GLOBAL GOLD OUTLOOK No.

3
JULY 2013

Short-term volatility hasnt changed our long-term positive outlook

Still Bullish on Gold!

If you listen solely to the mainstream media, you would come to the conclusion that the worst is already behind us and we are seeing substantial economic growth. It is even likely that the published GDP figures in the coming months, will underline this fact. Why? The answer is simple: A new calculation method for the GDP. Research and development costs and costs for creating intangible assets such as movies, books etc. will be considered as investments and will be added to the value of the GDP. The effect of this adjustment is that US GDP figures, which will be published at the end of July, are expected to be around USD500 billion or 3% higher than if one uses the old methodology. This new and improved calculation method will become the international standard and will start brining growth to Europe starting in September 2014. We hope you enjoy our outlook and look forward to your comments and feedback.

On Wednesday, June 19 FED Chairman Ben Bernanke announced the FED will likely taper its Quantitative Easing (QE) economic stimulus program, in light of an improved economic outlook over the next year, and possibly end its purchasing of assets entirely in 2014. Although Bernanke did not seem deterministic in his statement, saying the FED will provide whatever support necessary should the economy not improve as expected. This announcement caused a dive in global stock markets and commodities. Gold fell below USD1300 for the first time since September 2010. After this reaction, some analysts were of the opinion that Golds bull market has ended we, however, find this reaction highly exaggerated and stay by our case for gold, as we will illustrate below. First, what is Quantitative Easing? The QE program in essence is an unconventional monetary policy instrument, which central banks resort to with the aim of increasing money supply through the purchase of financial assets. The last QE round was launched in September 2012, Bernanke aimed to continue purchasing assets until the outlook for the labor market improves substantially in the context of price stability. Bernankes Quantitative Easing currently buys USD40 billion in mortgage-backed securities and USD45 billion per month in Treasury securities. This economic stimulus program has had its benefits, as it fueled a rally in financial markets and helped keep the worlds largest economy expanding in the face of federal budget cuts, a slowdown in China and a recession in the euro area, according to Bloomberg. We disagree! We see absolutely no benefit in the FEDs actions; they are simply fueling asset bubbles. It seems market participants have become addicted to more and more money being flooded into markets, this becomes clear when one looks at the chart on the next page.

Global Gold Inc.

Herrengasse 9 8640 Rapperswil Switzerland Tel. +41 58 810 1750 Fax. +41 58 810 1751 claudio.grass@globalgold.ch www.globalgold.ch

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10 11 12

QE impact on S&P
The chart on the right illustrates the dependency markets currently have on QE programs. Simplified: When a QE program ends markets fall and as soon as a new program is announced the markets tend upward.

1600 1400

1 2

67

1200 1000 800 600 400

04.01.2008 04.03.2008 04.05.2008 04.07.2008 04.09.2008 04.11.2008 04.01.2009 04.03.2009 04.05.2009 04.07.2009 04.09.2009 04.11.2009 04.01.2010 04.03.2010 04.05.2010 04.07.2010 04.09.2010 04.11.2010 04.01.2011 04.03.2011 04.05.2011 04.07.2011 04.09.2011 04.11.2011 04.01.2012 04.03.2012 04.05.2012 04.07.2012 04.09.2012 04.11.2012 04.01.2013

Source: Reichmuth & Co

1. QE1 Announcement 2. QE1 Launch 3. QE1 Expansion 4. End of QE1

5. Indications on QE2 in statement made by B. Bernanke 6. QE2 Announcement 7. QE2 Launch 8. End of QE2

9. Operation Twist 10. Expansion of Operation Twist 11. QE3 Announcement 12. QE3 Expansion

2013, not a great year for Gold

Earlier in April, gold went through its first wave of sell-offs reaching USD1400, after a strengthening in the US Dollar, reported weaker-than expected growth data of the Chinese economy, and news of Cyprus to sell off excess gold reserves to finance its bailout by the European Central Bank, according to press. Other drivers were a bearish outlook on gold, reported by Goldman Sachs and George Soross sell off of gold. Junes second wave of sell-offs came as a nervous and panicked reaction following Bernankes announcements that with a stronger US economy there will be no need for monetary stimulus. Thus, with a positive outlook on the US Dollar, yields were expected to rise. Accordingly, investors pulled away from their safe haven against inflation that they found in gold, in search for higher yield opportunities in equity markets.

July 2013: Gold Rises again as Bernanke halts Tapering of QE

Analysts were divided when Bernanke would carry out the tapering of the QE program. According to Bernankes earlier statements in the summer, the FED was looking for a substantial improvement in the unemployment rate before making the call to reduce the stimulus. In reality, however, though Bernanke seemed overly confident on the economic outlook at the time, the unemployment rate was still relatively high, and it rose slightly to 7.6% in May. Also, inflation rate was up by only 1.1% y-o-y in April, well below the Feds targeted 2%, according to Bloomberg. This was then confirmed by latest data published by the Labor Department citing an

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unexpected increase in the number of Americans filing for unemployment benefits, that rose to a two-month high in the week ended July 6, said Bloomberg. Accordingly, last week Bernanke made it clear that highly accommodative monetary policy for the foreseeable future is whats needed, and that the tapering of QE will be halted until better signs of improvement in unemployment data and inflation (which has yet to accelerate). Any rise in interest rates, implied by the stimulus slowdown would only worsen the situation. Following these statements, gold for August delivery reached USD1281 an ounce on the Comex in New York, according to Bloomberg, and futures rose 5.6% in the week up to July 12, in the best showing since October 2011. Thus sentiment on gold has improved (and may grow more positive) following these updates.

Where is the recovery?

The chart on the right compares the current recovery to previous recoveries in the US. As you can see the recovery is clearly below its historical mean.

Source: U.S. Department of Labor and National Bureau of Economic Research

Sell Offs are NOT due to lack of Physical Demand: We believe the markets initial reactions in June were highly exaggerated and panic driven - the FED is hardly in a position to reduce its purchases, particularly as the FED has been buying up a significant portion of newly issued treasury bonds. We reiterate the FED is in no position to taper at the moment, not only because of high unemployment and below-taget inflation cited by the FED. In light of the USs high debt burden, any increase in yield will translate into higher servicing costs. It is therefore that the FED finds itself in a vicious cycle. As we explained in a previous newsletter of Global Gold, the West including the US has a significant debt burden as a percentage of GDP, and an even greater one for unfunded liabilities (i.e. promises already made, like pensions etc. that have not yet been serviced) exceeding 450% of GDP. Because of these high debt levels, the US government finds itself trapped in a situation where it finances its funds through treasuries, but cannot afford

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increasing the interest rate as it will lead into an even greaterdebt burden. Moreover, we argue that the frenzy of April and June sell offs were driven by a frenzy of gold sales in COMEX, rather than a lack of physical demand. According to Reuters (citing CME data), US gold stocks of 100-troy ounce COMEX gold bars fell almost 30% between February and end-April this year, driven by a shift in sales to Asia a market with better prices and high demand compared to New York. Other cited explanations behind the COMEX sell-off (particularly by major investment banks) include increasing demand in China and India for coins and bars, and a growing preference by investors to hold physical metal rather than futures, attracted by the drop in bullion price (and an assertion of storage of value found in gold). This pent-up in physical demand has spurred a remarkable drop in the physical gold inventories held by gold brokers. Needless to say, Swiss gold refineries suffer from several weeks of delays in deliveries, and are operating at full capacity to keep up with this demand. We therefore find the current price levels as an attractive buying opportunity, particularly in light of potential supply shortage (with delays in refineries) that may have an upward impact on gold prices.

The relevance of gold is not in its price but in its ownership. This is precisely important for those who wish to make a profit from gold by purchasing certificates, ETFs and the like. Participating in a price movement is not the same as owning an asset.

Anthony Deden, Manager of Edelweiss Holdings Ltd.

Our Case for Gold still stands!

Has Gold exited the bull market? Though gold has started to pick up, it may take time to recover from the slump it faced this year. According to Incrementum Adivorss In Gold We Trust report dating end-June, gold is not in the bear market yet, but rather in a mid-cycle correction similar to the mid-cycle correction of 1974 - 1976, mainly caused by great pessimism over the gold price. According to Incrementum Advisors, the market has not yet witnessed the euphoria usually seen at the end of the bull market, therefore expecting a final stage the form of a trend acceleration and hike in the gold price. Analysts expect negative real interest rates in Europe (the opposite is expected for the US) to continue over the medium term. As we highlighted in our Global Gold outlook published December 2012, negative real interest rates is one from of financial repression, which we expected to increase in the future. In turn, riskless assets such as government bonds come to yield

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a negative return, which we argued is in favor of debt-burdened governments as it reduces the real debt level. With such a shaky economic foundation, we argue that these negative rates create a strong supporting argument for future demand for Gold, and potentially a future driver for the gold price.

Still bullish on Gold!

We continue to be bullish on gold, supported by its fundamentals that remain intact. We highlight golds high market ability and liquidity it is a worldwide accepted currency and medium of exchange, with abundant demand. But most importantly, we highlight the great plus factor of gold which lies in the lack of credit or counterparty risk. As we explained in our previous newsletter, in contrast to debt, gold secures your ownership. In contrast, as a depository of a bank, instead of being the owner of your asset, you become the banks creditor ownership is transferred to the bank. Additionally, with debt comes interest. Although you earn interest through your bank deposit, in real terms this interest represents negative returns after accounting for inflation and taxes. With gold on the other hand, value is safeguarded (in return for a depository fee). It is thus also store of value. We continue to find gold to be an important hedging instrument, not only against inflation, but also against possible currency debasement, and possibility of economic fluctuations and increased measures of financial repression introduced by western governments.

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JULY 2013

We are closer to communism than one might think

Living Marxs Dream

Karl Marx and Friedrich Engels drew up a ten-point plan towards communism. These ten points, listed in their Communist Manifesto of 1848, seek to make despotic inroads on the rights of property and as unavoidable as a means of entirely revolutionizing the mode of production. In other words, the implementation of this ten-point plan is the basis for creating a communist world and the creation of a classless society. So why should we be concerned with communism or Marx? Arent we all living in a free and capitalistic society? On the contrary! Not only do we see elements of this plan implemented, but we see them carried out by those very countries claiming to be far from communism. European countries and the United States, all advanced self proclaimed capitalist economies, are in fact significantly close to Marxs dream of socialism as this article will show. Though they might call it welfare state the resemblance to socialism is cunning. Marx believed communism could only be reached through the dictatorship of the proletariat where the proletariat (or the working class) leads its revolution. In the Manifesto Marx and Engels stated the proletariat will use its political supremacy to wrest, by degrees, all capital from the bourgeoisie, to centralize all instruments of production in the hands of the State, i.e., of the proletariat organized as the ruling class; and to increase the total of productive forces as rapidly as possible.

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Communism, to Marx, is a world with no classes, no state, and no private ownership. In his view socialism cannot work until capitalism functions properly! This implies that Marx sought to amend capitalism, as a means to eventually lead to a communist society - the implementation of these means does not necessarily imply the creation of one. To be direct: There is no such thing as a communist/socialist country! On the other hand, what we see are numerous advanced Western countries that have sought to introduce most elements of the ten-point plan who are on their way to achieving communism, according to Marxs formula. Below we show you the ten points of this formula and illustrate how these are reflected in todays modern economies.

The Ten Commandments of Communism:

1. Abolition of property in land and application of all rents of land to public purposes. 2. A heavy progressive or graduated income tax. 3. Abolition of all rights of inheritance. 4. Confiscation of the property of all emigrants and rebels. 5. Centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. 6. Centralization of the means of communication and transport in the hands of the State. 7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan. 8. Equal liability of all to work. 9. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country. 10. Free education for all children in public schools.

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Where do we stand today?
For the purpose of this article, we will highlight the centralization of credit in the hands of the state, in addition to progressive taxation as part of the notion of the welfare state.

An over-expansion of credit can enable the capitalist system to sell temporarily more goods than the sum of real incomes created in current production, plus past savings, could buy, said Ernest Mandel, the Marxist scholar, quoting Marx, but in the long run, debts must be paid. In turn, the introduction of the central banking system has led to the centralization of credit in the hands of the state. In our view, the central banking systems in connection with the fractional reserve banking system are the main causes for economic crisis. The most recent example would be the subprime mortgage crisis in 2008, which is considered one of the worst recessions experienced by the US. We can draw the root causes of the crisis back to 2001, when the FED cut rates extensively to increase money supply and jump start the economy which had suffered from a recession following the tech bubble in the 1990s. This in turn extended to the real estate market, as low interest rates were promoted the American dream of home ownership. This was in line with Bill Clintons National Homeownership Strategy, to achieve his target to increase

homeownership to 67.5% by 2000. This strategy ultimately promoted looser credit facilities from both the government-sponsored Fannie Mae and Freddie Mac, as well as private sectors lending institutions, to encourage lending of low-and middle income families, or higher-risk borrowers. This low-interest rate environment created an illusion that soon turned into a bubble. Needless to say, all this was steered from the centralization of the credit system. Back to Marx, and specifically his call for progressive taxes. Western Europes welfare states are upheld by their progressive taxation system. Germany for example, has a tax range between 14%-45%, the Netherlands 22%-52%, the UK 20%-25%, the United States has a maximum of 35%. These rates do not even consider other taxes such as VAT, wealth tax, real estate and many more. When one adds these to the equation it becomes clear that the total tax burden in many countries is well over 50%. Progressive taxation is a penalization of wealth, the socialist rationale is that the wealthy make too much but are not taxed enough. In our view the present income tax penalizes productivity. Simply put, the more we work and thus the more we earn (in theory) the more we get cut from our income. On a larger scale, we can say that progressive income tax skims off funds that are most likely to be directed into new investment and gives it to the government, which is known for its chronic mismanagement of funds. Throughout this article, we emphasized the reality that we in fact live the Marxian dream or rather nightmare, when one considers the negative effects the (partial) implementation of the plan has on our society. Although most people would argue against the introduction of a communist society, we currently seem to be heading in that direction. As freedom loving individuals it is of upmost importance to stay vigilant in relation to these developments. A wolf in plain sight is a threat, but can be dealt with; a wolf in sheeps clothing, on the other hand, is much more dangerous.

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

OUR SCENARIOS
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: 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 alarming. 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 Asian Peninsula and the Middle East we do not see the risk of a wide scale war for the time being.

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.

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 corrections we saw in April and June have worried some short term investors. Although it is possible that in the short term we see new lows, our long term fundamental outlook remains unchanged! We remain bullish on gold.

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.