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  1. 1. A Case for Gold Global Demand and Supply Scenario An In-depth look into How the DollarCollapse could trigger a New Gold Rush 1
  2. 2. AgendaPart I Reasons For Collapse of Dollar and Gold Rush• Increasing US Spending• Rising US Debt• Increasing Money Supply & US Inflation• Falling Yields and China’s Highest Dollar Reserves• Stronger Euro & Other Currencies gets stronger• American Housing Bubble/Sub prime• Crude at All Time HighGlobal Gold Demand and Supply• Countries increasing Gold Reserves• Gold Mine Production StagnantPart II Current and Future Gold Price Outlook 2
  3. 3. Why do World Central banks hold Gold ? • Confidence-The public takes confidence from knowing that its Government holds gold - an indestructible asset and one not prone to the inflationary worries overhanging paper money. • Unexpected Needs- It provides a form of insurance against some improbable but, if it occurs, highly damaging event. Such events might include war, an unexpected surge in inflation, a generalized crisis leading to repudiation of foreign debts by major sovereign borrowers, a regression to a world of currency or trading blocs or the international isolation of a country. • Diversification • Economic security-No one elses liability • Physical security • Income • Liquidity Source: World Gold Council 3
  4. 4. Why does a Currency Collapse?• The Government Expands and Increases spending,• The Govt. accumulates too much debt and• The Govt. repudiates its obligations by destroying its currency. 4
  5. 5. US Government SpendingRising Government Spending US $ 2869.30 Billion. Source: Bloomberg 5
  6. 6. The “War on Terror” Expense 6
  7. 7. US Military Spending and The Rest of the World 7
  8. 8. US Military Spending as a % of GDPUS Military Spending Comprises 19.77% of the US GDP Source: Bloomberg 8
  9. 9. The Pressure Building: Rising US DebtUS $ 9.5 Trillion and Growing The Federal Treasury Direct Website 9
  10. 10. Rising US DebtTherefore to cope up with this expenditure and to keep the taxpayers happy and the constituents satisfied The GovernmentBorrowed $1 Trillion in the late 1970’s which spiraled to$ 9.5 Trillion in 2008 and growing every second. Source:Bloomberg 10
  11. 11. National Debt Clock at Times Square, New York•National Debt Clocks are electronic billboards which show theamount of money owed by the government•According to Douglas Durst, the owner of the clock, National debt isnow increasing at such a rate that his clock will be obsolete (for lackof digits) when the debt reaches the $10 trillion mark, expected inSpring 2009 11
  12. 12. US Debt Position in 2012• US National Debt is increasing at the rate of 1.77 Billion USD per day• No. of Days between today and 1 Jan 2012 – 1198• If everything else is constant, US Debt in 2012 would be $ 2.12 TrillionUSD over and above the current Debt. 12
  13. 13. Why can the Dollar Collapse?The Gap between per capita GDP andper capita Debt is widened from 1980’s and becoming worse since 2006. 13
  14. 14. Why can the Dollar Collapse? The US Current Account Trade Deficit spiraled to US $ 738 Billion since 1999.Source: Bloomberg 14
  15. 15. Why can the Dollar Collapse? The M3 Money Supply grown to Over $10 Trillion. The Data became discontinued since 2006. Where did so much money come from?Source: Bloomberg 15
  16. 16. Why can the Dollar Collapse? US Inflation rises to over 5% US Inflation6.00%5.00%4.00%3.00%2.00%1.00%0.00% 2002 2004 2006 2000 (till june) 2008 16
  17. 17. Why the Dollar is in trouble? 1 2 US Borrows to finance US then prints new spending FIAT MONEY without raising taxes. to cover the deficit. 4 3 Inflation accelerates. Currency value plunges & This causes Money people look for more Supply to rise stable forms of assets to and this causes keep their savings in. INFLATION. 17
  18. 18. International Reserves Dollar Reserves growing at 10 times the rate. Countries like China, Singapore, Taiwan, Japan, India, Poland, Russia, Mexico,Brazil have more than doubled the reserves in this decade.These reserves are in dollars whichreflects the fact that US liabilities tothe world have been growing fasterthan ever. 18
  19. 19. Chinese International Reserves China holds the largest International Dollar Reserves of $1.8088 Trillion Dollars by End of July 2008, Half its GDP. Source: The People’s Bank of China 19
  20. 20. Japanese International Reserves Japanese Dollar Reserves at all time High US $ 976.947 Billion Source: Bank of Japan 20
  21. 21. Russian International ReservesRussian Dollar Reserves at all time High US $ 597.3Billion Source: Bank of Russia 21
  22. 22. Indian International ReservesIndian Dollar Reserves at all time High US $ 305.47Billion Source: The Reserve Bank of India 22
  23. 23. Point to Ponder: An increase in reserveshas long been seen as a sign of growingeconomic strength and a solid currency. But today it is less indicative of theseNation’s strength than a sign of the largest economy’s weakness. 23
  24. 24. Capital Flow to Asia Pacific Deficit countries needing This keeps US China recycles its capital like Factories running. Dollar reservesthe US attract funds from US pays in Debt Slip IOU. into US Debt Instruments. surplus like China. Democrats in the USA want to give more opportunities to American Industries suffered cause of competitive Chinese Goods. They want trade restrictions on China. Obama a democrat and a 24 strong Presidential Candidate, endorses this.
  25. 25. Half of China’s GDPreserves $ 1.80 Trillion China ain’t no Happy about it!in US Treasury Bonds, American Mortgage and Corporate Debt. US Treasury Bond Yield goes down. Citizens Unhappy China Government facing pressure from Citizens that openly 25 question China’s $ 1.8 Trillion Dollar Investment .
  26. 26. International Currency ScenarioTHE EURO Source: Bloomberg Euro climbed up almost twice the peg since it was launched in 1999. In 2000 1 Euro = $ 0.82 , In 2008 1 Euro = $ 1.45 26
  27. 27. The Euro is with the highest combined value of Euro replacing Dollar? cash in circulation in the world, having surpassed the U.S. dollar. • Recent weakness of the US dollar might encourage parties to increase their reserves in euro at the expense of the dollar Euro has been the • In September 2007, Alan Greenspan, the chairman of thesecond most widely Fed Reserve said that – “it is absolutely conceivable that held international the euro will replace the dollar as reserve currency” reserve currencyafter the U.S. dollar • By the end of 2007, shares of euro increased to 26.4% as the dollar slumped to its lowest level since records began in 1999, 63.8% 27
  28. 28. International Currency Scenario Indian Rupee getting stronger against the dollar.Source: Bloomberg 28
  29. 29. International Currency Scenario Mexican Peso is also rising.Source: Bloomberg 29
  30. 30. International Currency Scenario• 1 AUD $ = 1 $ USD, A Historic First in History! • Recently 1 Canadian Dollar = 1 US Dollar, never happened before in history.• In May 2007 Kuwait announced that its Dinar will no longer be tied to the dollar. 30
  31. 31. The Great American Housing Bubble 31
  32. 32. Why did it happen? The “Real” Reason.•Mania for Home Ownership builds in America 2005•Real Estate Boom, media creates hype that RealEstate always appreciates in value and never goesdown.•Time Magazine illustrating the Mania for HomeBuying, June 13, 2005 32
  33. 33. Why did it happen? The “Real” Reason.Banks grew Greedy and Money lent to everybody,even those with no payback capacity, nodocuments and without any credit check. Betterknown as Sub prime.Made quick money on both sides of the transaction 33
  34. 34. Why did it happen? The “Real” Reason.•Meanwhile Chinese Competition forces WeakProfits Nationwide in United States promptcompanies to lay off workers.•This slackens consumer spending•Rises Foreclosures•The Sub prime Problem. Banks, Mortgagecompanies files for bankruptcy due to risingforeclosures. Workers laid off.•Real Estate Prices go down and the Bubble busts.The problem dominos to other related industriestriggering recession.•Just In: US Economy Shrinks at end of2007.American Growth Rate Slows down. GDPincreases at 1.9% compared to the 34 projection of 2.3%.Source: Bloomberg
  35. 35. Companies Affected.New Century Financial, liabilities exceeding $100 millionBear Stearns H&R Block reported that it made aquarterly loss of $677 millionBNP Paribas it could not fairly value the underlyingassets in three funds as a result of exposure to U.S. subprime mortgage lending marketsNorthern Rock (UK)Option OneAmerican Freedom Mortgage, Inc. 35
  36. 36. We now come to 36
  37. 37. The Crude Story 37
  38. 38. Gold/Dollar/Oil Relationship 5 Year Correlation Gold Oil +90% Dollar -70% Source: Bloomberg 38
  39. 39. Gold/Dollar Relationship + Correlation: -70%Gold (5 years) BloombergDollar Dollar Gold + 39
  40. 40. Chindia – Rising Oil Demand Nearly 40% of the World’s Population 40
  41. 41. Chindia – Rising Oil Demand•World Growth is led by China and India orChindia.•Chindia’s economy consumes 90% as manygoods & services as US. Major player in worldstage.•Chindia has Higher Growth Rate than US.•Chindia fastest growing part of the world in termsof computers to copper to oil.•Chindia accelerating demand for oil since 1998. 41
  42. 42. Can we not Conserve Oil?•Even in the 1970’s when the prices hit all time high,demand did not go down. In fact Consumption of oilhad increased. Oil Conservation is hence a myth.•A Developing country needs oil to continuedeveloping, to create economic growth.•For Chindia growth is essential and will requireincreasingly higher amounts of energy.•Conservation would be a nightmare in China thatcould lead to massive unemployment and politicalrevolution. Chinese Govt. wont allow it. 42
  43. 43. Why not increase Oil Production?•According to US Geological Survey, Global discoveryof large new oil fields peaked in 1962 and has beendeclining since.•As Exploration progresses, the average size of fieldsdiscovered decreases.•Virtually all significant oil deposits in the planet’s crusthave already been found. Further exploration willresult in smaller discoveries and an even higherexploration cost per barrel of oil discovered. 43
  44. 44. Saudi Arabia & Russia•Even if Saudi Arabia’s Claim of doubling the oilproduction be true from 10 to 20 million bpd this willprovide a considerable boost to SA’s economicgrowth.•Saudi Arabia’s own energy consumption will grow aswell. They will end up consuming more than half oftheir new oil production themselves.•Russian oil production barely increased since 2005.Russian Oil Company Yukos ceases to exist.•Even if Russia tries to become a stronger exporter ofoil, its own economy is going to grow rapidly. And thatwill mean a much greater internal need for energy. 44
  45. 45. So how High could Crude go? $147 is cheap. Look forward to $ 200-plus Oil. 45
  46. 46. …and all that is some very good news forpeople holding pots (read lots) of Gold. 46
  47. 47. Gold Stocks, Demand & Supply Rapid demographic and other socio- economic changes in many of the key consuming nations are also likely to produce new patterns of demand. 47
  48. 48. Mine Production of Gold Gold Production (Mine) in the United States as a Percentage of World Production World U.S. PriceYear Production Production (Dollars) (in (in per Kilograms) Kilograms) Ounce2000 2,570,000 353,000 2802001 2,560,000 335,000 2722002 2,550,000 298,000 3112003 2,560,000 277,000 3652004 2,440,000 258,000 4112005 2,470,000 256,000 4462006 2,460,000 252,000 6062007 2,500,000 240,000 675Source: U.S. Geological Survey 48
  49. 49. Top 20 Countries who have increased their Gold Reserves since 2000, expressed as a %age of Total Reserves Greece 83.1 Ireland 16.7 Portugal 49.3 ECB 16.5 Germany 35.1 Netherlands 16.5 Spain 29.0 Venezuela 15.1 Italy 25.4 Lebanon 12.8 United States 24.3 Belarus 11.3 Cyprus 24.2 Finland 11.0 Austria 23.9 Mongolia 9.6 Belgium 20.9 Slovenia 7.9 France 19.7 Malawi 49 6.8 Source: World Gold Council
  50. 50. China’s Gold Demand Grams Source: World Gold Council, CEIC, Merrill Lynch APR Economics TeamThe New Shanghai Gold Exchange and liberalizationof citizens to freely buy gold and a cultural affinitytowards gold, makes gold an attractive asset class. 50
  51. 51. China’s Gold Demand 51
  52. 52. So What’s Driving Gold and Crude Down Now?•Hope rises for Russia and Georgia truce.•On concern a spreading global economic slowdown willreduce demand for raw materials.•Realization that the slowdown in the U.S. has broadenedacross the globe.•Fund selling of gold, may have spurred todays price dropin precious metals, said Toshihiko Sakai, head of trading inforeign-exchange and financial products at Mitsubishi UFJTrust & Banking Corp.•Investor Jim Rogers, 65, who in April 2006 correctlypredicted oil would reach $100 a barrel and gold $1,000 anounce, differs. The fundamentals for commodities are“astoundingly” good and the bull market “has a long way togo,” he told a conference in Australia Aug 6th. 52
  53. 53. Key Gold Drivers 53
  54. 54. Cause Effect Possible Ramifications Increased Govt.War on Terrorism Higher Spending & Debt, Gold Prices Weak $ Increasing Weakening Higher Money Supply US Dollar Gold Prices China $ Reserves Low Bond Yields Higher become questionable. Increase Supply. Gold PricesSlowing of US GDP Negative Higher Interest Rates Gold Prices 54
  55. 55. Cause Effect Possible Ramifications Liberalization of ChineseChinese Citizens to Higher Gold Demand Buy Gold Gold Prices Increase by 20% No new Increased Demand World Production Gold Mines leading to Higher consistent Gold Prices Higher Chindia Growth High Demand for Oil leading to Oil even higher Gold Prices Stronger Euro Higher Weak Dollar Gold Prices 55
  56. 56. So What’sthe Bottom Grab as line for much as Gold? you can! US $ 1300 per troy ounce Rs.18500 per 10 gm by June 2009. 56
  57. 57. Recommended Readings • Buy Gold Now – Shayne McGuire • Collapse of the Dollar- James Turk • The Coming Economic Collapse – How you can thrive when Oil costs $200 a Barrel - Stephen Leeb •The Trillion Dollar Meltdown – Charles Morris •Bad Money- Kevin Phillips •The Demise of the Dollar- Addission Wiggin. •Gold- Once and Future Money – Nathan Lewis •Crash Proof – Peter D. Schiff 57
  58. 58. Thank 58