise in in ation.
4. A Precarious Financial Market Structure In the current environment of passive investing and machine-driven trading, there is a strong possibility that even a small downside correction could cause a large-scale capital ight from equities, which would cause capital-seeking safe havens to go to gold.
5. A Bullish Supply and Demand Outlook for Physical Gold
With very few discoveries of any consequence over the last decade, the gold industry can’t sustain its current production levels to meet the growing global demand. Major producers are in the most precarious position, as they are dealing with projected natural declines in their mature mines.
\[I shall elaborate more fully why this factor is particularly important – it is indeed my favorite one – when we consider NOVAGOLD as a vehicle of choice to deliver extraordinary returns to its stakeholders.\]
6. An Expected Further Weakening of the U.S. Dollar The expected increased in ation and scal de cit should create an environment conducive to a weaker dollar, which investors see as traditionally producing higher gold prices.
7. Gold as an Ideal Portfolio Diversi er and Risk Dampener
An allocation to gold has been known to be a prudent strategy to reduce downside exposure during periods of market stress. For example, it has been demonstrated that a 10% allocation to physical metal employed since 1987 would have resulted in substantial outperformance vs. a traditional 60%/40% equity/ Treasury allocation.
8. A Boost from Bitcoin In a recent interview, legendary investor Warren Bu et called cryptocurrencies, of which Bitcoin is one, a mirage. “The idea that it has some huge intrinsic value is just a joke,” he said.
\[My only observation about Bitcoin is that the explosion of interest in cryptocurrencies, rather than undermining gold, is pointing to what will happen to the gold price when it starts to move. What changed to make Bitcoin go from the perception that it’s a fraud to an asset class? The price went up. Trite as that sounds, it is a classic phenomenon: What is cheap must be cheap because it should be, and will remain so – and what is dear must be valuable, and will only get more so.\]
9. A Brief Comment on Gold Mining Shares Quality gold mining shares have traditionally performed better than bullion. The question is, what is the meaning of “quality gold mining shares”?
Clearly, for the purposes of our Annual Report, this last point
is where the rubber hits the road. In my opinion, “quality gold
mining shares” signi es equity in a gold mining company that owns assets that can be characterized by the following: a very large gold endowment that cannot be ignored; a high-grade deposit; a moves- the-needle production pro le that anyone would want to own;
strong exploration upside; stable geopolitical location(s); a long-lived production pro le requiring no replacement for many years to come; and a highly professional, ethical, shareholder-friendly management team with a well-established track record of successfully building and operating major mines. Not surprisingly, I just described NOVAGOLD, whose 50%-owned agship Donlin Gold project in fact enjoys all of these attributes. In today’s asset-starved gold industry, Donlin Gold is a category killer asset with attributes that, if it weren’t backed by 1,396 drill holes, multiple feasibility studies, extensive engagement with our partners and local stakeholders, and funding to execute on its strategy – all of which have substantially de-risked the project over the last
two decades – one might consider it a fantasy. Let’s tally up the boxes that Donlin checks in a way that, certainly in the aggregate, renders it unique in our eyes:
f An extraordinary 39 million ounces of gold in the measured and indicated resource categories alone (100% basis), not including the inferred in proximity to the pit.
f With the present endowment contained within only 3 km
out of an 8-kilometer-long mineralized trend, there is ample opportunity to discover more substantial gold outside of the future mine’s footprint. The industry needs discoveries, and I for one personally believe that the next Donlin will actually be found at Donlin Gold.
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