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Bullion Management Group (Asia) Limited
8th April, 2013
For
Harris Fraser Group
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Reasons for Investing in Gold (recap)
- Debt
- Negative Real Interest Rates
- USD, Central Banks, India, China
- Irreversible Longer-Term Trends
- Demand and Supply
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Has anything fundamentally changed?
- Economic Perceptions
- The latest from the US and Europe
- Japan, China, Central Banks
- Mining Costs redefined
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Technical Charts
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Summary
US national debt is now over USD16.7 Trillion http://usdebtclock.org/
US unfunded liabilities estimate ranges from USD 80T to over 123T
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Gold is an effective inflation hedge, in fact, also an inflation indicator.
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Inflation as calculated in the 1980s shows the CPI to be much higher than
current official figures. See John Williams’ www.shadowstats.com
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We are slowly seeing the gradual demise of US dollar hegemony, and so
Central Banks have become net buyers of gold since 2009.
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Traditional strong public demand from India and since 2003 from China.
The Chinese government also has geo-political reasons to look to gold.

Peak Oil
Cheap and easy to extract oil is now on the decline. Going forward, oil
will continue to increase in price and be an inflationary factor.

Outsourcing
Outsourcing has led to systemic unemployment in the West, resulting in
less tax revenues and more government outlays, while putting more
spending power into countries that have a historical affinity with gold.

Demographics
The US and European retiring “baby boomers” (around 10,000 per day)
will spend less, pay less (if any) tax and live longer, requiring more
state pension outlays and healthcare expense. The state will have to
print more money.
Expect the curve to steepen as Baby Boomers retire. This is very inflationary.
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Annual Gold supply in 2012 was around 4,500MT (c. 2,900MT from
mines, 1,600MT from old scrap), roughly equal to demand.
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Gold represents only c. 0.7% of global financial assets (cf. 5% in 1968
and 3% in 1980). The game changer will be when pension funds enter
in force. After 20 years of near zero interest rates on government bonds,
2012 saw Japanese government pension funds begin to invest in gold.
USD231 Trillion
World Financial
Assets
US $1.5 Trillion
Central Bank Holdings
US $1.5 Trillion
Privately Held
Gold\
Sources: Credit Suisse Global Wealth Report 2011; World Gold Council. © 2012 Bullion Management Group Inc.
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Why have precious metals prices come under pressure?
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Why has the market become “risk on”?
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Where do we see signs of economic growth?
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At BMG we believe that the world is not seeing a real economic
recovery, that debt will only increase, that low interest rates are here to
stay, that developing countries with an affinity for gold are on the
ascendant, and that commodities are in a long term inflationary trend.
•
Technical Charts are valuable tools for identifying points of market
entry.
Gold’s recent decline was a result of:
- some investors thinking the euro zone debt crisis is improving
- George Soros selling gold late last year
- FOMC minutes raising expectations that the U.S. Fed will curtail QE
- and above all, “risk on” in the markets: Dow Jones and S&P at or near all
time highs (previously Dow 14,198 and S&P 500 1,576 in October 2007)
However whilst some sectors, such as oil and gas, are enjoying a real
boom, we believe the US equity markets are enjoying an essentially
liquidity-driven rally, not reflective of the broader economy. Recently we
have also seen some sector rotation as the more defensive sectors of
Consumer Staples, Health Care and Utilities outperform.
If key data disappoints in April/May, we could see a decline in bond yields,
equity markets come off, and a short covering rally in gold.
Disappointing Q2 economic data from China could also see a rotation from
economically sensitive bulk commodities to gold.
JANUARY 2013
- Jan 23 - US House of Representatives voted 285-144 to temporarily
suspend the US$16.394T debt ceiling till May 19.
- House Speaker John Boehner: “the premise here is pretty simple. It says
there should be no long-term increase in the debt limit until there’s a plan
to deal with the fiscal crisis that faces our country.”
MARCH 2013
- Start of “sequester” - $85 billion off fiscal budget, coming from military
spending and domestic programs. Obama said this will slow growth by 1%
and raise unemployment by 750,000.
- March 27 – the “Continuing Resolution” from Sept. 2012 expired, but an
Appropriations Bill was passed maintaining current funding for FY2013.
The fact remains: the US Fed cannot phase out QE. To do so would spark
a rise in Treasury yields, and with so much debt, there is no way the
national debt could be serviced once rates start to rise.
The Sequester is just a decrease in the projected rate of increase in
government spending over the next decade. We believe QE will continue.
End-February 2013
- ECB President Mario Draghi said, "Our monetary policy remains
accommodative…. "We are far from having an exit in mind." He added
that the ECB expects next year‘s inflation to come “significantly” below 2%.
- In addition to providing huge liquidity, the ECB has cut its main
refinancing rate to 0.75 percent and started a yet-to-be activated bondbuying programme, Outright Monetary Transactions (OMT).
- ZEW chief Clemens Fuest said he expects the German economy to
recover only slowly in Q1. "The forecast for fiscal policy is that it will be
extremely contractionary in most countries. Is that compatible with
recovery? I can't see it."
- Sovereign debt issue is far from over. Spain and Italy still look very
vulnerable. The UK also recently lost its AAA Moody’s rating. Plus,
German economic growth is slowing.
- Japan is at the other end of the spectrum, and wants to reflate its
economy.
- Shinzo Abe has set a mandated inflation rate of 2% via monetary
stimulus. As a result, the JPY has declined 13% since his election 3
months ago. Currency devaluation is good for gold.
- China’s recent NPC has called for an inflation target of 3.5%.
- Central Banks keep buying.
2013 will see a fresh look at costs, and increases here will eventually be
reflected in the market price of gold.
In January 2013, Goldcorp said it will start to define the costs of gold
mining more fully by calculating the “all-in sustaining cash costs.” These
include by-product cash costs, exploration and admin. expenses. For
Goldcorp, the estimated all-in sustaining cost will be around
USD1,100/oz. vs. a cash-cost of around USD575/oz.
An analyst at Bell Potter calculates an industry average all-sustaining
cash cost of USD1,170, vs. a cash cost of USD773/oz.
The long-term price uptrend remains in place. It will take a move below
major support at $1,500/oz. to negate the longer-term price uptrend from
the 2001 low of $255/oz, despite the high of $1,923 in the summer of 2011.
In terms of Elliott Wave, it looks as though we are on the verge of an
upward Wave 5.
Long and short term charts using various methodologies show strong
support below current levels. We expect to see the metals hold to the
downside, say low of 1,550, and go up from here into the $1,600-1,700
range.
US and European National Debt has reached unsustainable levels - to
pay it down will take large increases in GDP, which will take many years
to come to fruition and even longer if austerity measures are in force.
Default is not a serious option. The only way politically expedient way out
is to inflate, which will also result in currency devaluation against gold.
Very low official interest rates must remain to keep debt service
manageable, but many short and long term factors point to further
inflation down the road.
With stock markets breaking new records in a largely liquidity-driven rally,
portfolios should maintain an exposure to gold and precious metals as a
non-correlated “insurance policy” at a minimum.
BMG’s view is for considerable upside potential and that current levels
represent a very interesting entry point.