1. Why the Credit and Currency Markets Are Driving Gold Victor Adair White Bear Capital Corp Vancouver Resource Investment Conference January 18, 2010.

2. Disclaimer - Im a Private Trader 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

3. The Inflation/Deflation Forecast The range of analysts 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

4. 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 de- leveraging/deflation with stimulative policies Is it working? Wall street or Main street?

5. 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)

6. We are in a Credit Contraction This is not an ordinary recession De-leveraging is powerful and relentless Demographic change Periods of optimism – embracing risk Periods of fear – avoiding risk

7. Opposing Forces Private sector de-leveraging Balanced (?) by Massive fiscal deficits & easy monetary policy

8. Credit Supply & Demand Massive Govt 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 Govt sells debt at historically low yields

9. 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

10. More Government Govt 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

11. 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 worlds 6 th largest holder of gold (1500 tons?)

12. 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

13. Risks to a Continuing Gold Rally De-leveraging accelerates (which causes) 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 dont work

14. Risks to a Continuing Gold Rally 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

15. 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.

16. Conclusion Opposing forces in the credit markets impact the gold price Private sector de-leveraging (deflationary trend) is negative for gold Vs. Govt and Central Bank stimulative efforts (inflationary trend) are positive for gold Which force wins?