My presentation at the Singapore 2016 Mutual Fund Directors Forum

1. The Case for Gold & Silver
Dr. Thomas Frankl
Founding Manager Phoenix Gold & Silver Fund,
Geneva, Switzerland
‘If something can’t go on forever, it will
stop’
(Herbert Stein)

2. Contents
• Economic Diagnosis
• The Effects of NIRP / ZIRP
• Fiat Money versus Physical Money
• Fractional Gold and Silver Markets
• Invalidating the Case for Gold and Silver
• Alternative Asset Classes ?
• Black Swans
• When will the Tide Turn ?
• Fund Management and Investment Strategy
MFDF_TF 6 May 2016 2

3. Economic Diagnosis
• Low interest rates encourage profligacy, excess,
waste and unproductive investments while punishing
thrift and saving
• Fractional banking taken to extremes has created a
highly unstable global financial system
• Resources are redistributed from savers to borrowers
and from future generations to current voters and
cronies
• Politicians and central bankers show little willingness
to inform the public about the magnitude of the
economic problems, the lack of solutions, and the
cost of possible corrective actions
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4. Economic Diagnosis, cont’d
• The global financial system is still (+/-) functioning, yet the ever-
escalating ‘unconventional’ measures by central banks and the
unwillingness of governments to implement painful structural
reforms has increased systemic instability to a critical level.
• Central banks have neither the means left, nor the credibility to
contain the coming financial collapse.
• The collapse will require a reset of the global monetary system,
similar to Bretton Woods after WW 2. Those countries that own
the most gold will sit at the negotiating table.
• Nobody knows how many more snowflakes it will take to trigger
the global financial avalanche.
“We all know what to do, we just don’t know how to get re-
elected after we have done it.” (Jean-Claude Juncker, head of
the Euro-Group, in July 2014)
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5. The Effect of NIRP / ZIRP
• Central banks, namely the Fed, expected a ‘wealth
effect’ from low/zero interest rates (ZIRP): people
owning stocks would feel wealthier and consume more
• In reality, the savings rate keeps increasing as incomes
stagnate and people feel more and more insecure
about the safety of their jobs
• Negative Interest Rate Policies (NIRP) in CH, Denmark,
Japan, etc. has led to increasing retail gold sales:
– 33 metric tons of gold sold in Japan in 2015 vs. 18 in 2014
– Gold bar sales climbed 35% in Q1, 2016
• Gold is the ideal store of value: NIRP has led to a
shortage of bank safe deposit boxes: CH-based Cartier,
Bulgari, Bucherer boutiques now rent out safe space as
bank safes are all rented outMFDF_TF 6 May 2016 5

6. MFDF_TF 6 May 2016 6
The NIRP Zone

7. MFDF_TF 6 May 2016 7
NIR(wana) Bonds ?

8. The Fed’s ‘Unconventional Policies’
had only a limited, temporary effect
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9. Social Dynamite: Income Inequality
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10. Income Inequality & Wealth Distribution
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11. QE cannot forever prop up markets
markets
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12. MFDF_TF 6 May 2016 12
Money Printing: USA

13. MFDF_TF 6 May 2016 13
Money Printing: Japan

14. Japan: Debt Crisis Looming
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15. China: Debt Crisis Looming
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16. Debt is unsustainable at 5% GDP growth
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17. Fiat Money vs. Physical Money
• As paper currencies, USD, EUR, JPY etc. are
money but they are based on faith and trust (‘fiat
money’), having no intrinsic value. With trust
comes the possibility of betrayal.
• Au & Ag is money (or relative to USD, EUR, JPY,
etc. - currency) with an intrinsic value defined in
relation to fiat money.
• Like all moneys / currencies, Au and Ag don’t
offer any yield; they are therefore not an
investment (gold miners are) but a store of value
and for some, an insurance.
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18. Fiat Money vs. Physical Money
• Au & Ag are the only precious metals available in sufficient
quantity to serve as money.
• They are physical money – all other currencies exist almost
entirely (less than 8% for the USD) in electronic form only.
• All bank accounts carrying electronic money are
themselves also electronic entries in the accounts of
borrowers and lenders – subject to power outages,
infrastructure, exchange and trading platform collapses,
hackers and online theft (cf. e.g. the almost successful
attempt to steal USD 1 bn from a Bangladesh Bank via the
New York Fed)
• Bitcoin as an alternative currency is subject to the same
risks
MFDF_TF 6 May 2016 18

19. Fiat Money Makers vs. Gold Miners
• E.g. the Fed: privately owned and supervised by
government
– The regional reserve banks making up the Fed are owned
by the banks in each region (e.g. Citibank owns stock in the
New York Fed)
– Controlled by the Board of Governors, appointed by the US
President and confirmed by the US Senate
– Supplier of US electronic fiat currency
– US debt of 18 trillion means that in the absence of sufficient
GDP growth Fed must create inflation to pay off or at least
sustain debt
• Gold and Silver miners: privately owned companies
subject to a large variety of jurisdictions with limited
regulation / supervision by governments
– Suppliers of the world’s two physical currenciesMFDF_TF 6 May 2016 19

20. MFDF_TF 6 May 2016 20
Five-Year Gold Price

21. Fractional Gold and Silver Market
• Derivatives, e.g. COMEX futures, ETFs, or ‘unallocated’
or ‘eligible’ gold on the COMEX
• Fractional market works if conditions are orderly and
people don’t insist on physical delivery
• Derivatives > 100 times physical market volume
• For every 100 people who think they own gold when a
buying panic begins, only one will own physical gold
• Central banks are starting to show nerves: Germany
trying to repatriate their gold from Fed custody ( so far
only fractionally successful)
• China (officially 1658 t – probably 3000t), Russia (1400
t), Iran, Turkey etc. accelerating gold purchasesMFDF_TF 6 May 2016 21

22. MFDF_TF 6 May 2016 22

23. COMEX Gold Deficit
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24. COMEX Silver
Deficit
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25. Physical Gold moves to the East
• UK sold half its reserves between 1999 and 2002
• Canada has sold all its remaining gold in 2016
• India imports 1000 t/a (mostly for jewelry)
• China (world’s Nr. 1 producer) officially imports
200 t/a – in reality much more
• Shanghai (physical) Gold Exchange to take over
from (paper) COMEX, marking the shift of
monetary power from global Nr. 1 debtor US to
Nr. 1 creditor China
MFDF_TF 6 May 2016 25

26. Silver vs. Gold
• Silver is physical money destined for daily use (cf.
‘argent’ in French stands for both ‘silver’ and
‘money’, similar in Spanish (‘plata’)
• As the most conductive of all metals its industrial
use includes solar panels and electronics
• Very little recycling due to current low prices (and
20 year life of solar cells)
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27. Silver vs. Gold
• Silver production outweighs gold production ca. 10:1
• Historic gold-to-silver ratio: ca. 15:1
• Current gold-to-silver ratio: ca. 75:1
• Due to the low price, there are almost no pure silver
miners left: Ag is mostly a by-product of mostly gold
and copper mining, hence supply unlikely to rise
strongly on rising demand
• Silver/gold ratio started to normalize in 2016;
however, In times of high prices (2011: USD 40),
silver scrap increases supply, putting a temporary cap
on prices
MFDF_TF 6 May 2016 27

28. Events invalidating the case for Gold
and Silver
• ‘Lazarus economy’ (S. Das): all skeptics are
wrong and everything goes back to (pre-2008)
normal
• Governments around the world are taking
effective coordinated steps to avoid the collapse
of the international monetary system, and to
implement structural reforms to enable GDP
growth
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29. Economic events that would invalidate
the case for Gold and Silver
• Growth in China resumes to >7 % levels
• Transportation indices rise over several quarters
• Commodity prices (industrial metals & materials)
rise over several quarters
• Global debt de-leveraging occurs
• Business inventories fall
• Corporate bankruptcies fall
• EPS (ex-corporate buy-backs) riseMFDF_TF 6 May 2016 29

30. Market events that would (ceteris
paribus) temporarily affect the case
• Substantial increase in gold supply
– Gold sales by central banks (temporary or no effect, e.g.
recent gold sales by Bank of Canada – absorbed by Bank
of China buying); low probability (central banks have
been net purchasers for several years now)
– Mining innovation leading to reduction in the cost of
extracting gold from (poor) ores; low probability
(currently no indications)
– Large investments in production and exploration; low
probability (miner capex still close to historic lows as cost
reduction, consolidation and deleveraging is No.1
priority). MFDF_TF 6 May 2016 30

31. Alternative Asset Classes to Au/Ag ?
• Government bonds: at historically high levels,
can continue to rise risk is to the downside
• US and European stocks: at historically high
levels, can continue to rise but risk is to the
downside
• EM stocks (e.g. Brazil): stocks are cheap for a
reason (commodity prices, political risk) and
will be dragged down in a globalized market
crash MFDF_TF 6 May 2016 31

32. Alternative Asset Classes to Au/Ag ?
• EM bonds: vulnerable to commodity-price induced rise
in interest rates, inflation, currency risk
• Commercial and residential real estate: record high in
prime locations due to ‘money chasing assets’ –
vulnerable to a rise in record low interest rates and
economic crisis
• Agricultural land: good soils with water supply already
expensive – illiquid
• Private Equity: vulnerable to a rise in interest rates
• Cash: vulnerable to further monetary debasement
MFDF_TF 6 May 2016 32

33. The US government and the media
keep reporting that the US economy is
improving. Do any of the leading
indicators speak for an ongoing or
even a beginning economic recovery in
the US, and/or other key regions –
thus invalidating the investment case
for gold and silver ?
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34. 1. Global Air Freight: Stalling
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35. 2. Global Air Freight, II: Stalling
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36. 3. US Freight Rates: Going slow
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37. 4. BDI at historic lows (04/2016)
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38. 5. Container Shipping Rates: Sinking
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Note: the slump in the BDI is partly caused to
the current bulk shipping overcapacities –
much less the case in container shipping

39. 6. Commodity Prices Falling
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40. 7. US Business Inventories: nearing
2008 crisis levels (03/2016)
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41. 8. Global Debt Levels: No sighs of relief
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42. 9. Corporate Bankruptcies: Rising
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43. 10. Low EPS/high P/E
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44. High-Impact Event Risk (‘Black Swans’)
• Black Swans: Catastrophic events triggered by events
unforeseen by the experts, but which in hindsight were
predictable, e.g.
– Cyber attacks paralyzing stock exchanges or other vital
financial institutions
– EU Refugee crisis leading to closure of borders, end of
Schengen Zone and possibly break-up of the union
– Loss of confidence in central bank ability to steer economies
out of crisis leading to a synchronized loss in confidence in all
fiat currencies (‘emperor has no clothes’ event) leading to a
flight into safe havens
– Japan interest rates rising to 2 % triggering default
– Large US states following Puerto Rico example and defaulting
– Greece, Portugal, Spain, Italy, France debt downgrade and
default MFDF_TF 6 May 2016 44

45. High-Impact Event Risk (‘Black Swans’),
cont’d
– Systemic banks failures:
• Italian banks currently carry EUR 360 billion of NPLs: newly
created ‘Atlante fund’ (EUR 4,25 bn) inadequately funded
• Deutsche Bank carries EUR 461 trillion of derivatives on its books
• Spanish and Portuguese banks on a lifeline
– Chinese banks defaults spreading globally before the
Chinese government is able to get the crisis under control
(foreign banks have USD 1 Trillion exposure to Chinese
banks)
– US Auto loan crisis (NPLs at 20 year high at current 5%)
– Geopolitical crisis triggered by accidentMFDF_TF 6 May 2016 45

46. Alternative Scenarios
• Japanese-style stagnation: low growth, deflation,
ever rising debt levels, zero or negative interest
rates, central banks implementing ever less
effective measures to prop up stock and bond
markets: 70% (2016)
– Gradual increase of the price of gold and silver
• Collapse of the international monetary system
(gradual or sudden): 30% (2016)
– Rapid, exponential rise of gold and silver
– Very limited availability of physical retail Au and Ag
• Lazarus economy: < 1%
– Gradual fall of gold and silver prices as improving GDP
growth is confirmed by data
MFDF_TF 6 May 2016 46

47. When will the Tide Turn ?
• The central bankers are unlikely to stop the madness and
admit their errors – they will probably continue to do
‘whatever it takes’ (Mario Draghi)
• Their arsenal of ‘unconventional’ policies is in principle
limitless: more and deeper ZIRP, helicopter money, …
• The tide will turn when markets realize that:
– Central bank invention does not even produce a marginal effect
any more
– Inflation has started to rise
– Growth will stagnate for a long time
• The latest attempt by the BoJ to devalue the Yen gives a
foretaste: currency markets have moved in the opposite
direction MFDF_TF 6 May 2016 47

48. Fund Management and Investment
Strategy
Gold Fund Proposal TF_DB_2016 48

49. Fund Management
• Lead Fund Manager Dr. Thomas Frankl
– M.A., Ph.D. (magna cum laude) University of Munich; dissertations
on trade and international monetary policies
– Economist with over 20 years of experience investing in
infrastructure, commercial real estate, equities, currencies and
commodities
– Senior management positions in Fortune 500 companies (Texas
Instruments, Intel), the air transport sector (SITA) and the United
Nations
– Co-founder and Managing Partner of Geneva-based investment
firm Airport Development Partners SA
– Since 1/2015 manager of Phoenix Gold Fund, a customer
segregated hedge fund; Performance YTD: +53%
– Professor and Head of Department at International University in
Geneva (Strategy, Leadership, Entrepreneurship, Management)
Gold Fund Proposal TF_DB_2016 49

50. Investment Strategy
• Global Macro strategy driven by fundamental
analysis
• Risk minimization over returns maximization
• No leverage
• Technical aspects only (at times) taken into
consideration if indicating extreme market
positioning
• Investment into gold and silver and gold and
silver miners, with limited and temporary use of
ETF’s with the sole intent to protect the portfolioClosed Gold and Silver Fund Proposal
TF_DB_2016
50

51. Asset Allocation
1. Gold and Silver:
Prudent use of ETF’s (only if 100% backed by
physical metal and convertible into physical metal)
– If political climate indicates possibility of extreme
policy measures (confiscation of gold), move into
physical gold / storage in secure vaults in
Switzerland (non-banks) may be required
(strategic allocation decision to be taken by Board)
Gold Fund Proposal TF_DB_2016 51

52. Asset Allocation
2. Investment into gold & silver miners based on
the following key criteria:
– Operationally diversified across geographies with
low/moderate country risk
– Only senior miners (no exploration companies
/juniors) with no/low leverage
– Among the 10 miners with the lowest AISC, i.e.
miners remaining profitable at USD 1000/oz.
levels, and able to acquire weak competitors
– Top three streaming companiesGold Fund Proposal TF_DB_2016 52

53. ‘We can only tell what the true strength of the
Pound is…by knowing the amount the amount
of gold we have behind our currency’ (Col.
Smithers in Goldfinger)
Thank You !
tfrankl99@gmail.com
Gold Fund Proposal TF_DB_2016 53