The Case for Gold

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A C a s e f o r G o l dA 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

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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

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Why do World Central banks hold GoldGold ?

• 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

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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.

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US Government Spending

Rising Government Spending US $ 2869.30 Billion.

Source: Bloomberg

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The “War on Terror” Expense

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US Military Spending and The Rest of the World

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US Military Spending as a % of GDP

US Military Spending Comprises 19.77% of the US GDPSource: Bloomberg

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The Pressure Building: Rising US Debt

US $ 9.5 Trillion and Growing

The Federal Treasury Direct Website www.treasurydirect.gov

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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

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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

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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.

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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.

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Why can the Dollar Collapse?

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

Source: Bloomberg

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Why can the Dollar Collapse?

The M3 Money Supply grown to Over $10 Trillion.The Data became discontinued since 2006.

Source: Bloomberg

Where did Where did so much so much money money come come from?from?

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Why can the Dollar Collapse?

US Inflation rises to over 5%

US Inflation

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2000

2002

2004

2006

2008

(til

lju

ne)

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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.

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Why the Dollar is in trouble?

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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.

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China holds the largest International Dollar Reserves of $$1.8088 Trillion Dollars1.8088 Trillion Dollars by End of July 2008, Half its GDP.

Source: The People’s Bank of China

Chinese International Reserves

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Japanese Dollar Reserves at all time High US $ 976.947 Billion

Japanese International Reserves

Source: Bank of Japan

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Russian Dollar Reserves at all time High US $ 597.3 Billion

Russian International Reserves

Source: Bank of Russia

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Indian Dollar Reserves at all time High US $ 305.47 Billion

Indian International Reserves

Source: The Reserve Bank of India

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Point to Ponder: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.

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Capital Flow to Asia PacificCapital Flow to Asia Pacific

Deficit countries needingcapital 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.

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China ain’t no Happy about it!China ain’t no Happy about it!

US Treasury Bond Yield goes down. Citizens UnhappyChina 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.

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International Currency ScenarioInternational 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

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Euro replacing Dollar?Euro replacing 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%

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

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International Currency ScenarioInternational Currency Scenario

Source: Bloomberg

Indian Rupee getting stronger against the dollar.

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International Currency ScenarioInternational Currency Scenario

Source: Bloomberg

Mexican Peso is also rising.

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International Currency ScenarioInternational 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.

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The Great American Housing Bubble

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Why did it happen? The “Real” Reason.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

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Why did it happen? The “Real” Reason.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

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Why did it happen? The “Real” Reason.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: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

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Companies Affected.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.

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We now come to

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The Crude StoryThe Crude Story

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Gold/Dollar/Oil Relationship

5 Year Correlation Gold

Oil +90%

Dollar -70%

Source: Bloomberg

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+Correlation: -70% (5 years)Bloomberg

DollarDollar GoldGold

GoldDollar

+

Gold/Dollar Relationship

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Nearly 40% of theWorld’s Population

ChindiaChindia – Rising Oil Demand – Rising Oil Demand

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ChindiaChindia – Rising Oil Demand – 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.

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Can we not Can we not ConserveConserve Oil? 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.

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Why not increase Oil Production?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.

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Saudi Arabia & RussiaSaudi 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.

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So how High could Crude go?So how High could Crude go?

$147 is cheap.

Look forward to $ 200-plus Oil.

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

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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.

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Mine Production of Gold

Gold Production (Mine) in the United States as a Percentage of World Production

Year

World Productio

n (in

Kilograms)

U.S. Productio

n (in

Kilograms)

Price (Dollars)

per Ounce

2000

2,570,000 353,000 280

2001

2,560,000 335,000 272

2002

2,550,000 298,000 311

2003

2,560,000 277,000 365

2004

2,440,000 258,000 411

2005

2,470,000 256,000 446

2006

2,460,000 252,000 606

2007

2,500,000 240,000 675

Source: U.S. Geological Survey

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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 6.8

Source: World Gold Council

Top 20 Countries who have increased their Gold Reserves since 2000, expressed as a %age of Total Reserves

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China’s Gold Demand

Gra

ms

Source: World Gold Council, CEIC, Merrill Lynch APR Economics Team

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.

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China’s Gold Demand

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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.

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Key Gold Drivers

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War on Terrorism

Cause Effect Possible RamificationsPossible Ramifications

Increased Govt.Spending & Debt,

Weak $

Higher Gold Prices

Increasing Money Supply

Weakening US Dollar

Higher Gold Prices

Low Bond YieldsChina $ Reserves

become questionable.Increase Supply.

Higher Gold Prices

Slowing of US GDP Negative Interest Rates

Higher Gold Prices

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Liberalization of Chinese Citizens to

Buy Gold

Cause Effect Possible RamificationsPossible 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 forOil

Higher Oil leading to even higherGold Prices

Stronger Euro Weak DollarHigher

Gold Prices

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So What’s the Bottom

line for Gold?

US $ 1300 per troy ounce US $ 1300 per troy ounce Rs.18500 per 10 gm by June 2009Rs.18500 per 10 gm by June 2009..

Grab as much as you can!

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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

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Thank you.

gtekriwal@gmail.com