War Room 08/31 Gold – Where Do We Stand, And Where Are We Going?

War Room 08/31

Gold – Where Do We Stand, And Where Are We Going?

War Room

• Monthly macro discussion

• Using tools in context

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• Feedback - what should it to be?

Gold Market Fundamentals

Past + Present

Gold Market Fundamentals Jewelry = 57% of gold demand

Investments = 32% of demand

Two-thirds of Q1 2011 demand growth investment-related

Mining is keeping pace with core demand, not investment demand

Gold recycling fills the difference

Gold is never destroyed – unlike oil, the total world gold supply keeps on rising over time

Demand ('05-'10 5yr avg)

Supply ('05-'10 5yr avg)

Gold, Inflation, and Crises

- Gold responds to higher inflation, as expected- But gold has a mixed record in responding to crises

USSR Collapse,Gulf War I

9/11,Gulf War II

Gold Comparisons:

Silver Oil S&P 500

Silver vs Gold, 1960-2011

Silver moves with gold, but with higher volatility Has outperformed gold during precious metals rallies

Oil, Gold, S&P: Correlation Trends

Diversification? Oil, gold, and equities are thought to be non-correlated, but in fact their relationships widely vary over time.

Oil, Gold, S&P: Correlation Trends

Since financial crisis, oil, gold, and the S&P all highly correlated Correlation broke down in recent correction If gold – oil correlation is breaking down, which is overpriced,

and which is underpriced?

Oil – Gold Ratio, 1960-2011

Ratio has been as high as 34, and as low as 7, with Mean at 15.5

Currently near 20 – above average but not overextended

Oil Barrels Per Ounce of Gold

Commodities Boom + Bust of 2007-08Surge – 19 months

Gold Boom + Bust of 1979-80Surge – 10 months

Previous Commodities Bubbles

Comparing Oil 2008 + Gold 2011

Is Gold walking on air since July, or is it different this time?

Oil was Wile E. Coyote, walking on air, from May to July 2008, and then falling off a cliff.

Gold Miners are not Gold Exposure

Gold Miners more tied to Markets

Don’t confuse Gold Metal + Miners

Gold Scenarios

Present Gold Surge – 2 months old

The surge has just begun

Bullish Case for Gold:

QE 3 succeeds = more asset inflation

Euro Zone situation further deteriorates

Bubbles last a long time (JP Morgan target $2500)

Bearish Scenarios for Gold

QE3 Fails: Liquidity Trap

Deflation: US Becomes Japan

Gold Crash (via economic recovery)