GLOBAL GOLD

OUTLOOK N1
December 2012

On how your wealth is and will continue to be confiscated

Financial Repression
The term financial repression is becoming more and more present in the media. Whats actually behind the term? Financial repression is defined as measures which governments take to channel funds somewhere where they wouldnt go if left to the free market. So why would governments do such a thing? The answer is debt! Most western countries have piled up a gigantic debt burden. To illustrate this, the chart below shows the debt burden in percent of GDP for selected countries. It is clear, that even countries which are currently not in the spotlight have debt levels which already today seem simply repression are:

Negative Real Interest Rates Inflation Capital Controls Banking Regulation The times of negative real interest rates, meaning that after inflation riskless assets such as government bonds are yielding a negative return, are already upon us. We are convinced that this development will continue for the foreseeable future, because this suits debt burdened governments. Why? Because it leads to a reduction in the real debt level.

Claudio Grass, Managing Director at Global Gold AG

In the hectic times we live in it is important to take a step back and take a look at the big picture. Our aim with this publication is to give you, the reader, an overview of economic and political events impacting the gold markets as well as interesting articles in connection with precious metals. We plan to provide this newsletter on a quarterly basis in the future. Like everyone else, we dont have a crystal ball and cant predict the future. We do, however, have our view of where the future will take us. You will find an analysis of our views in the Our Scenarios section on the last page. I wish all the readers happy holidays and a successful new year. Please feel free to send me your comments and feedback regarding the publication.

Current Liabilities in % of GDP Unfunded Liabilities in % of GDP

900%

675%

450%

225%

0%

USA

UK

Greece

Spain

Italy

Germany France

Source: Jagadeesh Gokhal, "Measuring the Unfunded Obligation of European Countries" and IMF

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

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

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

unsustainable. If one takes the so called unfunded liabilities into consideration which are promises already made, like pensions etc. that arent funded yet the situation seems dramatic (red bar). Due to these extremely high debt levels governments all over the world have an incentive to channel funds into a certain direction, e.g. government bonds. Financial repression has already started in one form or another but is likely to increase in the future. So what forms can financial repression take on? Basically, the possibilities are limited only by the imagination of governments. Some non-exclusive examples of financial

The money owed and being repaid is worth less and less with every payment. These measures are simply a redistribution of wealth from owners of money to the government. Although not typically seen as a measure of financial repression probably because of the fact that inflation has become omnipresent, this in our view is the most persistent act of financial repression which is used worldwide to reallocate buying power from the citizens to governments. Governments just love inflation. Firstly, because most tax systems worldwide are progressive

GLOBAL GOLD
OUTLOOK N1
2500 2000 1500 1000 500 0 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985
December 2012

IS GOLD IN A BUBBLE?
Clients often ask me if I think that gold is in a bubble. In my opinion it is not. If one would adjust the gold price of 850 US-Dollars in 1980 for inflation one would get a price of around 2200 USD in todays dollars. This price is well below the current price. Another interesting chart I like to show is the one on the left. It compares the previous bull market starting in 1968 to the current one starting in 2001. Although the prices have increased more than sixfold since 2001, the price increases seem to be much more moderate than the development we had in previous periods.

1968 - 1985
Source: Bloomberg

2001 - Today
The above mentioned examples are just a few forms of financial repression measures which governments can enforce. We are convinced that at least a combination of the above mentioned and further additional measures will be implemented as governments become more and more desperate. We are certain therefore that it is essential to hold a substantial part of ones wealth in safe jurisdictions, such as Switzerland, which have historically always respected property rights. Furthermore it is of utmost importance to hold assets which are not prone to confiscation or measures of financial repression, the highest form of such an asset being gold. How much of gold is actually left?

in nature. If wages go up nominally, but stay the same in real terms, the government gets a larger percentage of your new "higher" income. Also inflation stimulates growth. Nominal growth that is! Implying that the government is doing a good job for economic growth. In sharp contrast to their prior stance on the issue, the IMF recently published a paper where they come to the conclusion that the implementation of capital controls can make sense and therefore could be acceptable under certain conditions. For a while now we at Global Gold have been pointing out the risk of capital controls being implemented on a wide scale in the west. We are convinced that this IMF paper, sets the foundation for the future justification of this measure. Another important action which governments have already taken for a while are banking regulations. Due to the fact that government bonds are deemed to be a risk-less investment, banks have been induced or in some instances outright forced to keep a substantial part of their assets in government bonds. This measure of course is again an excellent way of channelling savings to the government.

worldwide, ETFs or the increase in the Chinese demand. On the other hand the supply of gold seems to be relatively stable. This leads the authors of the report to believe that the only possible supplier of the gold to be western central banks. Auditing requirements for most central banks do not force them to list swapped or lent out gold as a separate item on their balance sheet, because it is legally still theirs. This makes it possible for such transactions to take place without any sort of notice to the public. Should these assumptions be correct, this would imply two things. Firstly, that our monetary system is built on an even shakier ground than previously assumed, because the only real asset on central banks balance sheet might be technically theirs, but just not physically there. Secondly, that the moderate increase in gold price is due to the fact that the central banks are lending and swapping out their gold artificially increasing the supply.

Central Banks Gold

A very interesting piece of research from Sprott Asset Management titled Do Western Central Banks Have Any Gold Left? recently caught our attention. In their piece they analyze the change of demand and supply of gold since 2000. From the figures they gathered they see a massive increase in the demand for physical gold, for example from central banks

GLOBAL GOLD
OUTLOOK N1
December 2012

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.

DESCRIPTION

BACK TO NORMAL

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.

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.

PROBABILITY: 80%

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.

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.

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.

IMPACT ON GOLD
As in recent years the current policies of governments positively impact gold prices.

IMPACT ON GOLD

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.

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%.

OUR CONCLUSION
The only scenario, which could have a negative impact on gold is a return to normality. As we deem this scenario to be relatively unlikely at the moment 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.