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SIX REASONS FOR VASTLY HIGHER GOLD PRICES IN 2003

Philip Judge
January, 2003

There is no question that Gold has been the only story worth talking about in 2002. For the year gold was up 20%. Many junior gold shares were up many hundreds of percent.

By comparison, the Dow lost 16% for the year, and a total of 30% since its all time high in 2000 (despite 11 rate cuts by the Fed). This is its 3rd year of losses in a row, eclipsed only by the USA's stock market performance between 1929 and 1932.

HAS GOLD RUN ITS COURSE?

At the start of 2003, gold is at 5-year highs. But can it keep going up from here? It is our view that the driving forces behind it's recent moves will continue to push prices much higher throughout the year.

1 - INSTITUTIONAL SHORT POSITIONS
For years, Bullion Banks have leased gold from Central Banks, which they have then sold into the physical market. This creates a "physical short position". Total short positions are huge, estimated at 10 - 17,000 ton (equivalent to 5-7 years mine production). Much of this leased gold has been sold at prices well below today's $345. Bullion Banks, having sold this gold short, must eventually pay this leased gold back. As/when they enter the physical market to cover their shorts, it has the effect of pushing prices to extreme levels very quickly, particularly if all the shorts storm the market at one time (short squeeze).

2 - US DOLLAR WEAKNESS
For many years, the US dollar has been viewed by much of the world as the as the ultimate place to park one's assets - amazing logic given:

a) extreme trade and current account deficits (equivalent to US$2 billion per day)

b) huge government deficits (despite reporting surpluses), and

c) massive increases in money supply (as high as 20% increases in M3 through 2002). NOTE : Don't be confused, Inflation is "increase in money supply" NOT "increase in prices" as we are so often told. Currently, the US is destroying its currency at the rate of 20% per annum.

d) For 2002, the US dollar lost 11% when measured against other currencies. When added to US stock market losses, 2002 was a rough year for the foreign investor. With the fall in the Dollar, foreign investors are starting to see that there are few other places to go, other than gold.

3 - GEO-POLITICAL UNCERTAINTY
Throughout history, there are clear cycles in investor psychology, accompanied by changing geo-political circumstances. Periods of relative or perceived safety and stability (e.g. the 1920's or 1990's) are often accompanied by more risk prone investment decisions, with a view to higher returns, usually ending in an investment mania and crash. Overtime the cycle leads to a period of geo-political tension and uncertainty, accompanied by risk adverse, "safe haven" asset deployment, with investors looking to preserve wealth rather than looking for easy or fast returns (e.g. 1930-40's or 2002 and going forward). As investor psychology shifts from the former to the latter, gold begins to again feature in conservative asset deployment strategies (for 6000 years, gold and silver have been the asset of last resort).

2003 is a year of uncertainty; financial uncertainty, war with Iraq (then Iran and North Korea??), massive infringement in civil liberties within the west, the potential for increasing terrorist attacks, instability in oil supplies, and the list go on. These are all issues adding to the geo-political uncertainty in the minds of the investor.

4 - ASIA/ARAB/EASTERN BLOC BUYING
Reports coming in continue to confirm strong hoarding and buying of gold by Russia, China, India and the Arab world. Two thirds of the world's non-western population still view gold as money. These people are not fools. The Arab world realize they are trading a diminishing asset (oil) and are not prepared in the long run to accept paper issued by a potential political adversary (US dollar). China is a net savings nation. Chinese and Indian nationals understand that real wealth can only be accumulated in a tangible asset like gold.

5 - SUPPLY SHORTAGE
Each year gold demand is close to 50% higher than mine supply worldwide, and it has been this way for many years. This massive supply deficit exists with demand running at recent years levels, without factoring the potential for higher demand discussed above. It will take many years of increasing new production and vastly higher prices from here to bring equilibrium between supply and demand. This is a long-term chronic problem that is not going away overnight.

6 - A LIMITED MARKET
Few people understand how very small the gold and silver markets are. There is less than an one ounce of gold above the ground per person on the face of the earth (and most of that is not available to the market). If I buy 10 ounces today, that is close on 20 people that will miss out completely tomorrow. In a small market, it does not take many new buyers entering the market at one time to push prices to extreme levels very quickly.

SUMMARY
Three years ago, gold was the most unfashionable asset on earth. Financial analysts declared gold was heading to $200 per ounce on its way to eventual oblivion. At that time, when I would address a group, I would start with the prediction of vastly higher gold prices in the near future. It would be normal to here audible scepticism in the audience.

In the western world, for too many years our outlook has been too myopic, our historical perspective too short. The vast majority of people have believed at least 75 years of lies and conditioning that gold is a valueless and dead asset, that it has lost its former role as a safe haven in times of financial and political uncertainty. 5000 years of history is easily drowned out by mainstream financial media's shallow 30-year perspective.

For the few that looked ahead and positioned themselves, they are already well in front of the pack.

It makes an interesting study to look into the asset structuring of high net worth families around the globe. Without question, families that have steadily increased their wealth over several hundreds of years, despite political and financial uncertainty, wars, famine and holocaust, have always held between 5 and 25% of their net assets in physical gold and silver (internationally diversified) - interesting.

It is our belief that gold has only just started a multi-year move that will eventually see it at prices far above those of today. It is not the price of gold that is the issue here; how can you measure something of tangible value and limited supply (gold) against something that has no real or fixed value and can be created without any restraint (US dollar). In the final analysis, the real issue here is whether you own some or not.

Philip Judge is a director of The Anglo Far-East Bullion Company, a private bullion banking and financial services company. He was producer and director of the 2-hour feature documentary "Millennium Money" which won a 1st place Gold Award at the 1998 US International Film Festival.

He can be reached at pjudge@goldheritagecertificate.com and www.goldheritagecertificate.com