“...there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few, gold has been the asset of last resort."
- Anthony C. Sutton, British and American economist  

Why are we focused on physical gold now? As contrarian investors, we have devoted our careers to finding “ahead of the curve” opportunities. We follow market cycles and, over the past 20 years, have successfully identified a number of major cyclical turns. Physical gold is our chosen way to position for the next approaching turn.

In 1998, anticipating a turn in gold prices, we started a gold equities fund. In 2002, we started a fund to profit from credit recovery after the crisis of 2000. In 2006, expecting another crisis, we launched funds to position for it. As the crisis unfolded in 2008, our bets paid off, but only because the government bailed out our counterparties. Had we relied solely on Lehman Brothers, we would not have been paid. This raised two crucial questions - why did a breakdown happen and could it happen again? After all, there have been multiple financial crises since the WWII but none of them have caused a systemic breakdown.

During 2009-2011, while pursuing distressed CDOs and mortgages, we spent time studying the history of debt supercycles. To understand the current supercycle, which started after rates peaked in 1981, we examined the worlds of economics, finance, currencies and monetary policy only to conclude that events of 2008 were symptoms of the supercycle entering its terminal stage. 

Once rates bottomed in 2008, the refinancing game of taking on more debt without paying more interest has run it's course. Now, every dollar of new debt increases the debt service burden. Indeed, since 2008 global debts have increased further by 40% forcing central banks to keep the benchmark rates at zero (or below) in an attempt to keep the debt party going. 

After seven years of zero rates, the "going" is getting tough. Rates cannot remain at zero forever but, as the 2015 Fed's 'normalization' attempt proved, neither can they be raised without triggering acute volatility. Combining excessive leverage with acute volatility is a time-tested recipe for losing a lot of money.

“Every debt gets paid off. The only question is who pays - the borrower or the lender?”
- James Grant, Grant’s Interest Rate Observer   

Over the past 35 years, the world has accumulated more debt than can be repaid or even serviced. Every obligation is someone’s asset and whenever financial obligations cannot be met, financial assets get devalued. History is clear - every debt supercycle has ended in devaluation of financial assets, a wealth transfer and a restructuring of the financial system. This time will be no different. 



"The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies."
- International Monetary Fund, 2016

The approaching transition poses two challenges:

  • How to protect capital from the approaching turn in the Debt Supercycle?  
  • How to profit from the fallout?

Risk management requires diversification but financial assets have all become highly correlated. Prudence requires a backup plan but using traditional hedges as a backup relies on financial counterparties that may fail to perform in a crisis. Financial backups must be independent from the financial system, just as backup generators must be independent from the power grid.

“When nothing happens for a long time people begin to assume that nothing ever happens. But something always happens in the end." 
- Steven Lagavulin, Writer

Our search for an effective solution has led us to physical gold, which uniquely combines low correlation to financial assets, complete independence from the financial counterparties and global liquidity under all market conditions. Once we moved from a thesis to execution, we realized that none of the existing gold ownership vehicles met our criteria for a proper backup plan. In 2011 we created a gold ownership vehicle that met our criteria and on January 1, 2014 merged it into TBR to enhance our offering.   

Unlike financial hedges, gold has no expiration, no decay, will never become worthless and does not rely on anyone’s promise to perform. Having declined since 2011 on the back of a belief that the system had been fixed, physical gold offers a cheap option with a potentially outsized payoff.

Those with a backup plan can afford to be right or wrong; those without it can only afford to be right.  We believe that the best defense is a good offense - the most effective way to protect capital is to have backup plans that empower you to buy when everyone else is forced to sell. This requires access to fully independent liquidity, which only physical gold can provide. 


Neither the information, nor any opinion contained in this message constitutes a solicitation or offer by TERA Management and/or Tocqueville Bullion Reserve L.P. or any affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. Any data included in this communication is obtained from sources believed to be reliable but cannot be guaranteed by TERA Management and/or Tocqueville Bullion Reserve L.P. Any opinions expressed herein are those of the TERA Management and/or Tocqueville Bullion Reserve L.P. and cannot be solely relied upon as representations.

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