chapter three

of the most challenging crisis

in our lifetimes

a personal view

Eduardo Elsztain
May 2020

Chapter Three – Page 1


UNPRECEDENTED TIMES
DEAR FRIENDS AND INVESTORS,
In 1990 we decided to take a sabbatical year with my
girlfriend and actual wife today, following a decade of
economic volatility in Argentina. Our good friend, investor
and mentor Peter Gruber —who was investment manager
in emerging markets for Sir John Templeton— agreed to
lend us his apartment in Midtown Manhattan, NY.
We will elaborate on that personal perspective but let’s start
by reviewing where are we today. The Chapter One of this
crisis is of course the health one, a pandemic of global
magnitude. We do not have much to add of what we already
know (or do not know) about it. The good news about this
perspective of the crisis is that we will hopefully be mostly out
of it by 2021, assuming we will keep with tight social
distancing measures and that vaccines will be successfully
developed, produced and distributed by then.

As you may know, that year my life’s path changed The Second Chapter of the crisis is about the current
forever… economic impact as a result of the extensive lockdowns
throughout the world which include an imminent GDP
plunge in Q2 which is expected to be massive and global:
• I had a life-changing business meeting with
George Soros, that fueled the enterprise I run
today.

• I had life-changing spiritual meeting with the

Lubavitcher Rebbe, that guide me like a compass
to this day. And

• My home country went through life-altering

experiences — including 200% inflation in one
month, and a currency crash so extreme it led to
the introduction of the 500,000 Austral currency
note. This period of inflation caused suffering and
riots that nobody should ever experience.

The lessons I learned in 1990, I will never forget. The US alone has destroyed all jobs that were created since
the last global financial crisis of 2008 at a speed never seen
It’s hard for me to believe that was 30 years ago. Today in before and taking the unemployment rates to levels
2020, several colleagues have reached out to me to get my comparable to the Great Depression:
thoughts on today's extreme, life-altering moment -- which
could be the most defining period in our lifetimes. So I sat
down with my team to define our vision for how to
survive and prosper in these unprecedented times.

While almost everyone shares similar views on the health

and economic impacts that this catastrophe will eventually
have, we believe that most of the people are still not
evaluating what we call the “Chapter Three” –and
ultimate consequences– of the way that the crisis is
being handled by central governments worldwide.
For this reason, we decided to put together this essay in
order to share our experience in doing business in Argentina
and explain why we believe those lessons are relevant to
today’s world.

Chapter Three – Page 2

Of course there should be a big reversal in unemployment
once the lockdowns are fully lifted, but that will still
unfortunately leave a massive amount of people without
jobs as it usually takes years for the economy to readapt and
absorb people without work, even if this will only be a
short-lived “thin spike”:
Consequently, the consumer bank loan delinquency rate in
the US is expected to jump dramatically:
For this reason, big banks have already started to record
back extraordinary loss provisions for bad debts:
The FED and other Central Banks initial response was to
reduce interest rates that virtually made the cost of money
zero or even negative:
However, the market reaction to those measures was as if it
was “not enough” as it is well synthesized in this cartoon:
For that reason, it didn’t come as a surprise that the FED has
pledged to do “whatever it takes” alongside other Central
Banks to make sure that this recession will not become the
worst depression ever and put together the most aggressive
balance sheet expansion on modern history, with the FED
itself expected to expand its balance sheet from USD 4
Trillion to a staggering almost USD 12 Trillion:
Chapter Three – Page 3
Not only have the FED asset purchase programs been In the meantime, the US is not alone in these
unprecedented in terms of size but also in terms of speed of “unprecedented fiscal measures”:
execution, compared with previous Quantitative Easing
(QE) trajectories:

As all these measures come to implementations, it does not

surprise us that the US M2 money supply is now over 16%
On top of that, the Trump administration and the US higher than last year, marking it a record increase:
Congress have put together an unprecedented amount of
almost USD 3 Trillion all-type bailout plans that will
expand fiscal spending –and subsequently the deficit–
to historic levels...

Meanwhile, the US Treasury continues to issue debt and has

hoarded already USD +1 Trillion to continue its spending
…while additional bailout programs are expected to be spree:
announced soon:

WSJ | Picture: Getty Images

Source: The Daily Shot

Chapter Three – Page 4

These measures have generated excitement in the market,
generating a strong comeback of stocks. However, in
previous crises, there has been short-lived rebounds in
stock prices on the way to the bottom:
But we “shouldn’t worry”. Why? The reason is perfectly
explained in the rules of the Monopoly game:
The truth is that what central banks are doing today is no
different of what the Germans did during the Weimar
Republic, with massive monetary issuance that led to
hyperinflation. Any of us would be in shock if saw the
modern version of the picture below, only that we will not
have that privilege because today all “printing” is digital.
But history suggests that double-digit inflation is likely to
result after massive shocks to the economy:
To put the current USD 24 Tn US National Debt into
perspective, we recommend you to see the following link with
additional interesting infographic.
CONSECUENCES OF THE
INFINITE PRINTING
LESSONS FROM THE “ARGENTINE LAB”
The Economic Science, as opposed to some other disciplines,
has the disadvantage that you cannot have an “Economic
Lab” where to test actual outcomes for different economic
policy making.
However, we have Argentina. This unique country had it
all. From periods of the Central Bank issuing gold coins to a
period of issuing quadrillions of unbacked fiat money; periods
of +5,000% hyperinflation rate to zero inflation for a decade
and periods of being a net exporter of capital to be a serial
defaulter of public debts.
The volatility of the Argentine economy has been many
times regarded as the main challenge for its sustainable
development.
Chapter Three – Page 5
Almost nobody argues against Argentina’s tremendous
potential from its rich natural resources, its valuable human
capital and its inner entrepreneurial spirit, but unfortunately
for the last century and a half, most of the governments
have systematically been spending more of what they could
really afford:
The consequences of that policy were that Argentina has
systematically used the “printing machine” to finance
deficits, evaporating the value of the local currency
throughout its history. That mechanism was used so
frequently that the country had five different currencies in
the last 140 years which deleted 13 zeros throughout that
time lapse. Even more, the current Peso used today that was
instituted back in 1992, represents only 0.01 Pesos in
purchasing power of the original one, so that makes an
effective deletion of 15 zeros in the purchasing power of
the Argentine currency in the last century and a half!
The environment of business had periods of such volatility
that I still remember a great lesson my grandpa gave me
while he was chatting with a construction businessman who
asked him: “Isaac! How can you know for a fact if you had a good
year or not? Inflation is so high! Interest rates are in the sky, not to
mention that the Peso keeps devaluating so much!”. My Zeide, from
whom I learnt the secrets of real estate and agriculture
investments, wisely replied: “It’s very simple. If by year-end I have
one more cow and one more square meter of apartments, that means I
had a good one!”.
You see… From those environments you could clearly see
that when fiat money is printed endless, the true long-term
economic value resides in Real Assets only.
For that reason, it does not come as a surprise that the only
coin that increased in value in Argentina throughout
history was the one minted by President Julio A. Roca
starting on 1881 and which contained 0.2334 troy ounce of
gold.
Argentine President Argentino De Oro
1880 – 1886 Minted 1881 – 1889 and 1896
1898 –1904
These Argentinos De Oro were originally minted by the
Argentine Republic back in the late XIX Century, during the
good and golden years, when Argentina was one of the richest
countries on earth.
Even when Juan D. Perón alongside with Evita took office in
1946 –and before more fiscal easing polices were taken– it
was well known his quote about Argentina’s reserves:
Fast forward to late 1990s, the Central Bank decided then
to sell the last few of those unique pieces. They even
further clarified that they were willing to sell those fine coins
at no premium on gold spot price because if they found no
buyers, they would just melt them and export the metal at a
loss.
Putting that news in context, back in those years, gold was a
hated asset, generating no income, incurred stocking
expenses and, by then, the precious metal was trading in US
Dollars at a 20-year low. But that single coin was able to
survive all economic volatility throughout Argentine
history. This Argentino De Oro, which original price was 5
Pesos of 1881 would be valued today at 452.3
Quadrillion (that is 15 zeros), or 9.4 Quintillion %
“return” on the investment, measured in the original
currency if consider all the subsequent currency changes that
the country has gone through.
However, it is obvious to realize that when analyzed
through my grandpa’s eyes, it becomes clear there was
actually no gains made on that. The holder just kept the
same amount of gold coins. However, the important
observation, is that the investment in Gold prevented the
loss of 99.999% of the wealth it had in the original
currency.
Chapter Three – Page 6

Part of infographic by LA NACION newspaper. Values are approximates.
Those events were probably the ones that inspired us to
focus our business development in Real Assets like real
estate and agriculture, always seeking to finance
operations with fixed interest rates and with long maturities
so, at the end of the road, appreciations of assets alongside
the concurrent business operations, would reward more than
the cost of the fiat money.
Furthermore, this thesis pushed us to enter also into the
precious metals mining industry in the early 2000s with the
acquisition of the Australian based company Austral Gold
(www.australgold.com) whose main asset was a gold mine
in Chile. Its production cost per ounce back then was higher
than the spot price. The former owner of the mine was
basically selling it at the price of an option.
CHAPTER THREE
TAKEAWAYS FOR TODAY’S WORLD
Having in mind what we know from what is going in today’s
world (the Chapter One on the Health Crisis and the Chapter
Two on the Economic Crisis), let us share our takeaways as
a 3rd generation of Argentine businessmen.
What our experience tells us is that when the national
governments need to finance deficits, they will not
hesitate to print as much money as possible to cover the
short term needs, especially if the effect of that printing
emission is generating no impact (i.e. no inflation) as is the
case today in developed countries. For this reason, we have
no doubts that as result of the current crisis, countries around
the world will keep running record fiscal deficits while the
FED and other central banks will keep buying national and
corporate bonds along with printing money as never before
in modern history.
That by itself wouldn’t have been a problem if not for the fact
that the recent fiscal performance in the US was so
catastrophic even before this crisis that the country was on
its way to the highest indebtedness as a % of its GDP in
its history.

Following that transaction, and with the price of precious

metals starting to pick up, we put together an all-star team
of geologists and professionals to run this mine, which
eventually was expanded to other regions including the
US. Since 2013, the Company has been producing an
average of 60,000 ounces of gold equivalent per year. For
2020, the production is expected to be consistent with prior
years with an All-In-Sustaining Cost (AISC) in the USD And after the current pandemic, things are looking worse
900-1,000 per ounce range. both for the US and Europe, among others:
The Company also has approximately combined reserves of
225,000 ounces of gold equivalent (AuEq) plus resources
for additional 880,000 ounces of gold equivalent (AuEq)
within multiple assets, with growth potential for mine life
extension. You can see a full detail of the operation and
technical information on reserves and resources in this link.
On top of that, our Group is also working to expand our
mining portfolio by partnering with a third party that
owns a vast deposit of almost 3 million ounces of Gold
in South America that could prove beneficial both for the
Group and the community. We will keep you posted on
that.

Chapter Three – Page 7

On top of that, several countries, headed by Japan and the
US, are facing sizable gross financial needs this year,
regardless of the health crisis:
The main problem in this environment is that after so many
years of thirst for the US Treasuries, the world (mainly
China) is now less willing to finance the US, and the
FED remains as the main buyer of those securities:
While in the meantime, the FED pushes for artificial
lowest rates on record:
We do also acknowledge that we will face first some
deflationary pressures in the short term as a result of the
economic downturn. But if we bear in mind that
unemployment rate will likely remain at a very high level and
the US Government and the FED will do “whatever it takes”,
gets us to the conclusion that the fiscal deficits and
printing of money will be so remarkable that once
double-digit inflation comes in, it will be too late to
reverse those toxic policies.
We also do understand those investors that want to keep
liquidity to take advantage of opportunities in the market. We
share their philosophy. However, on the other hand, who
could be comfortable in holding an asset that is being
multiplied by trillions?!
The FED is very lucky that there is (still) willingness from
the people to hold US Dollars, making today’s Velocity of
Money the lowest level in history:
But what will happen once people start realizing that the
promise they have in their hands is worth less and less
while its purchasing power is being melted?
The Argentine economic survival manual shouts that in
this context of epic fiscal deficits + highest debts ever +
money printing as never before + economic depression,
any person with small or big savings should move a
relevant amount of its liquidity to the only currency that
cannot be printed: Gold.
Chapter Three – Page 8
This perspective that up until now was contemplated by
marginal “gold bugs” only, is now increasingly becoming
mainstream in Wall Street banks and among Institutional
Investors and for this reason, we believe that we should
prepare ourselves to a new paradigm in the world
economy.
In Argentina, the US Dollar has been the historic shelter
for savers who wanted to protect themselves from the
depreciation of their currency. It was interesting to note
though that –at some points– the higher the value of the
USD relative to ARS Peso, the higher the demand of the
American currency from the Argentine citizens. Even
though it might sound counterintuitive, the logic behind that
is that during currency crisis, that is not the price of the FX,
but the cost to escape from a melting fiat currency.
Prestigious policy makers are realizing of the current trend
and started to rise red flags for what is coming:
That is way we did not find as a surprise that investors are
starting to pay high premiums for gold coins:
While I was seeing a few days ago the Bloomberg screen with
the price of Oil trading at minus USD 40 / barrel, I was
remembered by an amazing quote of an American writer:
“You can have the evidence right in front of you, but
if you can't imagine something that has never
existed before, it's impossible.”
– Rita Dove
That’s why when we are asked if today’s price of an ounce of
gold at USD 1,700 is expensive or not, we believe that this is
level only express the start point of what might be the
strongest rally of the metal as never before, at the same
pace that fiat money is being printed worldwide.
In our particular case, we keep increasing exposure to all
gold-related assets and have recently launched a fund in our
Tel Aviv-based Epsilon Investment House which has most
of its portfolio focused on this strategy and which has
significantly outperformed the S&P500 and the TA-35 during
this market volatility. We also like GLD –Gold ETF, GDX –
Gold Mining Cos ETF, physical gold coins and we keep
expanding our business in our own mining subsidiary
Austral Gold (ASX:AGD/TSXV:AGLD) that although it has
jump in price recently, it still currently trades at only ~2x
EV/EBITDA (up to -75% lower than competing junior
producers), constituting a unique entry point to any mid
to long term investor.
Wishing you all the best, stay healthy and protect your
savings!
Eduardo Elsztain
PS: Should you have any suggestion or additional investment
ideas to share, please do not hesitate to contact me or
Gerardo Tyszberowicz with whom we penned this article
together at: gerardo@dic.co.il
Chapter Three – Page 9
Argentinization of the World

Argentisferio
Martín Kovensky, 2008

Disclaimer
This essay does not comprise an admission document, listing particulars or a prospectus relating to any investment, does not constitute an offer or invitation to purchase or subscribe for any securities
and should not be relied on in connection with a decision to purchase or subscribe for any such securities. The presentation does not constitute a recommendation regarding any decision to sell or
purchase securities of the Group’s portfolio of companies or funds.
Statements in this presentation that are not historical facts are forward-looking statements. Forward-looking statements are statements that are not historical and consist primarily of projections -
statements regarding future plans, expectations and developments. Words such as "expects", "intends", "plans", "may", "could", “potential”, "should", "anticipates", "likely", "believes" and words of
similar import tend to identify forward-looking statements. Forward-looking statements in this presentation in regard to Austral Gold include 2020 production and cost guidance, exploration growth
potential. For further information relating to the Austral Gold´s combined reserves and resources please refer to the Company´s FY2019 Annual Report at www.australgold.com. The total reserves and
resources figures provided in this letter comprise reserves and resources from the Amancaya, Guanaco and Casposo projects and the gold equivalent ounces were calculated using a silver to gold
factor of 80x. Reproduction of this letter is strictly prohibited without the prior written permission of the Group.
All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the authors.

Chapter Three – Page 10