January 2015

We are in the midst of an international currency war. Guido Mantega, Brazilian Finance Minister, September 2010
Heres what I know. Russia is buying 100s of tons of gold. China buying 1000s. Americans could care less. Someones right,
someones wrong. Tweet by Jim Rickards, Author of Currency Wars & The Death of Money, November 2014.
Its not the critic that countsThe credit belongs to the man in the arena, whose face is marred by dust and sweat and blood.
Theodore Roosevelt

Deja Vu
As we start of 2015 and look back over 2014, Im reminded of my introductory paragraph from last January. It ended with the
phrase $%&+*^#!*!
And so it does again.
It was another very frustrating year for those of us working in the precious metals world. And no doubt doubly frustrating for
those investing in it. I was wrong about the price direction again this year and Santiago Gold Fund again lost money.
In reviewing the last few years it hasnt been golds fall in price that has been the biggest surprise. We came through the initial
correction relatively well. But the duration of the correction, while perhaps not a surprise to some, has indeed been a surprise
to me.

This is what has hurt our performance the most and I take full responsibility for getting this wrong.

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

David and Goliath

Soto say that the last few years have been a difficult time to be operating in the precious metals arena would be a dramatic
understatement. And in talking to many of my colleagues in the gold world, it in many ways feels that we are fighting a losing
war against the most powerful and entrenched entities on the planet. Out sized. Out gunned. With no one thinking we have
chance and most of them thinking we are crazy. In many ways it is the proverbial David vs Goliath situation.

So after 3 down years, what should a gold investor do? Should we continue to fight Goliath? Or should we admit defeat,
lick our wounds and sound the retreat? It probably wont surprise you to hear me say we fight. Emphatically!
This answer is probably the biggest frustration that the main street media and typical Wall Street analyst has with those of us
who promote gold. They want to know why cant we just admit we were wrong, admit that gold is too risky, get over it and
move on? Are we so stubborn that even after 3 years we cant take a hint?
The first thing I would point out that while gold in fact may be volatile, it is not in fact very risky. Volatility encompasses the
day to day price movements while risk involves the potential for a permanent loss of capital. Golds price may indeed fluctuate
wildly from time to time. But unless it was a short term investment based on short term trends, rather than a long term play
based on long term trends, these price fluctuations shouldnt really matter. Because there is almost no chance of a permanent
loss of capital when talking about gold. It has held its value over a longer period of time than any other asset I can think of.
But the gold bears do have somewhat of a point here. Those of us who promote gold have indeed been wrong on the short
term direction of gold prices. And I think its important for us to acknowledge this. So if the gold bears need someone from
our industry to stand up and admit it, then here I am. Guilty as charged. I have been wrong for 3 years.
But if we are going to play that game, then turn around is fair play. Because when you step back and think about it, is it any
more ridiculous to continue to believe that there might just be at least a small place in your overall portfolio for the most
enduring asset in history, than to continue to believe that the FED is going to raise rates anytime soon? Especially after they
have been saying the exact same thing for six years?

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

So yeah, maybe gold bugs have been wrong for three years. But the Fed has been wrong for as long as I can remember. Yet
the markets still hang on their every word. Who is it that has really lost credibility here?
Furthermore, is continuing to believe there might be a small place in your portfolio for the most enduring asset in history really
that much more crazy than starting every year for the last 5 with the expectation for US GDP to grow at 3%, only to see it get
revised down quarter after quarter, year after year?

Why is it that gold bugs are the only ones castigated for myopic tunnel vision, but the main street media, equity perma-bulls
and economists are not held to the same standard?
Some people will say yes, thats true. But even though interest rates are still down and GDP is stagnant, the stock market is
up. Whats not to love?
Fair enough. But past returns are not guaranteed to hold going forward. And deep down, whether they will admit it or not, I
think most people know that the returns of the stock market have been derived by the expansion of Central Bank balance
sheets and monetary stimulus.

If this is not the case, and if the economy is actually as strong as stock prices suggest, why cant the Fed normalize interest
rates? Why cant we get any GDP traction? Why cant we reduce these central bank balance sheets?
I would also argue that every investment, regardless of what it is, and regardless of what it has returned in the last few years,
should be measured on its potential reward vs the potential risk in the years going forward.
Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

But lets forget about gold for a moment and instead look at conventionally diversified portfolio. Can anyone honestly say that
by removing gold there is no longer any risk present here?
Risks accompanying a traditional portfolio:

Cash: Pays nothing and is subject to bail-in risk sitting at the bank.
Fixed Income: Interest Rates are near all-time lows. When interest rates rise, bond prices tend to fall.
Equities: Stocks have climbed for six years and are at all-time highs. Will they hold up now that stimulus has ended?
Real Estate: Also impacted by rising interest rates (mortgage payments) and stock valuations (wealth affect).

What if we now add 10% in gold?

First of all, this would be far more gold than most people would have but an amount that I think is very appropriate and probably
even on the small side. And everyone knows based on the last few years how volatile gold can be. Traditional portfolio
managers claim that gold is dead and that it is probably going below $1,000 an ounce.
For a moment lets assume that they are right and that gold has further to fall. How would that affect this portfolio? Since we
have shown that there are risks apparent in all of these asset classes, lets take a look at this portfolio and see what would
happen if each of these asset classes had a draw-down of 5%, 10%, 15%, 20% and 25%.

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

Even if Gold drops to $1,000, another 15% from here, it would not impact your portfolio as much as if equities corrected by 5%
(which they have almost done already in the first two weeks of 2015).
Even if Gold drops to $900, which is another 25% from here, it will not impact your portfolio as much as if equities dropped by
10%. And if you dont think its possible for equity market to drop by 10% after the run theyve had over the last six years, then
you just dont understand markets.
But the benefits to owning a piece of gold are immense as we have discussed in many other letters and presentations.
But why is it important to hold gold now? What has it done for me lately besides cause me grief?

Currency Wars
To understand why its important right now, we need to go back to 2010. Thats when Guide Mantegna, the Brazilian Finance
Minister proclaimed:
We are in the midst of an international currency war.
This comment was made in response to Ben Bernankes QE2 speech at the Jackson Hole Fed conference a month prior. In
2012 Jim Rickards wrote Currency Wars which he followed a few years later by The Death of Money. These books help make
it very clear what has actually been going on at the highest levels of international sovereign finance. And they are absolutely
required reading for anyone remotely interested in international monetary policy, financial markets or their own portfolio.

Currency wars are interesting from both a philosophical as well as real perspective. They are interesting in these cases because
the central banks are battling their own domestic currencies and their own citizens purchasing power. Its only by a second
derivative knock on effect that they are fighting against other countries currencies. Because when trying to win a currency
war, the Central Banks goal is to weaken their own domestic currency. This in effect strengthens the currency of foreign
trading partners and makes the domestically produced goods cheaper and easier for the international market to purchase.
This then leads to increased exports as well as having the added benefit of making the debts incurred by the domestic
government easier to pay off.
Perhaps no country and no central banker has committed to this type of policy more aggressively than Shenzo Abe at the Bank
of Japan. In this war, Japan has printed an absolutely astronomical amount of money. And lest you think the Term war is too
harsh a term, let me point out that they havent labeled this the three teddy bear approach because it is warm and fuzzy. They
have named it the Three Arrows. Because arrows are weapons of war. And they want to kill deflation via Fiscal Stimulus,
Monetary Easing and Structural Reforms.

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

While the Japans deflationary monster is still reeling its head, they have made some progress. The yen has weakened 14% vs
the dollar in the last six months. 120 seems to be the Rubicon level. And once it is crossed decisively, many think 130 and then
140 will not be far behind.

But its not just the US Dollar that it has depreciated against. It has also depreciated 30% vs the Chinese Yuan over the last 3
years with 8% coming in the last 6 months.

Why is this a big deal? Because Japan is one of Chinas biggest economic competitors. And China will have a very hard time
competing if their currency remains that much stronger than Japans. Not only that, but the Yuan is pegged to the US Dollar.
It will be very hard to maintain this Dollar peg and remain competitive with Japan. Furthermore, China is struggling to continue
its credit fueled growth rate. Losing market share to Japan will not help this problem. As a result, I think it is very possible we
see an official devaluation of the Yuan in the not too distant future.
Ok, so why would this a problem? Because the US has already labeled China as a currency manipulator and has been
encouraging them to break their Dollar peg and let the Yuan appreciate. Which is the exact opposite of what the Yen
depreciation is pressuring them to do!
But this is not just an Asian problem. The Euro area is also under the threat of deflation and the European Central Bank is on
the eve of a monetary easing package of their own in order to weaken the Euro. Based on the mere anticipation of this program
the euro has already in fact weakened vs the Dollar.

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

So this should be helpful to Europe, right? Yes, except this Euro weakness will really hurts one of the strongest economies in
Europe, which is Switzerland. Because of their economic strength, the Swiss Franc is in large demand. But because central
bankers hate strong currencies, the Swiss National Bank has been printing billions of Francs to buy billions of Euros over the
last three years in order to maintain the Franc/Euro peg of 120. Otherwise the strong Franc would lead to higher relative prices,
lower exports and thus potentially pull Switzerland down into a recession. So the more the Euro weakens, the more the Swiss
would have to print.
But there are limits to what even Central Bankers can do. And after 3 years of trying to maintain this peg, in a surprise move
the Swiss National Bank through in the towel this morning ahead of the expected ECB program next week. The result was an
immediate 15% appreciation of the Swiss Franc which caused some havoc in the overall capital markets.

Suffice to say that the currency wars are alive and well. And we havent even talked about the Norwegian Kroner, Aussie
Dollar, Brazilian Real, Indian Rupee or a number of emerging market currencies yet.
So do all these international currency wars affect our currency, the US dollar? Of course! As a result of these programs and
the slowdown in the global growth story, the Dollar has been on a tear over the last 6 months and is currently breaking above
multi year highs.

Well theres nothing wrong with that right? King Dollar means that our purchasing power is increasing and that our earnings
will go further. It will be cheaper for us to buy the things we want. Cheaper to take that foreign vacation. Cheaper to buy that
foreign car, etc. etc. This currency war sounds like one we are winning, right? Wrong!

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

You have to remember, Currency Wars are a race to the bottom, not top. A strong dollar means you are losing the war, not
winning it. At least thats how Central Bankers see it. And our Central bank is no different. Like Japan, the Fed also has a stated
policy goal of 2% inflation. A dollar breakout is heading in the exact opposite direction of this 2% inflation goal.
As if thats not enough, anyone who has listed to Raoul Pal in the last 6 months knows that this Dollar breakout is what he calls
the scariest chart in the world. Why? Because there is nine trillion in US Dollar denominated debt outside the United States.

First of all, $9 Trillion is a ridiculous amount of money to owe. For all intents and purposes it is impossible to pay off. But it
becomes harder to even maintain the facade if your local foreign currency is depreciating against this US Dollar Debt.
Furthermore, almost half of this debt is located in emerging markets, which are the drivers of global growth. If an increasing
amount of emerging market earnings has to be set aside to pay off a rapidly appreciating debt that leaves less earnings to put
towards growth and as such prospects for global GDP acceleration are greatly diminished. And it becomes only a matter of
time before defaults start.
Not only that, but there are by some estimate $700 Trillion of financial derivatives sitting out there on global bank balance
sheets. There is $130 Trillion sitting at JP Morgan and Citibank alone. Anyone who claims to fully understand what kind of
impact a currency war and dollar breakout would have on these grenades is just kidding themselves.

In other words, a dollar breakout is a potential nightmare for a lot of people and for a lot of reasons.
So whats left?
At this point its important to remember that Gold is not just a commodity. It is also a currency. And not just any currency:
Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

It is still, by all evidence, a premiere currency. No Fiat currency, including the dollar, can match it.

Now this isnt me saying this, this is Alan Greenspan, perhaps the most famous central banker speaking at an investment
conference just a few short months ago. He went on to say:
The Feds Balance sheet is a pile of tinder, but it hasnt been lit. Inflation will eventually have to rise.
To be clear, inflation is code for the weakening of the dollar. And where did he think the price of gold would be in 5 years as
a result?
Higher
How much?
Measurably
Now think about this for a moment. Alan Greenspan is one of the most famous central bankers in history. And we are living
in an environment where Central Bankers have become Rock Stars. The financial markets literally hang on their every word
and their perceived power has never been greater. Gold bugs by contrast have been relegated to the lunatic fringe. Central
Bankers (almost by definition) hate gold and are fierce proponents of Fiat currency. It is literally David vs Goliath.
So then why is Greenspan betting on David?

David was NOT the underdog

Once you understand the true nature of Gold, as well as the true nature of the David & Goliath story, Greenspans reasoning
becomes much more clear.
In his book by the same name, Malcolm Gladwell shatters the David vs Goliath myth. He also did a short TED talk on the subject.
(you can watch it by clicking this link)
http://www.ted.com/talks/malcolm_gladwell_the_unheard_story_of_david_and_goliath?language=en

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

As Malcolm points out, and Ill reiterate here, in this case its actually good to be David. Because in reality, despite conventional
wisdom based on their physical appearances, David was not the underdog. David was the sure thing!

First of all its highly probable that Goliath wasnt such a capable guy to begin with. There is evidence to suggest that despite
his enormous size, he was in many ways physically impaired. Furthermore, David never had any intention of fighting Goliath
in hand to hand combat, even though this is implied in every telling of the story. In fact, David never planned on getting
anywhere near Goliath until he was already dead. So why was David so confident despite everyone else placing him in the
lunatic fringe?
Because he was a slinger.

Now the story is popularly told as this being a lowly position. The story is makes it extremely clear that Goliath is a monster of
a man with intimidating weapons and heavy armor. And David is a boy fighting with no armor and nothing more than piece
string a piece of rock for a weapon.
But modern day military experts have shown that the fire power of a slinger throwing a rock was similar to that of a modern
day handgun. And that skilled slingers could hit their target from hundreds of feet away.
So David and Goliath was really more like that scene out Raiders of the Lost Ark rather than some terrible battle. Indiana Jones
was never scared of the swordsman even though he was much bigger and had an intimidating weapon. He simply pulled out
his gun and shot him.

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

And so it was with David. Despite Goliath talking all kinds of trash, David wasnt scared either. He simply pulled out his sling
and shot him.
Ok, so this is an interesting twist on a very old story. But whats the point?
The point is that the Currency Wars are here. This is not theory. They are happening right now. And they are a race to the
bottom where no fiat currency will win. And despite being relegated to the lunatic fringe, gold is not the underdog either.
So why anyone would willingly go through a currency war without having at least a piece of the premiere currency on their side
is beyond me. Because in a fight to the death, you dont bet on the guy who has the shiniest armor or even the cleanest dirty
shirt. You bet on the guy who cannot die. Because if you cannot die, you cannot lose.
So get yourself a piece of gold while you still can. Or better yet hold on to the piece you already have.

It has no counterparty risk

It cannot be created or destroyed
It does not tarnish and it does not decay
It cannot be diluted by inflation and it cannot be destroyed by deflation.
It has survived wars and revolutions
It has survived every economic tragedy and economic boom throughout history

Quite simply, gold endures

Now this doesnt mean you will win the war with one shot on the first day of battle like David did long ago. And I cant tell you
that gold wont go down further before it finally wins.
But as Santiago Advisory Board member Rick Rule said a few months ago:
We are going to win. I dont know when we are going to win but we are for sure going to win. Because we cannot lose.
Best regards,

Brent Johnson
Santiago Capital

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com

The information contained herein reflects the opinions and projections of Santiago Capital, LLC (Santiago Capital)
as of the date of publication, which are subject to change without notice at any time subsequent to the date of
issue. Santiago Capital does not represent that any opinion or projection will be realized. All information provided
is for informational purposes only and should not be deemed as investment advice or a recommendation to
purchase or sell any specific security. While the information presented herein is believed to be reliable, no
representation or warranty is made concerning the accuracy of any data presented. All trade names, trademarks,
and service marks herein are the property of their respective owners who retain all proprietary rights over their
use. This communication is confidential and may not be reproduced without prior written permission from Santiago
Capital.
Santiagos performance returns are preliminary and un-audited, and subject to change. Results reflect the total
returns of the portfolio net of all standard fees calculated at the highest rate charged, expenses and incentive
allocation. The actual performance of an investors investment for the same period may vary. An investment in any
strategy, including the strategy described herein, involves a high degree of risk. There is no guarantee that the
investment objective will be achieved. Past performance of these strategies is not necessarily indicative of future
results. There is the possibility of loss and all investment involves risk including the loss of principal.
Positions described in this letter do not represent all the positions held, purchased, or sold, and in the aggregate,
the information may represent a small percentage of activity. The information presented is intended to provide
insight into the noteworthy events, in the sole opinion of Santiago Capital, affecting the portfolio.
THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN
ANY FUND MANAGED BY SANTIAGO CAPITAL.

Santiago Capital

301 Battery Street, 2nd Floor, San Francisco, CA 94111 (415) 699-8972

www.santiagocapital.com