GLOBAL GOLD

OUTLOOK N2
April 2013

Comparing a real depository, such as Global Gold, to banks

Banks vs. Global Gold

Cyprus dominated media headlines for the last month. The initial plan to levy some sort of a one-time fee or effectively a haircut on all deposits was dropped due to the public outcry especially in connection with deposits amounting to less than 100000 EUR. As it seems currently, and we cant stress currently enough since the bureaucrats in Brussels have shown time and time again that in times of crises they can come up with final solutions on a daily basis. For now, deposits of less than 100000 EUR will remain untouched and a higher fee will be levied on deposits over 100000 EUR (in the likely scenario that the shareholders equity and a haircut on bonds is not enough to cover the losses). The whopping outcry after the plan was announced made one thing clear: There is a deep misconception among wide parts of the population about how banks function and what deposits actually are. This article is aimed at clarifying this issue and explaining where the differences lie between banking institutions in comparison to gold storage providers such as Global Gold offering physical and unencumbered ownership of physical metals. Throughout this article we will call the latter real depositories. Now lets dive in.

on the other hand, the ownership of the metals stays with you at all times. The metals are stored 1:1 as ordered in our vaults with strict security measures to ensure your assets safety.

Interest vs. Cost

As we mentioned above, when depositing funds with a bank your deposits become the banks assets. What the banks do is lend out the deposits to earn interest (they are only required to hold a fraction of the deposits as a reserve). A part of the interest, which the banks earn is paid to the depositors. With regards to interest we should however mention here that after accounting for taxes and consumer price inflation, not to mention asset price inflation, deposits have in most cases a negative return in real terms. Although the numbers on the bank statement get larger every year the amount of goods you can purchase with your money decreases year by year. So even if you are earning interest, deposits are not the best instrument to save your assets in the long run. Real depositories however concentrate on keeping your assets safe and accessible by you at all times. Your gold and silver remains untouched and is not lent out in any form. Consequently, real depositories have to charge a fee for the services they offer.

Claudio Grass, Managing Director at Global Gold AG

At Global Gold we like to concentrate on the big picture and not on the noise which is produced by the mainstream media day in and day out. Since our last Outlook report, the world and the big picture havent changed! Debt was and still remains the biggest issue out there. Just one example: When the baby-boomers were born in the1950s, it took the US government one year to increase the public debt by 3.1 billion USD today, as the baby-boomers retire it takes the government only 22 hours to do so. This development is simply unsustainable. Unable to cope with the immense debt, we believe that governments will continue to intensify their path of financial repression. Cyprus offered us a taste of things to come in the western world. We hope you enjoy our outlook and are looking forward to your comments and feedback.

Debt vs. Ownership

When you deposit money at a bank you cease to be the owner of the funds. The assets become part of the banks balance sheet and you become the banks creditor (you are effectively lending the bank money). If the bank goes bust and the depository insurance fails or is otherwise unable to pay, the depositor can lose all or parts of his assets. There are some differences in technicalities in different jurisdictions, but we will not go into the details. When you store precious metals with a real depository

Please feel free to contact us if you have any questions.

Global Gold Inc. 8640 Rapperswil Tel. Fax. eMail. Website. Herrengasse 9 Switzerland

Bank run vs. immediate delivery

If each and every Global Gold customer would demand physical delivery of their precious metals tomorrow, we would admittedly be

+41 58 810 1750 +41 58 810 1751 claudio.grass@globalgold.ch www.globalgold.ch

GLOBAL GOLD
OUTLOOK N2
April 2013
faced with some administrative effort but would be able to ensure physical delivery of all metals. Since the customers metals are in our vaults and not lent out, this would not pose any form of problem. The problem of bank runs when a huge number of depositors want to withdraw at the same time is only possible because deposits are lent out and only a fraction of the deposits are held as a reserve. Pretty much every bank you can think of when faced with massive withdrawals (still only amounting to a fraction of the complete deposits) would be faced with massive liquidity issues and would need to get money from the lender of last resort the central bank. market interaction. Although the gold price can fluctuate in USD terms, in the long run its a good store of value. In this connection we would like to mention the ABCD rule, which is simply invest in Anything Bernanke Cant Destroy. Through its operations the FED can in essence destroy the value of all nominal assets. But even if the alleged intervention of the FED in gold markets is accurate, in the long run the value of gold in contrast to paper currencies cannot be destroyed by governments or central banks. Although there are more differences, the aforementioned cover the key distinctions between banks and real depositories. In any case, even when dealing with real depositories, we advise you to always be skeptical and to read all the terms and conditions and especially be on the lookout for clauses which limit your ownership rights, such as cash settlement clauses and the like. Why gold is the ultimate currency! troubles within the Euro Zone. The still existent problems regarding the exponential debt accumulation and excessive money printing in the US are currently not receiving any sort of coverage. David Franklin and David Baker of Sprott Asset Management came out with a strong response to SocGens latest Gold Report and share our assessment concerning SocGen's report. They however stress another issue: The strong positive correlation between central bank assets and the gold price. Over the past 3 months (Q1 2013) the collective central bank balance sheets have shrunk by approximately USD 415 billion, whereby the ECBs balance sheet alone shrunk by the equivalent of USD 370 billion (the chart is visible on the next page). According to their calculations, for every trillion USD increase in the collective central banks balance sheet, the price of gold increases by USD 210/oz. Based on this calculation a decrease of USD 415 billion in the balance sheets would lead to a decline of roughly USD 87/oz, which is pretty much in-line with the actual price decline of USD 76/oz in the first quarter. According to their view gold is not in a bubble, but simply reacting to the "temporary" decrease in the central banks balance sheets. Notwithstanding the above we are convinced that manipulations have and are still taking place to drive down the price for gold and silver. The COMEX, which is highly leveraged and allows selling precious metals without having actual ownership, is in our view one of the important tools used today to manipulate the prices of precious metals. If you are interested in this topic you can view our article on the subject here. Paul Craig Roberts, a former Assistant Secretary of the Treasury during the Reagan era, released an article with the title The Assault on Gold in which he describes why the ongoing manipulation of the gold price is taking place and why the Federal Reserve is panicking to do so. Although we can't really say if all the accusations made in the article are correct, it is still interesting to read what an "insider"

Securities accounts and real depositories

Securities accounts and real depositories are similar in the sense that in both cases ownership remains with the client. Hence, the before mentioned is not applicable. However your assets are still inside the banking system so your assets can be inaccessible if there are banking holidays or the stock market is not functioning (the most recent case being Cyprus). It is also important to be cautious about what securities you own. A lot, if not most of the innovations which the banking sector produces such as structured products or swap based ETFs etc. entail some sort of counterparty risk.

Gold is money.

Real vs. fake money

Another important difference is what is actually being stored. When you make a deposit at a bank you are dealing with fiat currency, which basically means a currency which is lacking any sort of anchor in the real world and is only used because the government forces us to do so. However, when you make a deposit in a real depository you are trusting in gold, which has been used as a currency for over 3000 years and was not forced on to the public, but developed through free

At the end of March Socit Gnrale (SocGen) came out with a report on gold, where they claim that gold is in a bubble and that they see a correction coming, which would send the gold price below 1'400 USD/oz. The main reason for their assumption is that ETFs and hedge funds are selling some of their long gold positions and furthermore they predict a strong dollar in the future, which is typically a negative sign for gold. We at Global Gold disagree with SocGen's view that gold is in a bubble due to the following reasons: firstly, it is not uncommon for institutional and private clients alike who are invested in gold and most of which have built up positions well below current levels, to realize some gains. This in our view does not change the fundamental outlook for gold, which we believe is still positive because of central bank policies worldwide. It might be true that a stronger dollar is a negative signal for gold; however we should mention that the current reason for a stronger dollar is not that the dollar is a powerful currency or that the US economy is picking up, it is solely that the media is concentrating exclusively on the

GLOBAL GOLD
OUTLOOK N2
April 2013

GOLDS CORRELATION TO CB ASSETS

This chart by Sprott Asset Management clearly shows the correlation between gold and the balance sheet. The recent decrease in the gold price is fully explained by the minor contraction of the balance sheet of the worlds largest central banks.

Source: Sprott Asset Management LP

believes is taking place behind the scenes. Extract from the article: The Federal Reserve began its April Fools assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the governments own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.. As we are sending out this report the gold price dipped below 1400 USD/oz, however we are not concerned with short term volatility. We at Global Gold invest in gold for the long haul and are convinced that one should use the current corrections in the precious metals market to increase ones position in gold. It is in essence a "gift" especially for individuals who havent invested in physical precious metals until now. The fundamentals speaking for gold are still strong, because the central banks are still printing money like there is no tomorrow. In such an environment one should hold (part of) ones assets in the only currency which central banks worldwide

cant print, namely gold. One should also keep in mind that we are currently going through the biggest wealth transfer in history, so holding physical (and not paper) precious metals outside of the banking system in a safe jurisdiction is a must. Otherwise, you might wake up one day wondering why you didn't learn anything from the savers in Cyprus.

higher when the supply of capital goods (savings) are lower and vice versa. Interest holds two further components: entrepreneurial profit and the price premium. Entrepreneurial profit or as it is more commonly called today default risk, is basically the compensation for the risk one is engaging in when one loans out money. Because every loan is speculation and the creditor takes on the risk of a partial or total loss he will expect to be compensated for this risk. The price premium on the other hand is the premium (or discount) applied to the interest rate to account for the expected change in the purchasing power of money. Under our current monetary system price premium is in general an inflation premium, because fiat currency in general continually loses value. Under a gold standard however, prices would in general tend to decrease turning this premium into a deflation discount. Concentrating on originary interest we would like to look at the effect of different interest rates on asset prices. If the real originary interest rate were 0%, which doesnt seem to require too much imagination under current circumstances, this would mean that present and future goods would be valued exactly the same. Imagine a piece of land (example borrowed by Mises) or a piece of real estate, which after deducting all costs and

Austrian view on interest

In this piece we will look at what interest actually is from the viewpoint of the Austrian School of Economics and how the setting, or rather manipulation of the interest rate by central banks negatively impacts the economy in the long run. In essence, interest is the ratio between the value assigned to a good today, to be exact, the good itself is irrelevant but rather the underlying want satisfaction, in comparison to the identical good at a future point in time (this is called originary interest). The reason that identical future goods trade at a discount is that humans in general have a time preference, meaning they want to reach their goals sooner rather than later. This originary interest is in our view the origin and main component of interest or the reason why interest is paid, however the supply and demand of capital goods also play a role in the level of the interest rate. It can be said that in general interest rates tend to be

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OUTLOOK N2
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April 2013

WHERE IS NEXT BUBBLE?

The historically low interest rates, which we have seen since 2009 will lead to bubbles as did the low rates after the dot-com bubble burst. The question is, which bubble will burst this time government and corporate debt, equities or other assets?
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0 1997

Federal Funds Target Rate

Source: Federal Reserve Bank of NY

maintenance repairs would generate a yearly income of lets say 10000 USD indefinitely. What would the fair value of this piece of land be? The fair value would be the sum of all infinite future earning streams (undiscounted), meaning that no amount of money would be enough to buy the piece of land. In general we can say that the closer the interest rate gets to 0% the higher the asset price becomes and the higher the interest rate the lower the asset price. The fair value of the above mentioned piece of land would be 100000 USD if the interest rate is 10% or increase tenfold to 1000000 USD if the interest rate were 1% (10000/1%). Under normal circumstances the originary interest, which as a reminder is the discount of future goods to present goods, would never fall to zero and would likely also be somewhat higher than the rates we have seen in recent years. In the likely case that the interest rate set by the central bank deviates from the originary interest, there is either a deflationary or inflationary effect on asset prices from their true or un-manipulated prices. The tendency of central banks leans towards having too low interest rate, which leads to higher asset prices or even the formation of asset bubbles such as the real estate bubble, which

was mainly brought forward by low interest rates. We should also hold fast to the fact that central banks even with their armies of economists have no knowledge of what the correct interest rate should be, meaning that it will always deviate from its true value. So why not just leave it to the free market? Another closely connected issue is that too low interest rates lead to a misallocation of resources in the economy. Lets assume that the originary interest rates, as defined by the subjective want-satisfaction preference of each individual, would be 5% and the dictated rate by the central bank is 1%. At the same time we have an investment, which requires an initial investment of 1000 USD and would yield 50 USD infinitely. With the manipulated rates of the central bank, this endeavor seems to be lucrative because the project would have a positive present value with the real interest rate, however the present value of project would be 0 USD making an investment pointless. The real estate bubble in the US not only lead to an increase in asset prices, but made the American dream affordable to everyone, simply because the rates where artificially low. When rates however started

to rise, many Americans were hit hard with the reality that their investment was simply not financeable under normal market conditions and the artificial boom of the real estate prices came to an abrupt end. Taking the above mentioned into consideration it becomes evident that we would have less asset bubbles and a better allocation of scarce resources if interest rates were left to the free market. However we live in a world where money is born both from the central bank and private banks through credit, which makes the setting of the interest rate by the central bank inseparable from our current fiat monetary system. While living in a world of manipulated interest rates we urge our readers to scrutinize investment opportunities to verify they would still seem attractive in a world of real interest rates and to hold part of ones assets outside of this corrupt and manipulated paper money system, ideally in precious metals, which we consider to be the only real currency. The value of fiat money can be manipulated at the whim of central bankers to the detriment of normal savers and to the advantage of bankers who get newly created money first.

GLOBAL GOLD
OUTLOOK N2
April 2013

Our Scenarios

How we think the world will develop in the coming months and years

We dont and we dont claim to have a crystal ball. What you will be reading in this section is our view about the direction politics and economic development are going to take us. We use our common sense and we refrain from using

complicated models which no one understands. In each issue we will introduce three scenarios. Each scenario will be explained and we will discuss how probable we think each of the scenarios is and how this could impact your gold investment.

STATUS QUO
DESCRIPTION
Under our status quo scenario, governments will continue essentially as they have so far, delaying any real problem solving. They will continue to moderately inflate currencies, bailout banks etc.. Furthermore real economic growth rates will stay low.

BACK TO NORMAL
DESCRIPTION
In this scenario central banks worldwide abandon their current monetary policy and return to a more prudent approach. This is coupled with higher real economic growth in the world.

CRISIS
DESCRIPTION
Crises can take on many different forms, such as a complete collapse of the financial and monetary system, a world war, civil unrest or many others.

PROBABILITY: 80%
We think that this scenario is the most likely for the coming months and years. Governments cant and wont tackle any real problems, they will follow their muddle through policy as they have done so far. Measures of financial repression like the capital controls and the confiscation taken place in Cyprus are likely to increase.

PROBABILITY: 10%
Due to the very high debt levels in western economies we hardly think that central banks can return to their normal monetary policy. The lack of any real growth impulses leads us to believe that this scenario is not a very realistic one for the foreseeable future. In the beginning of this year Japan decided to join in on the money printing party so it seems if anything that the central banks will intensify rather than stop their efforts.

PROBABILITY: 10%
Political developments in most parts of the western world are worrying (for example in Southern Europe). We think that our current financial and monetary system is not sustainable. We dont, however, see the tipping point on the horizon quite yet. Although we are following the news from the Korean Peninsula, North Africa and the Middle East we do not see the risk of a wide scale war for the time being.

IMPACT ON GOLD
As in recent years the current policies of governments positively impact gold prices. We think that the current correction is only a temporary phase in the long term upward trend.

IMPACT ON GOLD
A back to normal scenario would probably impact gold prices negatively. Historically gold has tended to perform negatively when real short term interest rates have exceeded 3%.

IMPACT ON GOLD
In a crisis scenario the price of gold would likely dramatically increase nominally. In real terms gold should be an ideal medium to store value over the long term.

OUR CONCLUSION
"The only scenario, which could have a negative impact on gold is a return to normality. We don't think this is a very likely scenario, because the fundamentals haven't changed. QE or "money printing programs" are still ongoing, the debt burden is rising and we still have negative interest rates, for that reason we remain bullish on gold and would use current level to increase positions."

Disclaimer: The following publication represents the opinion and analysis of Global Gold AG (GG), based on data available to the firm, at the time of writing. This GG publication is not a recommendation, offer or solicitation to acquire or dispose of any securities, investments or any other transaction. As trading and investing may involve serious risk of loss, GG recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. GG assumes no responsibility for the content, accuracy or completeness of the information presented.