The Case for Gold

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Information about The Case for Gold

Published on August 12, 2008

Author: gtekriwal

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Global Demand and Supply Scenario
An In-depth look into How the Dollar Collapse could trigger a New Gold Rush

A C a s e f o r G o l d Global Demand and Supply Scenario An In-depth look into How the Dollar Collapse could trigger a New Gold Rush

Agenda Part 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 High Global Gold Demand and Supply Countries increasing Gold Reserves Gold Mine Production Stagnant Part II Current and Future Gold Price Outlook

Part 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 High

Global Gold Demand and Supply

Countries increasing Gold Reserves

Gold Mine Production Stagnant

Part II Current and Future Gold Price Outlook

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 else's liability Physical security Income Liquidity Source: www.gold.org World Gold Council

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 else's liability

Physical security

Income

Liquidity

The Government Expands and Increases spending, The Govt. accumulates too much debt and The Govt. repudiates its obligations by destroying its currency. 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.

US Government Spending Rising Government Spending US $ 2869.30 Billion. Source: Bloomberg

The “War on Terror” Expense

US Military Spending and The Rest of the World

US Military Spending as a % of GDP US Military Spending Comprises 19.77% of the US GDP Source: Bloomberg

The Pressure Building: Rising US Debt US $ 9.5 Trillion and Growing The Federal Treasury Direct Website www.treasurydirect.gov

Rising US Debt Therefore to cope up with this expenditure and to keep the tax payers happy and the constituents satisfied The Government Borrowed $1 Trillion in the late 1970’s which spiraled to $ 9.5 Trillion in 2008 and growing every second. Source: Bloomberg

National Debt Clock at Times Square, New York National Debt Clocks are electronic billboards which show the amount of money owed by the government According to Douglas Durst, the owner of the clock, National debt is now increasing at such a rate that his clock will be obsolete (for lack of digits) when the debt reaches the $10 trillion mark, expected in Spring 2009

National Debt Clocks are electronic billboards which show the amount of money owed by the government

According to Douglas Durst, the owner of the clock, National debt is now increasing at such a rate that his clock will be obsolete (for lack of digits) when the debt reaches the $10 trillion mark, expected in Spring 2009

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 Trillion USD over and above the current Debt.

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 Trillion USD over and above the current Debt.

Why can the Dollar Collapse? The Gap between per capita GDP and per capita Debt is widened from 1980’s and becoming worse since 2006.

The Gap between per capita GDP and per capita Debt is widened from 1980’s and becoming worse since 2006.

Why can the Dollar Collapse? The US Current Account Trade Deficit spiraled to US $ 738 Billion since 1999. Source: Bloomberg

The US Current Account Trade Deficit spiraled to US $ 738 Billion since 1999.

Why can the Dollar Collapse? The M3 Money Supply grown to Over $10 Trillion. The Data became discontinued since 2006. Source: Bloomberg Where did so much money come from?

The M3 Money Supply grown to Over $10 Trillion.

The Data became discontinued since 2006.

Why can the Dollar Collapse? US Inflation rises to over 5%

US Inflation rises to over 5%

US Borrows to finance new spending without raising taxes. US then prints FIAT MONEY to cover the deficit. This causes Money Supply to rise and this causes INFLATION. Inflation accelerates. Currency value plunges & people look for more stable forms of assets to keep their savings in. 1 2 3 4 Why the Dollar is in trouble?

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 which reflects the fact that US liabilities to the world have been growing faster than ever.

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 Chinese International Reserves

Japanese Dollar Reserves at all time High US $ 976.947 Billion Japanese International Reserves Source: Bank of Japan

Russian Dollar Reserves at all time High US $ 597.3 Billion Russian International Reserves Source: Bank of Russia

Indian Dollar Reserves at all time High US $ 305.47 Billion Indian International Reserves Source: The Reserve Bank of India

Point to Ponder: An increase in reserves has long been seen as a sign of growing economic strength and a solid currency. But today it is less indicative of these Nation’s strength than a sign of the largest economy’s weakness.

Capital Flow to Asia Pacific Deficit countries needing capital like the US attract funds from surplus like China. This keeps US Factories running. US pays in Debt Slip IOU. China recycles its Dollar reserves into US Debt Instruments . 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 strong Presidential Candidate, endorses this.

China ain’t no Happy about it! US Treasury Bond Yield goes down. Citizens Unhappy China Government facing pressure from Citizens that openly question China’s $ 1.8 Trillion Dollar Investment . Half of China’s GDP reserves $ 1.80 Trillion in US Treasury Bonds, American Mortgage and Corporate Debt.

International Currency Scenario 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 Source: Bloomberg THE EURO

Recent weakness of the US dollar might encourage parties to increase their reserves in euro at the expense of the dollar In September 2007, Alan Greenspan, the chairman of the Fed Reserve said that – “it is absolutely conceivable that the euro will replace the dollar as reserve currency” 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% Euro replacing Dollar? The Euro is with the highest combined value of cash in circulation in the world, having surpassed the U.S. dollar. Euro has been the second most widely held international reserve currency after 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

In September 2007, Alan Greenspan, the chairman of the Fed Reserve said that – “it is absolutely conceivable that the euro will replace the dollar as reserve currency”

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%

International Currency Scenario Source: Bloomberg Indian Rupee getting stronger against the dollar.

International Currency Scenario Source: Bloomberg Mexican Peso is also rising.

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.

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.

The Great American Housing Bubble

Why did it happen? The “Real” Reason. Mania for Home Ownership builds in America 2005 Real Estate Boom, media creates hype that Real Estate always appreciates in value and never goes down. Time Magazine illustrating the Mania for Home Buying, June 13, 2005

Mania for Home Ownership builds in America 2005

Real Estate Boom, media creates hype that Real Estate always appreciates in value and never goes down.

Time Magazine illustrating the Mania for Home Buying, June 13, 2005

Why did it happen? The “Real” Reason. Banks grew Greedy and Money lent to everybody, even those with no payback capacity, no documents and without any credit check. Better known as Sub prime . Made quick money on both sides of the transaction

Why did it happen? The “Real” Reason. Meanwhile Chinese Competition forces Weak Profits Nationwide in United States prompt companies to lay off workers. This slackens consumer spending Rises Foreclosures The Sub prime Problem. Banks, Mortgage companies files for bankruptcy due to rising foreclosures. Workers laid off. Real Estate Prices go down and the Bubble busts . The problem dominos to other related industries triggering recession. Just In: US Economy Shrinks at end of 2007 .American Growth Rate Slows down. GDP increases at 1.9% compared to the projection of 2.3%. Source: Bloomberg

Meanwhile Chinese Competition forces Weak Profits Nationwide in United States prompt companies to lay off workers.

This slackens consumer spending

Rises Foreclosures

The Sub prime Problem. Banks, Mortgage companies files for bankruptcy due to rising foreclosures. Workers laid off.

Real Estate Prices go down and the Bubble busts . The problem dominos to other related industries triggering recession.

Just In: US Economy Shrinks at end of 2007 .American Growth Rate Slows down. GDP increases at 1.9% compared to the projection of 2.3%. Source: Bloomberg

Companies Affected. New Century Financial , liabilities exceeding $100 million Bear Stearns H&R Block reported that it made a quarterly loss of $677 million BNP Paribas it could not fairly value the underlying assets in three funds as a result of exposure to U.S. sub prime mortgage lending markets Northern Rock (UK) Option One American Freedom Mortgage, Inc.

We now come to

The Crude Story

Gold/Dollar/Oil Relationship Source: Bloomberg -70% Dollar +90% Oil Gold 5 Year Correlation

+ Correlation: -70% ( 5 years) Bloomberg Dollar Gold Gold Dollar + Gold/Dollar Relationship

Nearly 40% of the World’s Population Chindia – Rising Oil Demand

Chindia – Rising Oil Demand World Growth is led by China and India or Chindia. Chindia’s economy consumes 90% as many goods & services as US. Major player in world stage. Chindia has Higher Growth Rate than US. Chindia fastest growing part of the world in terms of computers to copper to oil. Chindia accelerating demand for oil since 1998.

World Growth is led by China and India or Chindia.

Chindia’s economy consumes 90% as many goods & services as US. Major player in world stage.

Chindia has Higher Growth Rate than US.

Chindia fastest growing part of the world in terms of computers to copper to oil.

Chindia accelerating demand for oil since 1998.

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 oil had increased. Oil Conservation is hence a myth. A Developing country needs oil to continue developing, to create economic growth. For Chindia growth is essential and will require increasingly higher amounts of energy. Conservation would be a nightmare in China that could lead to massive unemployment and political revolution. Chinese Govt. wont allow it.

Even in the 1970’s when the prices hit all time high, demand did not go down. In fact Consumption of oil had increased. Oil Conservation is hence a myth.

A Developing country needs oil to continue developing, to create economic growth.

For Chindia growth is essential and will require increasingly higher amounts of energy.

Conservation would be a nightmare in China that could lead to massive unemployment and political revolution. Chinese Govt. wont allow it.

Why not increase Oil Production? According to US Geological Survey, Global discovery of large new oil fields peaked in 1962 and has been declining since. As Exploration progresses, the average size of fields discovered decreases. Virtually all significant oil deposits in the planet’s crust have already been found. Further exploration will result in smaller discoveries and an even higher exploration cost per barrel of oil discovered.

According to US Geological Survey, Global discovery of large new oil fields peaked in 1962 and has been declining since.

As Exploration progresses, the average size of fields discovered decreases.

Virtually all significant oil deposits in the planet’s crust have already been found. Further exploration will result in smaller discoveries and an even higher exploration cost per barrel of oil discovered.

Saudi Arabia & Russia Even if Saudi Arabia’s Claim of doubling the oil production be true from 10 to 20 million bpd this will provide a considerable boost to SA’s economic growth. Saudi Arabia’s own energy consumption will grow as well. They will end up consuming more than half of their 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 of oil, its own economy is going to grow rapidly. And that will mean a much greater internal need for energy.

Even if Saudi Arabia’s Claim of doubling the oil production be true from 10 to 20 million bpd this will provide a considerable boost to SA’s economic growth.

Saudi Arabia’s own energy consumption will grow as well. They will end up consuming more than half of their 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 of oil, its own economy is going to grow rapidly. And that will mean a much greater internal need for energy.

So how High could Crude go? $147 is cheap. Look forward to $ 200-plus Oil.

… and all that is some very good news for people holding pots (read lots) of Gold.

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.

Mine Production of Gold Source: U.S. Geological Survey 675 240,000 2,500,000 2007 606 252,000 2,460,000 2006 446 256,000 2,470,000 2005 411 258,000 2,440,000 2004 365 277,000 2,560,000 2003 311 298,000 2,550,000 2002 272 335,000 2,560,000 2001 280 353,000 2,570,000 2000 Price (Dollars) per Ounce U.S. Production (in Kilograms) World Production (in Kilograms) Year Gold Production (Mine) in the United States as a Percentage of World Production

Top 20 Countries who have increased their Gold Reserves since 2000, expressed as a %age of Total Reserves Source: World Gold Council 6.8 Malawi 19.7 France 7.9 Slovenia 20.9 Belgium 9.6 Mongolia 23.9 Austria 11.0 Finland 24.2 Cyprus 11.3 Belarus 24.3 United States 12.8 Lebanon 25.4 Italy 15.1 Venezuela 29.0 Spain 16.5 Netherlands 35.1 Germany 16.5 ECB 49.3 Portugal 16.7 Ireland 83.1 Greece

China’s Gold Demand The New Shanghai Gold Exchange and liberalization of citizens to freely buy gold and a cultural affinity towards gold, makes gold an attractive asset class. Grams Source: World Gold Council, CEIC, Merrill Lynch APR Economics Team

China’s Gold Demand

So What’s Driving Gold and Crude Down Now? Hope rises for Russia and Georgia truce. On concern a spreading global economic slowdown will reduce demand for raw materials. Realization that the slowdown in the U.S. has broadened across the globe. Fund selling of gold, may have spurred today's price drop in precious metals, said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. Investor Jim Rogers , 65, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, differs. The fundamentals for commodities are “astoundingly” good and the bull market “has a long way to go,” he told a conference in Australia Aug 6th.

Hope rises for Russia and Georgia truce.

On concern a spreading global economic slowdown will reduce demand for raw materials.

Realization that the slowdown in the U.S. has broadened across the globe.

Fund selling of gold, may have spurred today's price drop in precious metals, said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp.

Investor Jim Rogers , 65, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, differs. The fundamentals for commodities are “astoundingly” good and the bull market “has a long way to go,” he told a conference in Australia Aug 6th.

Key Gold Drivers

War on Terrorism Cause Effect Possible Ramifications Increased Govt. Spending & Debt, Weak $ Higher Gold Prices Increasing Money Supply Weakening US Dollar Higher Gold Prices Low Bond Yields China $ Reserves become questionable. Increase Supply. Higher Gold Prices Slowing of US GDP Negative Interest Rates Higher Gold Prices

Liberalization of Chinese Citizens to Buy Gold Cause Effect Possible Ramifications Chinese Gold Demand Increase by 20% Higher Gold Prices No new Gold Mines World Production consistent Increased Demand leading to Higher Gold Prices Chindia Growth High Demand for Oil Higher Oil leading to even higher Gold Prices Stronger Euro Weak Dollar Higher Gold Prices

So What’s the Bottom line for Gold? US $ 1300 per troy ounce Rs.18500 per 10 gm by June 2009 . Grab as much as you can!

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

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

Thank you. [email_address]

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