Our Current Views on the Gold Market

• We believe gold has bottomed and has entered a new bull market.
• Gold was sold last year by western investors because they thought it was an inflation hedge and, despite QE, there was no consumer price inflation in North America and Europe (according to government statistics), so sell gold and buy stocks.
• In our view, gold is an effective inflation hedge and it is driving aggressive buying of gold in Asia and the developing world, where there is inflation
• But the main reason to own gold is not as an inflation hedge...gold is the only form of final settlement, the only asset that backs itself; gold is therefore the ideal hedge against the risk of default. And because it is outside the banking/financial system, physical gold is the only reliable hedge against predatory governments and Central Banks.
• Huge and rising debt levels, massive carry trades, enormous derivative positions, unsustainably low interest rates combined with immense leverage and faltering emerging markets and currencies have created a very fragile financial system with growing default risks.
• The Fed is engaged in a course of reducing the flow of new liquidity to a financial system that needs it (tapering).
• Since tapering began in December, gold has gone up, equity markets have stalled and emerging markets have been hit hard.
• If the Fed continues to taper, default risks will rise as liquidity declines...financial assets will fall which is almost always good for gold.
• If the Fed decides to stop tapering in the future, it will be a sign that the Fed cannot reduce liquidity and that inflation is inevitable. Not tapering (continuing QE) would undercut confidence in the Fed and the US economy which would be very bullish for gold.
• We see gold making new highs before the end of next year.

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