1. A Case for Gold
Global Demand and Supply Scenario
An In-depth look into How the Dollar
Collapse could trigger a New Gold Rush
1
2. 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
2
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 else's liability
• Physical security
• Income
• Liquidity
Source: www.gold.org World Gold Council 3
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
8. US Military Spending as a % of GDP
US Military Spending Comprises 19.77% of the US GDP
Source: Bloomberg
8
9. The Pressure Building: Rising US Debt
US $ 9.5 Trillion and Growing
The Federal Treasury Direct Website
www.treasurydirect.gov
9
10. 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
10
11. 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
11
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 Trillion
USD over and above the current Debt.
12
13. 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.
13
14. Why can the Dollar Collapse?
The US Current Account Trade Deficit
spiraled to US $ 738 Billion since 1999.
Source: Bloomberg 14
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. Why can the Dollar Collapse?
US Inflation rises to over 5%
US Inflation
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2002
2004
2006
2000
(till
june)
2008
16
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. 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.
18
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
23. 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.
23
24. Capital Flow to Asia Pacific
Deficit countries needing
This keeps US China recycles its
capital like
Factories running. Dollar reserves
the 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. Half of China’s GDP
reserves $ 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. International Currency Scenario
THE 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. 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 the
second most widely Fed Reserve said that – “it is absolutely conceivable that
held international the euro will replace the dollar as reserve currency”
reserve currency
after 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
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
32. 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
32
33. 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
33
34. 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 34
projection of 2.3%.
Source: Bloomberg
35. 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.
35
40. Chindia – Rising Oil Demand
Nearly 40% of the
World’s Population
40
41. 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.
41
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 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.
42
43. 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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44. 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.
44
45. So how High could Crude go?
$147 is cheap.
Look forward to $ 200-plus Oil.
45
46. …and all that is some
very good news for
people holding pots
(read lots) of Gold. 46
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. Mine Production of Gold
Gold Production (Mine) in the United States as a
Percentage of World Production
World U.S. Price
Year Production Production (Dollars)
(in (in per
Kilograms) Kilograms) 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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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. China’s Gold Demand
Grams
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.
50
52. 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.
52
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 Prices
Slowing of US GDP Negative Higher
Interest Rates Gold Prices
54
55. Cause Effect Possible Ramifications
Liberalization of Chinese
Chinese 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. So What’s
the 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. 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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