2011 Cabot Investor Conference - Keynote Speaker

CABOT’S 22ND ANNUAL INVESTMENT CONFERENCE & LUNCHEON Friday, September 23, 2011

Robert T. LuttsPresident & Chief Investment OfficerNEW ECONOMIC ORDER:Currency, Stocks, Governments andGold

A CHANGING WORLD“It is not the strongest of the species that survives, nor is it the most intelligent,it is the one that is the most adaptable to change.” – Charles Darwin

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OUTLINE Governments – Status of Fiscal Crisis Currency and Interest Rates – Temperature of patient Why Should One Should Take Risk Today?  Alternatives to equities are fading  Long-term conditions excellent Corporate Conditions –Steady and Fairly Strong Gold and Precious Metals

Status of World Financial Markets Governments and Consumers (US and many Developed Economies) are now overleveraged Deleveraging Cycle – It takes time to remove debt Top-Line Growth Will Be Challenging – Manage profits Employment Growth Elusive – may recover very slowly Global Growth Concerns and Deflation Concerns

GOVERNMENTS: Far Too Important Today (They Control Debt Pile) Currency Debasement – Watering down value of currency. Currency Debasement – Has been carried out by central bankers since beginning of time. Printing of money – more money chasing the same amount of goods and services. This eventually leads to inflation!  Roman Empire – Gold Coins, Silver Coins, Base Metals  Central Bankers – No central banker has ever had the opportunity to debase without doing so.  Government Strategy – Financial Repression

GOVERNMENTS: Solutions to Sovereign Financial Crisis• Reform Financial Management of Government – This will take decades and will not likely have positive impact for many years. It is possible we will not really reform at all.• Inflate Economy To Create Growth – This is the path the Federal Reserve is taking. Today the Fed and other Global Central Bankers are creating money to give governments the ability to invest and create a new wave of growth. Problem: The cost is high – currency debasement leading to inflation. Not understood by average citizen.• Most Likely Outcome – A watered down version of Reform that looks more like the same as the last few years. In this case we are confident gold goes higher and currency values decline further relative to real assets.

What is Currency Debasement?1. More Dollars Chasing the Same Goods – Classic definition of inflation2. Fed – Bernanke has Chosen the Inflation Route – The cost is your dollar’s value fading fast. (UK, Europe are taking this path as well.)3. Debt Burden Large and Growing - $14 Trillion Official Debt. Value Destruction – Burden on Future Generations – A Debasement Factor4. Gold and Precious Metals – A real asset impervious to currency debasement.

Debasement is Not a New Strategy

What Can You Do to Protect Against Currency Debasement?• To Understand Currency Debasement - “Gold – Once and Future Money” – Nathan Lewis (A history of central bankers over 2000 years – all have debased the currency). “Empire of Debt” – The Rise of an Epic Financial Crisis – Bill Bonner and Addison Wiggin• Real Asset Strategy – Precious Metals – Gold, Silver, Platinum, Diamonds, Land. Stocks – represents real assets – although it is difficult to manage profits in inflationary periods. Protect wealth with a healthy dose of these asset classes• Gold – A Very Difficult Asset Class to Analyze – See www.eCabot.com for our white papers on this topic. Or, www.gold.org, the World Gold Council website. Another resource is “Hard Money”, Shayne McGuire, 2010 Wiley. (I believe it is the single best gold book ever written.)

Allocation to Alternative Assets Currency Protection – Gold and Gold mining Shares, Silver, Diamonds, Platinum other precious metals International Bonds – High-quality sovereign bonds Fixed-Income Hybrids – High Yield, Preferred, Convertibles, Floating Rate Notes Non-US Currency Securities – Yield plus protection from weaker dollar Commodities – Energy, grains and other indexes

Anticipate Inflation to Increase in Next 2-3 Years• Risks Today - Bond market is in a large bubble.• 10-Year Treasury Yield 2.0% - Not compensating you for interest rate risk or credit risk.• Manipulation of Interest Rates or Real Recession Fears? – Both. Federal Reserve is buying about $20 billion per week to keep interest rates low!• We Believe the Fed Will Get Its Wish – Reflation will be Successful. Side effect: 2-5 years will create higher levels of inflation.

Where Are We Today? Long-term Perspective30-Year Chart of 10-Year Treasury Yields Thirty Year Chart of Ten Year Treasury This Trend Yields Will Eventually This Trend Will Eventually End – When? End

Where Are We Today? Short-term Perspective30-Year Chart of 10-Year Treasury Yields Depression Fears Abated Double-Dip Fears Again

Positive Considerations• Economies Adapt in Time – Conservative economic thinking is spreading like wildfire.• What is Important After Crisis: TIME – We are healing and adapting now. Risk taking is slowly coming back into the markets.• Economic Data – Glass is more than half full today.• There are Bull Markets Today – It is not all bad.

Bullish Factors• Investor Psychology – Investors have given up on equities today. This means opportunity!• One needs to think positively when all others are fearful.• Markets today are looking forward 12-18 months.• Governments Strategy – Move money to active risk-taking places. This is beginning today and will accelerate once confidence levels rise.

4 Reasons Why Not to Give Up on Stocks1. If you wait for clear signs of economic improvement, markets will already be much higher. Stock market discounts 12-18 months ahead.2. Time is on your side. Once you have 10 years of close to zero performance in broad-based equity indexes, large opportunity is likely just ahead!3. Money flows are ultra-bullish and monetary conditions are ultra-bullish. Contrary indicators here are helpful.4. Classic Bullish Signs: Corporate Buybacks, Insider Buying by CEOs and Corp Officers are both at very high levels. These buyers usually know value better than most.

Why Equities Now? Low 12-year Returns = High Expected ReturnsDOW JONES INDUSTRIALS AVERAGE 10-YEAR ROLLING RETURNS 20% 15% 10% 5% 0% Dec-19 Dec-39 Dec-44 Dec-64 Dec-69 Dec-89 Dec-94 Dec-24 Dec-29 Dec-34 Dec-49 Dec-54 Dec-59 Dec-74 Dec-79 Dec-84 Dec-99 Dec-04 Dec-09 -5% -10% NOW! -15%

16 Year Trading Range15 YearTradingRange

We AreHere Now!

Gold Bull Market - Primary Drivers• Central Bankers Debasement Activity – Printing $$$• Investment Demand is Accelerating – There are three phases of a bull market. We are now in Phase Two. Phase Three is the most interesting and most profitable!• Wealth and Power Building in China and India – These investors love gold.• We Believe Institutions (Pension and Profit Sharing $) Are Just Discovering Gold – Evidence of this just beginning.

Investment Demand For Gold Bullion Is Growing

30 Years Ago, GoldRepresented 2.5% of AllFinancial Assets Today Approx .70 percent

If we project a 15x increase from $400Move from $40 to level, we could reach$600 price was a $6000 per ounce. This15x total increase is consideredover 11-year period. impossible today!

What Happens if Institutional Investors Start Buying Gold? It would be like an elephant jumping into a bathtub! 1% of World Wealth - $1.3 Trillion. This equates to 20 times the amount now invested in GLD (ETF) or 20 times annual mine production globally.

What Is the Public Doing With Gold Today?1. They Are Selling – Ask a local jeweler.2. Gold Parties: MyGoldParty.com – Large part of the public is not joining the bull market in gold.3. Public Is Buying Gold Coins and Bullion.4. How Does Cabot Buy Gold? – Bullion (GLD), Gold Miners (GDX and PSAU) and Gold Companies like Barrick Gold (ABX)

What Is America Reading about the World Financial Markets Today ?• There is a bull market in books promoting fear!• The titles do not paint a pretty picture.• Considering America is focused on these subjects, it is a wonder anyone takes any risk at all!

Will the bull return? If so, when?

Established Bull Markets Today China, India & Brazil – Emerging Middle Class Dramatic outperformance of these equity markets over last ten years. Internet Productivity Companies – New Products and Services Productivity Companies (technology) – Leading Change Gold and Precious Metals – Seven-Year Bull Market

Tianjin, China

Singapore

São Paulo, Brazil

Beijing, China 2002

Tianjin, China

Jaipur, India

We travel both globally and locally!

Where Are the Coming Opportunities?1. Internet Networks are changing everything. Internet arrived about 25 years ago. Email gained popularity in the late 1980s. An internet that links 100 million people is not worth 10 times one that links 10 million people. In fact, due to massive connective power, a network that links 100 million people is really worth much more than ten times the one that links 10 million. Most of the productivity benefits in the internet are in the future. We are expecting many great investment opportunities in this space.

Where Are the Coming Opportunities?1. Internet • Mobile Data – Wireless Proliferation • Cloud Computing • Software – Smart Phones, E- Readers, Migration to Digital • Search – Application Market, Medical Applications • Networks – Infrastructure • Unique Use of Internet

Where Are the Coming Opportunities?2. Energy Energy complex is the single largest sector of our economic world and has changed only moderately in the past 50 years. Cars are essentially the same technology – better, but the same engine. Electricity is also generated pretty much the same way it was 50 years ago. We anticipate some very large opportunities to invest in wealth creating ideas in the coming decade. Solar, Wind, Advanced Materials, Battery Technology, Clean Energy, Climate Change are just a few of the incredible new developments we anticipate. Large fortunes will be created for those who think big and invest in the winners!

Where Are the Coming Opportunities?3. Healthcare • Demographics favor this space in the USA. • Cardiac technology • Diabetic Trends / Preventive Medicines • Best-in-Class Medical Devices • Next Generation Drugs • Healthcare waste Disposal

Where Are Coming Opportunities?4. Emerging Middle Classes: China, India and Brazil • Retail and Healthcare • Travel and Transportation • Banks • Insurance and Education • Auto • Internet and Advertising • Infrastructure

CHINA: Opportunity and Risk• Companies in China – have double the profit margins of US Companies: Why?• Lower government infrastructure costs• Lower taxes• Lower healthcare expenses• Lower executive salaries• We anticipate outperformance in China for many years• Volatility – Will Continue to Be High. Markets are Immature.

To Succeed Today One Needs• Flexible Thinking. Do not be afraid of change – Embrace it!• Use Risk Management Techniques: – Size of positions – Loss discipline – Diversification strategy• “It Will Go Well – But It Will Not Be Relaxing!” Greg Esterbrook

IN SUMMARY Longer-term we are constructive and bullish, but shorter-term we are more cautious and defensive. Government solutions and the new economic order will work in time. We will adapt and manage. Currencies will be depreciated. Overall economic conditions will improve in time. Capitalism will not disappear – economic growth will again reassert itself. Patience and a conservative strategy will be rewarded.

QUESTIONS Thank you for joining us today.

2011 Cabot Investor Conference - Keynote Speaker

by cabotmoney on Nov 11, 2011

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2011 Cabot Investor Conference - Keynote Speaker — Presentation Transcript