news

1st June 2009

This issue: This Thunder Road News was a bit more hurried than normal as
I took a few days holiday at the Center Parcs resort in Sherwood
Forest. In the neighbouring chalet was a lovely couple who had
Demographics, stock market both trained as doctors and now work as psychiatrists in the north
earnings and food/energy
west of England. One evening we got chatting and they were
investments (here)
telling us about their concerns for the future and how most of
Gold - suspicious exports their savings are in UK government bonds and they weren’t sure
from US (here) if this was the right place for them going forward. That was like a
red rag to a bull and it was hard not to unleash a verbal tsunami
about the need for everyone to protect themselves from reckless
politicians and central bankers and to buy gold/silver, as well as
energy, food/agriculture (they were already thinking about land)
and internet infrastructure related investments – the “global end
of normal”, etc, etc. I hope I didn’t bore them too much.

The first three investment classes had a stellar week last week as
the global inflation trade (or should we call it an emerging dollar
crisis) took centre stage while I was away: The 22.6% rise in the
silver price was its biggest weekly rise since April 1987. I’m told
that a high profile fund manager in London has personally bought
a cubic metre of silver - the investment case is becoming better
understood! I stick to my view that before this gold and silver
bull market is over, people will be discussing ownership of gold
and silver exploration companies over dinner in London and New
York.

Many people are getting optimistic about maturing green shoots

in the global economy, but I still have grave doubts regarding
the UK and US. These quotes from the Cara Trading Advisory
(Bahamas) team after the close on Friday summed up my feelings
perfectly:

“What is going on today is atrocious. Where is the SEC these

days? Do you feel like a frog dropped in the lukewarm water
as the heat is slowly turned up, oblivious to one’s impending
demise? We do. Seriously, could Friday get any duller? Are the
masters lulling us to sleep, trotting out their minions on Tout TV,
imploring us to invest on “hope”, buying time as financial firms
desperately raise much-needed capital? Then suddenly jerking
our chain, as they did in the final moments of Friday’s trading, to
be sure they have our full attention. Points of interest for Friday:
Paul Mylchreest
paul@thunderroadreport.com
 BB Gold (GLD + 2.04%) and silver (SLV + 3.62%) continued their ascent, particularly strong since Thursday
morning, the fundamentals too compelling to ignore;

BB A rare combination of major bond strength (TLT + 2.23%) and extreme dollar weakness (Euro ETF FXE
+ 1.36%);

BB An unbelievable buy-on-close program, which drove the S&P futures +2% in five minutes, which left us
shaking our heads at the co-ordination with Tout TV’s usual talking heads; and

BB The Financials (XLF +1.42%) are coiling, getting ready for a large move – one way or the other.

But think, now that Government leaders have taken center stage, with promises everywhere; has
government ever come up with the most efficient, most cost-effective solution? Wasn’t government in
league with bankers to blame for this mess?

Most people lost nearly -50% of their net worth over the past 18 months. A week ago I remarked that
promoters were coming out in flocks. This appears to be the start of Silly Season – a bit like the summer of
1987. Please don’t start swinging for the fence, attempting to get back what is “rightfully” yours. Instead,
think singles and doubles, minimizing risk while ringing the register.”

Demographics, stock market earnings and food/energy

A blog I’ve started to follow is “Nathan’s Economic Edge” at economicedge.blogspot.com. Recently he wrote
a piece (here) on demographics and the work of Harry S. Dent in particular. At the beginning he considers
the extent that demographics impacts economics, highlighting the quote from David Foot in his book,
“Boom, Bust & Echo”:

“Demographics explain about two-thirds of everything: which products will be in demand, where job
opportunities will occur, what school enrolments will be, when house values will rise or drop, what kinds of
food people will buy and what kinds of cars they will drive.”

Nathan argues (correctly I think) that the impact of demographics is far less than two-thirds as there are so
many other factors that “comprise the economic brew that add up to prosperity of lack thereof”. One factor
he mentions is the rule of law (i.e. contracts with integrity), and I want to go off briefly on a tangent here.
Regarding countries without the rule of law, Nathan argues that they:

“are far more likely to be poor because their rule-shifting drives capital away.”

I thought it was very interesting how Obama bulldozed through bankruptcy law in respect of the demotion
of Chrysler’s secured creditors vis-a-vis their unsecured counterparts with stronger political connections. It
augurs badly for confidence in the US, just at the moment when it needs more finance than ever before.

Back to demographics and the subject of world population, the growth of which is firmly in its exponential
phase. The planet is currently adding one billion people every 13-14 years and the population could double
again by 2040. On a daily basis, the world population is increasing by 211,000 people daily. This is shown
in chart for below:

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 Growth in the world population

Nathan then ties this in with the work of economist and writer, Harry S. Dent. I wasn’t familiar with his
work, although I probably should have been. Wikipedia describes Dent’s work as follows:

“The basis of Dent’s research is the highly predictable nature of consumer spending based on a family
formation pattern - minimal spending as young adults, spending more as raising children, peaking in that
spending as children are leaving home, and then slowing spending during the last 15 years of working life
(48-63) while saving more and preparing for retirement.

In the late 1980s, Dent forecast that the Japanese economy, then the darling of the world, would soon enter
a slowdown that would last more than a decade. In the early 1990s, he predicted that the Dow would reach
10k. Both of these predictions were met with much skepticism, and yet both eventually came to pass. In
Japan, Dent was using their peak of 45-50 year olds (1990-1994) as the beginning of a long slowdown.”

While these were stunning successes, he did not anticipate the recession of 2002-03 in the wake of the dot.
com bust and predicted the Dow would reach 40,000 by the end of this decade. Despite this, I think much
of his analysis is not only thought-provoking, but also has a great deal of validity.

Nathan uses some of the charts on Dent’s website, www.hsdent.com, to make a bearish case for the stock
market focusing on US data. The first key chart is the birth rate index adjusted for immigration. This shows
the first peak associated with height of the “baby boom” generation in 1961:

Trend in US birth rate

Source: H.S. Dent Foundation

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 As an aside, the UK birth rate peaked at almost the same time. The next phase of the analysis focuses on
the age of peak earnings power, and therefore peak spending power, of the statistically average person.
Dent worked out that the average age for peak earnings power is 48.5 years old:

Typical lifecycle spending cycle

Source: H.S. Dent Foundation

Obviously, for a person born at the peak of the baby boom generation in 1961 would reach their peak
earnings power in late 2009 or early 2010. The most interesting part of Dent’s work is when he compares
the birth rate adjusted for peak spending (i.e. by 48.5 years) versus the inflation-adjusted chart of the Dow
Jones. For much of the last fifty years, the trends in the two charts have followed each other quite closely:

Spending (birth rate adjusted) vs. inflation-adjusted Dow Jones

Source: H.S. Dent Foundation

The message is that the inflation-adjusted Dow should be peaking in the next 12 months. Now as we know,
Dent hasn’t been infallible and the Dow Jones actually peaked in October 2007 at 14,164. This is where
Nathan makes an interesting point when he asks why was Dent late in his estimate?

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 “The reason is DEBT!...central bankers were able to force more and more debt into the system. This pulled
the baby boomer’s FUTURE INCOMES into the NOW. The effect of this was to over accentuate the growth
phase and now to over accentuate the decline as well as to make the decline lengthier in time as future
incomes will be servicing the interest on all that debt.”

I couldn’t agree with him more as one of my mantras is “Debt brings forward consumption”. The decline in
peak spending power feeds through to corporate earnings!

US corporate profits after tax

Source: St Louis Federal Reserve

Nathan then makes another interesting point:

“The baby boomer’s kids (echo boomers) are now moving through or past college and people who represent
the leading edge of this wave are already moving into their first homes. What impact will this have? If you
are going to invest in real estate, you should know. Thus, it is fair to say that for the near-term, luxury
home prices will languish and starter home prices will hold up better.”

Leaving aside differential moves within the residential property market, it seems to me that there is
another strong and obvious investment message. The exponential rise in world population combined with
Dent’s work regarding the lull in spending power in developed economies like the US (accentuated by the
heavy ongoing debt burden) is a powerful driver for basic commodities and food/agriculture and energy
related investments in particular. To the extent that the supply side of these commodities is constrained
only adds to their attraction.

In my view, if you want confirmation about the demographic justification for food and energy related
investments you got it with the secret meeting of billionaires on 5 May 2009 at the home of Sir Paul Nurse,
president of the Rockefeller University, in Manhattan. Despite their best efforts to keep it secret, it leaked
into the mainstream media with an article on page 26 of the Sunday Times on 24 May 2009.

“Some of America’s leading billionaires have met secretly to consider how their wealth could be used to
slow the growth of the world’s population…The informal afternoon session was so discreet that some of the
billionaires’ aides were told they were at security briefings.”

Those present included David Rockefeller, George Soros, Bill Gates, Michael Bloomberg, Warren Buffet, Ted
Turner and Oprah Winfrey. The Sunday Times reported one guest saying that “population growth would be
tackled as a potentially disastrous environmental, social and industrial threat.”

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 The reason given for all the secrecy, which is laughable in respect of the agenda of at least one of the
guests:

“They wanted to speak rich to rich without worrying anything they said would end up in the newspapers,
painting them as an alternative world government.”

Gold – suspicious exports from the US

In the last few weeks, I’ve been highlighting the massive buying of gold call options in the June and
December contracts on the COMEX exchange in New York. The June contract expired on 26 May 2009, i.e.
last Tuesday. Trading that day was very illustrative of how the character of the gold market had changed
recently. As the chart below shows, the interventionists moved in to suppress gold prices during the
morning session in London, but the buyers were waiting. The usual “Plan A” of the interventionists to push
down the price on the opening in New York was run, but once again, the buyers were waiting.

Gold price on 26 May 2009 (US$/oz)

Source: Kitco

Now we have to see to what extent the holders of “in the money” call options for the June contract take
delivery of their futures contracts and stand for delivery of physical gold.

For those who haven’t heard about him, Rob Kirby of Kirby Analytics (www.kirbyanalytics.com) is an
excellent forensic analyst with an uncanny ability to uncover data that everyone else has missed. His latest
piece, “US Gold, Going or Completely Gone?” (here) shows how the US has exported a massive amount
of gold during the last two years and how the US authorities have done their best to hide this fact in the
official statistics.

Kirby set out to prove that the US trade statistics were inaccurate and was analysing Mineral Industry
Surveys published by the United States Geological Survey (USGS) This shows import and export data for
commodities and, in the latest survey for gold in January 2009, he found the following:

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 US imports and exports of gold

Source: USGS, Rob Kirby

In 2008, under the terminology of “Gold compounds”, the US reported exports with a gross weight of 2,920
tonnes. Rob Kirby contact the USGS to query the number and was told that the data was provided by US
Census Bureau and gold compounds were “typified by industrial type products containing low percentages/
amounts of actual gold content – like gold paint.”

Kirby had already checked the 2007 data, which showed that the export level was significantly lower at
2,150 tonnes. With a much weaker global economy in 2008, he asked the USGS representative, why would
exports surge in 2008? The USGS representative acknowledged that this didn’t make sense and admitted
that the US Census Bureau was questioned on this line item. Kirby asked whether it was the gross weight
of these exports or the gross value which was questioned? The USGS confirmed that it questioned the gross
value of these export goods. And here is the key - Kirby asked:

“Being an issue of gross value – then let me guess that the US Census Bureau is assigning an astronomically
high value to these goods. Such a high value would be completely inconsistent with what the US Census
Bureau claims these items are – namely industrial goods. The values being reported would be more in line
with these goods being gold bullion or equivalents?”

The USGS representative replied:

“That would be correct.”

Rob Kirby concludes:

“the forgoing data and discussion with the US is proof that the US has surreptitiously exported physical
gold – and continues to do so.”

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 If these “Gold compounds” are gold bullion, or predominantly gold bullion (like melted down gold coins
– see below), the tonnage is massive. Aggregate exports of 5,070 tonnes in 2007-08 compares with the
official (alleged) figure for US gold reserves of 8,133.5 tonnes and annual US mine production of just over
200 tonnes.

Having established the existence of these gold exports, the next question is what they represent? Kirby
speculates:

“The exports are likely coin melt (or gold compound, if you prefer) from the great gold confiscation back in
1933; or alternatively, this terminology is being used to disguise the physical repatriation of foreign gold
bullion formerly on deposit with the N.Y. Federal Reserve.”

For readers who are less familiar with the gold market, some explanation might be useful here. President
Roosevelt confiscated gold from US citizens in 1933 to stem a run on the US’s gold reserves during the
Great Depression. In many cases, the confiscated gold coins were not pure gold (often about 90%), but
nonetheless, were melted down into bars. Such bars might fit with could be described as “Gold compounds”
in the USGS trade data. If this is the case, it would represent the US covertly exporting part of its gold
reserves to sell on foreign exchanges to suppress the gold price and protect the value of the US dollar.

Alternatively, as Kirby speculates, it could represent foreign central banks repatriating gold reserves stored
at the vaults of the New York Federal Reserve. Describing such bullion exports as “Gold compounds” could
just be a convenient way of trying to hide their true nature. Coincidentally, in last week’s TRoad News, I
reported that according to Jim Willie’s (of the Hat-Trick letter) source, Germany is demanding that its gold
stored in the US be returned. From other sources, I also noted that the US and Germany may have engaged
in a gold swap that allowed the US to “mobilise” Bundesbank gold in Europe to hold down the price on the
major physical markets in Europe, i.e. London and Zurich.

What’s also interesting is that the USGS trade data also shows which nations the gold compounds was
exported to or imported from. Rob Kirby doesn’t mention this, but it’s worth taking a look. The table below
shows imports and exports for 2008:

US imports and exports of “Gold compounds” in 2008 (tonnes)

2008
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year
Imports 4 11 1 17 0 27 24 0 16 3 0 0 102
Exports 220 281 293 232 257 359 187 197 265 226 228 174 2,920
Canada 41 68 36 54 43 65 44 37 42 47 35 38 550
China 66 23 100 69 46 43 0 1 19 52 30 0 449
Dominican Rep. 13 13 10 10 10 12 29 22 5 18 15 18 174
Germany 0 1 1 1 1 6 2 0 1 3 3 2 21
Netherlands 0 33 11 5 7 7 2 30 17 6 38 19 173
Singapore 55 108 94 63 87 204 86 72 120 68 92 78 1,127
Switzerland 0 0 0 0 0 0 0 0 0 0 0 0 0
Taiwan 15 12 10 11 15 13 4 21 10 10 2 8 130
UK 3 0 1 0 2 0 2 0 0 1 0 0 10
Other 26 23 30 17 48 10 19 13 51 22 14 11 284

Source: USGS

I’ve included the UK and Switzerland even though the exports are negligible. If physical gold from these
“Gold compounds” was being used to suppress the gold price in Europe it would most likely be exported to
either or both of these nations, or ones nearby. This is not the case, although there are modest exports to
the Netherlands and Germany.

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 By far the biggest destination is Singapore (exports of 1,126.5 tonnes in 2008 alone) but, according to the
World Gold Council, Singapore’s official gold reserves are only 127.4 tonnes. It is possible that Singapore
has covertly increased its gold reserves without making a public announcement, just as China did between
2003 and April 2009. Alternatively, it could represent the US selling gold reserves into Asia to satisfy the
strong demand in the region where holding savings in gold is far more common than in the west.

The movement of these gold compounds to China could represent the repatriation of some of the 454
tonnes of bullion purchased (and now acknowledged) during the last six years. Another very suspicious
figure is the 174 tonnes of gold compounds exported to the Dominican Republic, that well known hub of
world gold trade! Maybe these gold compounds really are used in gold paint and that artist who normally
puts colourful tarpaulins around islands and buildings has painted the whole of the Dominican Republic
gold. I’ll go and check Google Earth. If not, maybe this quote from Reuters last year is closer to the mark:

“Drug smugglers are flying with impunity into the Dominican Republic and have turned it into a far more
important transshipment point for South American cocaine than its largely lawless and impoverished
neighbor, Haiti, U.S. officials said on Thursday.”

Wouldn’t it be interesting if drug smugglers have seen the writing on the wall for the paper dollar and will
now only accept payment in gold bullion?

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 Author: I started work the month before the stock market crash in 1987. I’ve worked mainly as an analyst
covering the Metals & Mining, Oil & Gas and Chemicals industries for a number of brokers and banks
including S.G. Warburg (now UBS), Credit Lyonnais, JP Morgan Chase, Schroders (became Citibank) and,
latterly, at the soon to be mighty Redburn Partners.

Disclaimer: The views expressed in this report are my own and are for information only. It is not intended
as an offer, invitation, or solicitation to buy or sell any of the securities or assets described herein. I do not
accept any liability whatsoever for any direct or consequential loss arising from the use of this document or
its contents. Please consult a qualified financial advisor before making investments. The information in this
report is believed to be reliable , but I do not make any representations as to its accuracy or completeness.
I may have long or short positions in companies mentioned in this report.

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