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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: carranza2 who wrote (64170)	6/11/2010 8:28:32 AM
From: TobagoJack	5 Recommendations Respond to of 217835

just in in-tray, and i highlighted key words :0) From a JP Morgan Conference - in Beijing John Paulson, President of Paulson & Co. presenting to a packed ballroom his views on Gold as an alternative currency. An analytical presentation explaining his bullish view of gold based on an inevitable inflationary environment in 3-5yrs. Paulson foresees that the demand for gold as a reserve currency and inflation hedge will overwhelm supply causing price to rise sharply. Macro Environment: + Quantitative Easing: employed by the US government in 2008/9 saw the growth in the monetary base explode to 138% vs. sub-20% levels over the past 20 years. + Inflation still modest: Historically, an expansion in monetary base would translate into a likewise growth in money supply and ultimately result in inflation. However, money supply and the monetary base have de-coupled as the money multiplier (velocity) has collapsed from c.9.3x to c4.2x between 2008 and 2010. + Velocity turnaround: requires economic growth, employment growth and credit expansion in order to reverse the decline and Paulson sees the beginning of an improvement (rise) in the money multiplier in recent macro data. + Exit strategy: Unlike the 1930s depression when the US govt hiked taxes and savings to deal with the excessive system leverage, the US, Swiss, UK and to some degree, the EU governments opted to print money. Today, there are tools that the US can employ to remove the monetary stimulus but Paulson does not believe that they will be utilized as they are contractionary to economic growth, unemployment remains high and the US deficit will likely remain elevated on the next 10 years. Gold as an Inflation Hedge/Asset Class: + Correlation: From 1960 to present, gold has exhibited much volatility but is on the whole, correlated with money supply. Gold often also overshoots in periods of high inflation. + 2 year lag: Using the 1970s as a reference, rise in inflation and gold prices lagged money supply growth by approx. 2 years. + NOT a crowded trade: the amount of investment gold available is only $1Tr vs. financial assets of $200Tr. Likewise, gold ETF holdings are $78.3bn vs. US money market funds of $2849bn. + NOT overvalued: in real terms, gold today is half the level than in 1980. Gold as a Reserve Currency: + Central banks have been decreasing their % of reserves in gold from 60% in 1980 to a stabilized level of c.12% today. Gold has appreciated consistently vs. the US$ in each of the last 9 years. + China has been a net purchaser of gold reserves but it only accounts for 1.7% of their $2.4Tr of foreign reserves. Q&A: + The US is not like Japan: Japan did not employ QE but the reduction of system debt was funded by the high savings rate. + Other commodities are unsuitable: logistic issues and liquidity prevent oil and other hard commodities to be currency substitutes. + China will fare better: continued robust economic growth and RMB re-valuation will allow China to offset global inflation. + Double dip? A reverse in the economy will remove the drivers of money velocity preventing the expansion in monetary base to translate into money supply.