Matterhorn Asset Management

GOLD MARKET UPDATE
Gold had a significant break on Friday 21 November. It broke out of a trading range to a closing high of $ 800.
But more importantly Gold made new weekly closing highs in many currencies including the Pound and the Swedish Kroner and the Euro. Whilst the world’s stock markets in 2008 have lost between 40% and 70%, gold has gained against all major currencies except against the dollar. The table below summarises Gold’s performance in four currencies. Since the lows in the second half of 1999 Gold has gained between 169% and 242% in these five currencies or 18% to 26% annualised.
Gold has also outperformed all major stock
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“There is a tide in the affairs of men Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life Is bound in shallows and in miseries. On such full sea are we now afloat. And we must take the current when it serves, or lose our ventures”
W. Shakespeare, Julius Caesar, Act 4

FORTUNE OR MISERIES

The current financial crisis will have a major impact on virtually every person in the developed world as well as in the developing world. We are today standing at crossroads in our personal lives and affairs. The decisions we take today will either lead us to “fortune” or “miseries”.
Do not for
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MELTDOWN
by Egon von Greyerz
RESCUES

Central banks and governments are now in a frantic state to save banks and financial entities that are falling like dominos on an hourly basis. It is almost impossible to keep up with all the businesses that have collapsed worldwide only in the last week. The authorities around the world have no choice. They will print any amount of money to save whoever needs to be saved. Also the whole world is waiting for the US rescue package of $ 700 billion to be passed. This might help for a few days or weeks but not much longer

Let us be very clear; no rescue package or action
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NO, THE EMPEROR HAS NO CLOTHES
by Egon von Greyerz
MELTDOWN
For anyone who has been reading our reports in the last few years it comes as no surprise that the banking system is crumbling. In the last week we have seen AIG being nationalised, Lehman go bankrupt, Merrill Lynch swallowed up by Bank of America and HBOS bought by Lloyds TSB. The week before Fannie and Freddie were nationalised.

We have been warning investors that the banking system is bankrupt and have named all the above names and some others as being vulnerable. So finally the world has realised that the Emperor Has No Clothes. What is happening now is not surprising. What
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MARKET UPDATE
We are currently going through a correction in all markets. Dollar up, precious metals down and stockmarkets up. This is a typical thin summer market shake up with exaggerated moves due to the fact that most of the heavy investors and traders are on holiday. Therefore central bank intervention to boost the dollar and computerised, black box trading are currently managing to push the markets further than normal. But remember that central banks run out of ammunition very quickly and the black boxes are lemmings just following any short term trend.

The corrections in the precious metals, albeit always unpleasant to experience, are totally normal. We have seen it many
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GLOBAL WARNING
by Egon von Greyerz

In the last few days various reports have been published from organisations such as the BIS (Bank for International settlement in Basel), Barclays Bank, Royal Bank of Scotland (RBS). They are basically all saying the same thing namely that the world financial situation is extremely precarious.

BIS says: “The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point.” BIS goes on to say: ”The magnitude of the problems yet to be faced could be
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HOW TO SURVIVE AND PROSPER IN A STAGFLATIONARY ENVIRONMENT
by Egon von Greyerz
Today’s financial world is a minefield. There is massive divergence in performance in different markets and sectors; European stockmarkets are down around 15-20% this year, US slightly less whilst some Asian markets are down in excess of 30%. Certain sectors such as Banks and Property are down 50-80%. On the other hand we have seen substantial gains in commodities, especially food and energy (crude up 42%, corn up 59%) and also in precious metals. These trend are likely to continue for at least 2-3 years and probably a lot longer during which time commodities (especially precious metals) will outperform
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IS THE BANKING SYSTEM
A HOUSE OF CARDS?
by Egon von Greyerz
The answer to the above question is an unequivocal YES! We have for a long time warned investors of the fragility of the banking system due to the combination of the unmanageable mountain of OTC (over the counter) derivatives totalling $ 525 trillion combined with reckless lending in mortgage loans, personal credit, credit cards, car loans as well as too aggressive commercial lending both in real estate and private equity. Without the rescue of Bear Stearns we would have had a systemic crisis with catastrophic consequences for the world economy. But in the short term the Fed (and other central banks)
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IS IT TIME TO PANIC?
by Egon von Greyerz
The question above is clearly justified. Especially after the Fed has cut the discount rate by 1 ¼ % in the last ten days. This is undoubtedly panic action. And the cut is not due to the fall of the stockmarket. The reason for the cut is in the statement issued by the Fed on 30 January: “Financial Markets are under considerable stress” . This statement is Fed speak for the fact that the financial system is fighting for survival.

Derivatives – Financial Weapons of Mass Destruction

We forewarned investors already in November and December about the looming problem of Credit Default Swaps (CDS), a
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Credit Insurers
by Egon von Greyerz
It is Friday before Christmas and most people have already started the holiday celebrations. We normally don’t send out frequent reports especially not in Late December but the dominos are falling so rapidly that we feel obliged to avert investors.
The bond insurers are now officially in trouble. ACA Capital has lost $ 1.1. billion in the recent quarter and has only $ 1.1 billion in cash for future claims. There are more losses in the pipeline. ACA has now lost its AAA rating and been downgraded to CCC (a twelve rating downgrade). Due to the rating downgrade they now need $ 1.7 billion in new capital
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