com 12 The Practicality of Gold as a Currency The graph below is a proxy for the ongoing cumulative change of global input costs over 30 years in terms of US dollars. It simply shows the change of an index of traded and non-traded global commodities that we consume daily and that go into finished goods. There is nothing remarkable about it, other than it shows in graphic terms significant price increases associated with USD monetary inflation. Given our assertion that gold will be the surviving currency, however, it seems to us that the proper way to judge the change in the value of goods and services would be to deflate their nominal prices in gold. The graph below isthe ongoing cumulative change of global input costs over the same time period deflated for stabilized wealth (i.e. deflated for gold, which maintains scarcity over paper currencies). So the graph above shows the change in input costs for dollar holders and the graph below shows the change in input costs for gold holders. These graphs illustrate the commercial importance of picking the right currency. They also imply broader economic and social benefits few consider. In many modern finance-based economies such as the US we have been conditioned to think that input costs for goods are relatively insignificant in the broader scheme of things because our manufacturing bases have become smaller relative to our service sectors; however, as we are discovering presently, the general price level – as well as overall consumption -- relies upon global input costs. Very few people know they should care about the graph immediately above because very few people, businesses or governments have owned or have funded their consumption or operations with gold. CRB RIND Index (Traded & Non-Traded Global Commodities)CRB RIND Index (Traded & NonTraded Global Commodities)

QB ASSET MANAGEMENT www.qbamco.com 13 See Important Disclosures at the end of this report. The rejoinder to this discussion would be: “Big deal! Everyone knows gold has risen in US dollar terms and soowning it would naturally cheapen everything else for its holders! What if gold drops

in the future? The opposite would happen!” To refute such an assertion we would again note our Shadow Gold Price. Based on precedent and proper identities, (monetary base divided by official gold holdings), the SGP shows that gold is currently very cheap by a multiple of almost five times given the amount of monetary inflation already undertaken in the US by the Fed: And the graph below is the Shadow Gold price divided by the Spot Gold Price: Clearly, the intrinsic price of gold in US dollar terms is at its lows vis-à-vis the spot price. Principles, fundamentals and technicals matter, and they all seem to point toward gold becoming more valuable in terms of other currencies. And if central banks continue to manufacture more currency, gold would become that much more valuable. QBAMCO Shadow Gold Price(US Monetary / US Official Gold Holdings)QBAMCO Shadow Gold Price / Spot Gold

QB ASSET MANAGEMENT www.qbamco.com 14 Change for a Dollar If the economic manner in which the US is operating is not in the sustainable best interest of its owners --Americans increasingly becoming poorer and unproductive in real terms -- then it seems logical there will be forced change. As just proven, the political dimension in the United States and around the world has the legal authority but not the political will to act preemptively to rebalance global economic equilibria by reinstating monetary discipline. Only the power of popular dissention can force authorities to pull the ripcord on the current system. We do not think there will be a political coup d’état or that Western democracy and capitalism will be threatened.

We do believe the “revolution” that must occur, (if it is indeed a “revolution” at all), will be only monetary in nature. The most likely path is that an event will force global monetary and financial market seizure. This seizure would force a recapitalization of nominal asset prices to reflect their real values. People, businesses and nations in possession of durable assets and resources, like primary homes, cars, inventory and scarce resources, will continue to own them while a new system of quantifying their value is worked out.We think precious metals will increase their purchasing power vis-à-vis all baseless currencies. We also thinkconsumable natural resources with inelastic demand properties will, at a minimum, retain their purchasing power(which is to say enjoy substantial price appreciation in fiat money terms – far more than financial assets relying onexisting leverage or future systemic leverage growth). Tipping Point So when will financial markets better reflect sustainable economics than a series of dubious political constructs that have placed valuations in a constant state of disequilibrium? Well, how about this: when the milk to Dow Jones Industrial Average ratio widens to the point where only equity holders are oblivious to milk prices? Imagine an island with ten people on it and each person has $100 and a $200 equity portfolio consisting only of shares in the island’s coconut milk farm. The people on the island consume 20 coconuts-worth of milk a day. The island’s milk output and wealth cannot be increased with the addition of money, only with the addition of consumer demand. Now imagine that 9 out of 10 people on the island do not own shares in the coconut farm. The 1 owner of the farm can sell shares in it and increase his cash position with which he can then…well, buy more milk. But how much more milk could he want to buy when he can only consume 2 coconut’s worth a day? Applied to the contemporary global economy, the frenzy around nominal growth, valuations and budget deficits misses the fundamental point of financebased economics: money and credit can grow in leaps and bounds while consumer demand can only grow linearly. The increase in money and credit supply may drive up the apparent valuations of dairy farms, but no amount of new money and credit supply can increase the global demand for milk beyond its natural growth rate. A billionaire does not buy 1,000 times more milk, computers or medical care than a millionaire, who in turn does not buy a million times more of these items than a pauper (or the government on behalf of the pauper). We repeat: the “debt problem” is a currency problem and the currency must and will collapse. The global monetary system exists at the pleasure of the Fed, which legally exists at the pleasure of Congress, which as we have learned only has the political will to control the Fed at the pleasure of the Fed’s shareholder banks. It is the Fed and nothing else that determines the solvency of Treasury. Analogously, it is the Fed that ensures the ultimate solvency of the fractionally-reserved banking system – the system that shorts dollars via perceived “lending” today and covers those dollars once devalued as the Fed creates them tomorrow. Ultimately, Congress, the Fed and Wall Street will have to answer to the masses that buy milk and pay and staff its military. There is a light at the end of the tunnel that is both another train and, leaving emotions aside, an investment opportunity for the willing and able. This is change we can all believe in, and it seems closer than most think. Lee Quaintance & Paul Brodskypbrodsky@qbamco.com

QB ASSET MANAGEMENT www.qbamco.com

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