The Case for Gold
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The Case for Gold

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Case outlining the fundamentals for a coming currency collapse in the US dollar and the rise of alternative assets like gold.

Case outlining the fundamentals for a coming currency collapse in the US dollar and the rise of alternative assets like gold.

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The Case for Gold Presentation Transcript

  • 1. Private & Confidential+ The Problem – Government Debt Section 1
  • 2. Private & Confidential+ Sovereign Default Scale (SDS) Key$Rao:$Total$Govt.$Debt$to$Govt.$Revenues$
  • 3. Private & Confidential+ Sovereign Default Scale (SDS) Key$Rao:$Total$Govt.$Debt$to$Govt.$Revenues$ Debt$to$Govt$ $Mean$μ$value$ Sample$Size$ Sample$period$ 95%$ Revenues$Rao$ Confidence$ interval$ Value 4.2^ n=89 182722003 0<x<9.0 ^Thisisthemeanvalueatwhichsovereigndefaultshaveoccurredinourdataset. Debt$to$Govt$ 1.0$ 4.0$ 7.0$ 9.0$ Revenues$Rao$ Default 13% 60% 88% 95% Probability**Source:)Derived)from)Reinhart)&)Rogoff)“This)Time)is)Different”;)Primary)Data)sources)include)League)of)NaBons,)Mitchell)(2003a,2003b),)the)United)NaBons.)))Analysis)of)currency)crisis)and)sovereign)defaults,)either)explicit)(bond)defaults))or))implicit)(currency)devals,)excessive)inflaBon)or)haircuts).)P(x))based)on)frequency)of)occurrence.))
  • 4. Private & Confidential+ Examples of Defaults in our data set DebtRaQosattheQmeofdefault Rao$of$ Rao$of$ Year$of$ Total$Public$ Year$of$ Total$Public$ Country$ Country$ Default$ Debt$to$ Default$ Debt$to$ Revenue$ Revenue$ Mexico 1827 4.20 SouthAfrica 1985 1.32 Spain 1877 15.83 Russia 1998 4.95ArgenQna 1890 12.46 Pakistan 1998 6.28Germany 1932 2.43 ArgenQna 2001 2.62 China 1939 8.96 Turkey 1978 2.69 Source:)League)of)NaBons)&)United)NaBons)datasets Mexico 1982 5.06 Brazil 1983 1.98Philippines 1983 1.25
  • 5. Private & Confidential+ “Safe” countries have defaulted before. Takealongerhistoricalview.Ithashappenedbeforemany,manyQmes. A+$or$higher$ Years$of$Default$ Event$ rated$“Safe”$ Countries$ UnitedStates 1790,1933 1790:Interestpaymentsdeferredfor10 years 1933:GoldClauseabrogated.USrefused topayPanamaannuitydueingoldunder 1903treaty,offeringinsteadotheropQons UK 1749,1822,1834, ConversionofDebtintolowercoupon 188821889,1932 rates UnitedStates: 1841–1884 10statesdefaultedorrepudiatedtheir StateGovts debts Source:)Reinhart)&)Rogoff)“This)Time)is)Different”)2009
  • 6. Private & Confidential+ “Safe” countries have defaulted before. Takealongerhistoricalview.Ithashappenedbeforemany,manyQmes. A+$or$higher$ Years$of$Default$ Event$ rated$“Safe”$ Countries$ Canada(Alberta) 1935 ProvinceofAlbertadefaultedfor10years China 1921,1932 InterestRatesreducedforciblyfrom9to6 percent,amorQzaQonperiodsdoubled Spain 193621939 Interestpaymentssuspended Germany 1932,1948 Limitedcurrencyholding,parQalaccount seizureandblocking Source:)Reinhart)&)Rogoff)“This)Time)is)Different”)2009
  • 7. Private & Confidential+ “Safe” countries have defaulted before. Takealongerhistoricalview.Ithashappenedbeforemany,manyQmes. A+$or$higher$ Years$of$Default$ Event$ rated$“Safe”$ Countries$ Japan 1946–1952 ExcessiveInflaQon,forcedcurrency conversionintonewnotes Austria 1945 Schillingreform,50%ofdeposits temporarilyblocked Russia 1998–1999 $39billiondefault ArgenQna 2002–2005 Dollar2denominateddebtforcibly convertedintopesos Source:)Reinhart)&)Rogoff)“This)Time)is)Different”)2009
  • 8. Private & Confidential+ Closer Look: European Default Tally Sinceindependenceor1800topresent(2008) Total$ Total$ Source:)Standard)&)Poors,)Purcell) and)Kaufman)(1933),)Reinhart)&) number$of$ number$of$ Country$ Country$ Rogoff)(2009),)Reinhart,)Rogoff)and) defaults$or$ defaults$or$ Savastano)(2003a) rescheduling$ rescheduling$ Austria 7 Norway 0 Belgium 0 Poland 3 France 8 Portugal 6 Germany 8 Romania 3 Finland 0 Russia 5 Greece 5 Spain 13 Hungary 7 Sweden 0 Italy 1 Turkey 6Netherlands 1 UK 5
  • 9. Private & Confidential+ Selected Countries Debt Levels Default$ Government$ Debt$to$Gov$ Govt$Revenues$ Probability$ Current$Status$ Debt$ Revenues$ Esmate$%$ UnitedStates $15.03T $2.3T 6.53 85%$ OK$ Yields$rising$ Italy $2.3T $960B 2.40 35%$ dangerously$ Greece $533B $132B 4.04 60%$ In$Default$ UK $9.0T $926B 9.72 95%$ OK$ Yields$rising$ Spain $2.2T $503B 4.37 65%$ dangerously$ France $4.70T $1.23T 3.82 55%$ OK$
  • 10. Private & Confidential+ Fundamental Analysis   Webelieve that most Western countries are at a high risk of some form of sovereign default in the next 10 years due to over-indebtedness, including the US and UK.   Greeceis the canary in the coal mine. Small countries with less liquidity default first, followed by larger countries.   Alternative ratios of debt burden calculation such as Debt-to-GDP, Debt-to-Exports etc point to a worsening and likely unfixable fiscal situation.
  • 11. Private & Confidential+ Market pricing of default risk Section 2
  • 12. Private & Confidential+ Market Pricing of Sovereign Default   Marketpricing of sovereign default risk is shown through:   Yields on public debt   Credit Default Swaps (CDS) pricing   Webelieve that markets are fundamentally short-sighted. Companies focus on quarterly earnings. Fund managers on annual performance. If an event is very unlikely to happen in the next 12 months, it may be improperly priced.   Sovereign defaults are very rare “Black Swan” events that may happen only 1 or 2 times for a country in 100 years.
  • 13. Private & Confidential + Pricing of Greek CDS Inefficient5000+ Pricing Level based on fundamentals2009: Accountingshenanigans disclosed. 30% default 50% default lossDebt burden much larger loss settlement settlementthan expected. proposed proposed
  • 14. Private & Confidential+ Inefficient Pricing   Greece’sfundamentals and public finances remained unchanged, in bad shape, from 2009 to 2011. Markets realized too late that a default was the most probable event.   Markets, as well as rating agencies, are too late to predict and price a sovereign default since they are so rare.   Webelieve that the full default risk is not currently priced in for US and other major European nations.
  • 15. Private & Confidential+ Trading Strategy Section 4
  • 16. Private & Confidential+ Print$Money$$ Default$ Balance$Budget$ EsQmatedProbability 80% 15% 5% MonetarySupply InflaQonary DeflaQonary DeflaQonary Unemployment High High High HedgingNeeds ForinflaQon DefaultprotecQon Asset2priceprotecQon Decline$shortWterm,$ PreciousMetals Increase$ Increase$ increase$longWterm$ CreditorcountryHigh2 Increase$ Increase$ Increase$ YieldFixed2Income
  • 17. Private & Confidential+ Trading Strategy – Option #1   Precious metals-only   Long-only, physical bullion stored in Swiss or Australian Mints   Leveraged 3:1   3-year price target   Gold $2800/oz   Silver $45/oz   Speculative strategy with high- return and risk profile
  • 18. Private & Confidential+ 10-year Historical Gold Prices
  • 19. Private & Confidential+ Central Banks: Net Buyers now   Central Banks are the largest and most stable holders of gold bullion   Theyhave reversed a 20-yr selling trend (1989 – 2008), and since 2009 have become Net Buyers of gold   Thisis extremely bullish for the long-term prospects of gold, since the gold rally from 2000 – 2008 was despite the fact that central banks were Net Sellers.   Only1% of China’s reserves are currently in gold. China is expected to add another 3000 tonnes over the next 5 – 7 years to diversify reserves away from USD.
  • 20. Private & Confidential+ Central Bank Gold Purchases Net Purchases800 728600400 347 350200 0 2002 2003 2004 2005 2006 2007 2008 -123 2009 2010 2011(est)-200 -346-400 -380 -396 -446 -535-600 -587-800
  • 21. Private & Confidential+ Why are Central Banks buying?   Diversify reserves away from declining real values   All major currencies (USD, Euro, Swiss Franc, Yuan, Yen etc) are engaging in money printing (QE etc)   Low-interest rates globally in the major currencies   Easy-money policies causes their reserves to be inflated away   Hedge against currency collapses or major devaluations of particular countries or currencies   Hedge against sovereign debt default, geo-political risk, or major financial meltdown   It is food for thought that major central banks around the world consider these scenarios probable enough to buy large amounts of gold bullion