CHRIGIS DARE2SHARE GOLD REPORT!

Quote: Christian, God gave you many gifts, but forgot to include a filter on your mouth! This report takes advantage of this lack of filter to share certain realities about the gold market that many market participants choose to keep to themselves. After receiving positive feedback from writing monthly newsletters for clients and speaking at their conferences, we thought it would be beneficial to prepare a report on a regular basis for all our clients. The result of this is the Dare2Share Gold Report!

THIS MONTHS QUESTION: WHERE IS INFLATION? Christmas is magical when one is a child. Santa Clause comes once a year to bare gifts, and this regardless of any financial or economic crisis. When you wake up in the morning you run downstairs and you glow as you see dozens of gifts below the beautiful Christmas tree. Then one evening when you are 8, you are a bit too curious for your own good and get up in the middle of the night to try and see Santa Clause. But to your surprise all you see is your parents putting gifts lovingly below the tree and a myth dies instantly. What happens next? Reality happens. Over the following years, instead of receiving many gifts you start getting less and less until you become a teenager where you only get one gift, or sometimes none at all, as the magic of Christmas has vanished. This is exactly what the situation is today: western governments print money in excess and there is no inflation. Santa Clause is clearly in town. However, where does all this printed money go? The USA is the most interesting example of this unique phenomenon and coincidentally just happens to be the country that celebrates Christmas best! The USA has printed a total of approximately USD 2 Trillion via QE 1 and QE 2. However, despite this substantial increase of liquidity the positive effects remain to be seen within the real economy and Main Street. The reality remains that banks are still reticent of lending money to small businesses, so where has all this cash gone? Well, it can be summarized in one chart:
1990 2012 RESERVES OF DEPOSITORY INSTITUTIONS (SEASONALLY ADJUSTED, BREAK ADJUSTED)

Source: Federal Reserve Board 2012

WHAT DOES THIS CHART SHOW?

Between January 1990 and August 2008 the bank reserves with the Federal Reserve varied between approx. USD 0.04Trillion and USD 0.05 Trillion.

As of August 2008 these reserves increased substantially over the next 3 years which happens to be the same period of QE1 and QE2.

The bank reserves peaked at USD 1.65Trillion which is an increase of 3100% from their levels of 2008!

In other words, the real result of QE1 and QE2 are that banks received liquidity bailing them out from their toxic assets and instead of lending this money out to the market to jump start the economy, they increased their reserves with the Fed. This is one of the reasons, why to date we havent seen any substantial inflation in the USA. To put things in perspective as of Feb 2012, the Federal Reserve estimates that M1 = USD 2.2 Trillion (Source: http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt, April 2012). In other words, the increase in bank reserves at the Fed, since 2008, represents 72% of M1. We cant really criticize the banks for doing this, as government interventions most often create inefficiencies in a free market and banks just happen to be very good at exploiting these inefficiencies. During the financial crisis banks were being criticized for issuing easy credit to consumers and mortgage holders. So now when the Federal Reserve and government not only bail them out when they are in trouble, but allow them to receive 0.25% p.a. on this newly received free cash they would be morons not to exploit this. We will therefore all soon wake up in the middle of the night to see that Santa Clause doesnt exist, and in fact was simply a not so jolly bald man with a beard whose name rhymes with Yankee. BE CAREFUL FOR WHAT YOU WISH FOR

If you wish for growth, well then this will most likely be via additional liquidity in the market through easy credit. If credit eases, banks are likely to reduce their reserves at the Fed in order to put their capital to work. Once this happens the logical effect is inflation. Therefore, in our opinion it will be difficult to have growth in the USA without a substantial increase in inflation. Our logical conclusion: Cash is good but Gold is better.

However, many investors believe all gold is equal and it isnt and this will be the topic of our next monthly update. Yours truly, Chrigi

Contact Us:
pmtrading AG Bahnhofstrasse 9 6341 Baar Switzerland Contact: Direct: Email: Christian Wehbe +41 (0)41 760 20 82 christian.wehbe@pmtrading.com pmtrading (Asia) Limited The Hong Kong Club Building, Level 9 3A Chater House Hong Kong, China Contact: Direct: Email: Dewey Yee +852 3125 7623 dewey.yee@pmtrading.com

Disclaimer: We are not promoting any type of financial instruments and our reports simply reflect our opinion on the gold markets. This publication serves only for information purposes and is not research. Although we have taken reasonable measures to verify the data and research contained herein, there is no representation or warranty provided in relation to the accuracy, completeness or reliability of the information.