Why the Credit and Currency
Markets Are Driving Gold
Victor Adair
White Bear Capital Corp
Vancouver Resource Investment
Conference January 18, 2010.
Disclaimer - I’m a Private Trader
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Not an analyst
Not a broker
Nothing to sell
No axe to grind
Just a guy trying to make a buck trading
his own money in the market
• Talking points to get you thinking
The Inflation/Deflation Forecast
• The range of analyst’s forecasts vary from
deflation/depression to hyper-inflation
• Why would your forecast be any better
than theirs?
• Your forecast/opinion may be your
biggest financial risk
My Historical Framework
• Generational Credit Boom produced an Asset
Boom and a huge appetite for Risk
• The Credit Crisis led to de-leveraging which
pressured asset prices and re-priced risk
• Lenders are less willing or able to lend
• Borrowers are less willing or able to borrow
• Global policymakers are trying to counter deleveraging/deflation with stimulative policies
• Is it working? Wall street or Main street?
Perspective
• Prolonged prosperity wore down the
scepticism of creditors. (James Grant,
Money of the Mind, 1992)
• …the current combination of high asset
prices, low interest rates and massive
fiscal deficits is unsustainable. (The
Economist, 2010)
We are in a Credit Contraction
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This is not an ordinary recession
De-leveraging is powerful and relentless
Demographic change
Periods of optimism – embracing risk
Periods of fear – avoiding risk
Opposing Forces
• Private sector de-leveraging
• Balanced (?) by
• Massive fiscal deficits & easy monetary
policy
Credit Supply & Demand
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Massive Gov’t debt supply
Balanced (?) by demand from
Retail (safety)
Banks (balance sheets)
Hedge funds
Central Banks (Domestic and Foreign)
The degree of balance/imbalance will help set
the level of interest rates and the availability of
credit to the private sector
• So far the Gov’t sells debt at historically low
yields
Credit Spreads / Risk Premiums
• Very wide at crisis peak – huge
counterparty risk
• Narrowed dramatically during optimism
rally (March 2009 to date)
• Corporate
• Sovereign
• Credit Default Swaps
• Yield curve
More Government
• Gov’t revenues are down, expenses are
up - deficits get bigger
• Cut services? Raise taxes? Borrow more?
Break promises? Depreciate the currency?
• Expect the public to welcome more
government into their lives
• Expect the government to default on some
of their promises
Flow of Funds to
Gold/Commodities
• Flow of funds into commodity sector
greatest ever in 2009 – bigger than 2008
• Commodities seen as an “Asset Class”
that is a risk diversification (wrong?)
• Flow of funds a dominant force in
commodity prices
• Gold ETFs now world’s 6th largest holder
of gold (1500 tons?)
Gold Has Rallied
• Gold is doing what it should when global
policymakers are trying to fight deflation –
Martin Murenbeeld, 2009.
• Since 1999 Washington Accord (supply)
• Since Obama elected – socialist and
inflationist fiscal policies, implicit weak
dollar policy,
• Because Central Banks will remain
extremely easy for an extended time
Risks to a Continuing Gold Rally
• De-leveraging accelerates (which causes)
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Deflation worries to escalate
Counterparty risk to soar
Capital to seek safety – US$ rises
Hot money to leave commodities/gold
Credit spreads to widen
• Possible triggers: geo-political event, China stalls, Euro
fails, stimulative measures don’t work
Risks to a Continuing Gold Rally
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Economies recover (which causes)
Inflation worries to escalate which causes
Interest rates to rise
Real interest rates to rise faster
• If USA recovers first then US$ rises
Why Gold Goes Higher
• Fiscal and monetary policies designed to
battle deflation debase fiat currencies –
which means:
• Inflation – which dictates:
• Buy hard assets – diversify out of paper
assets.
Conclusion
• Opposing forces in the credit markets
impact the gold price
• Private sector de-leveraging (deflationary
trend) is negative for gold
• Vs.
• Gov’t and Central Bank stimulative efforts
(inflationary trend) are positive for gold
• Which force wins?