It sometimes feels like it has been a big secret that over the past three years the place to have been invested is in the precious metals. Yes that is the same precious metals market that was once the home of such infamous names as Bre-X, Cartaway Resources and Borneo Gold amongst others. Of course now if investors had been paying attention they could have substituted those names for Enron, WorldCom and Global Crossing and that is only the beginning of the list. The high profile collapse in the high tech and some financial companies has made the scandals in the precious metals market look like amateurs.

The precious metals market has led all markets for the past two years. Consider that since January 2000 when the Dow Jones Industrials (DJI) topped and March 2000 when the S&P 500 and the NASDAQ followed suit the Philadelphia Gold and Silver Exchange (XAU - generally hedged mining companies) is up roughly 83% and the Gold Bugs Index (HUI - unhedged mining companies) is up 275%.

When one considers where they have come from their lows in October 2000 the gains are even more dramatic up 152% and 588% respectively. Compare this to the drop in the markets since that time of the DJI down 17%, the S&P 500 off 31%, the TSX down 30% and the NASDAQ crashed 61%. And these losses are still after a yearlong rally that has added over 50% to the NASDAQ alone. As well Precious Metals mutual funds have led or been in the forefront of the leaders for the past two years as well.

Yet in listening to numerous interviews with fund managers and other analysts even recently the focus and belief is still on the broader markets and many give the precious metals markets short shrift. Most acknowledge that a portfolio probably should have some but then we are reminded in some form that for 20 years the gold market did nothing but lose money so why should they change now. Of course on the other side the ones that were gold bugs before this current bull run started were gold bugs during a period they probably shouldn't have been (mea culpa). Old habits die-hard.

But gold as an investment is gaining more credibility within the broader investment community and even amongst the institutions whose main focus was the broader investment market of bonds, mergers and the big cap stocks owned by the institutional investors. The 2^nd Annual Gold Investment Summit held in London, England November 20-21 drew a large institutional representation. Tony Fell, Chairman of RBC Capital Markets, made the opening remarks and there was a strong acknowledgment of a growing interest in gold from the institutional side.

Keynote speakers over the two day conference included the World Gold Council - promoting gold to investors; Nick Barisheff, President of the Millennium Bullion Fund (MBF) (note: I am a director of the MBF); John Hathaway of Tocqueville Asset Management - Investing in gold, the Hedge Fund's perspective; an examination of premiums applied to gold equities from RBC Capital Markets; the Aurion Gold acquisition by Placer Dome Inc.; Gold as a reserve asset from a central banker; China and the impact on the gold price from the People's Bank of China and the Shanghai Gold Exchange; gold shares in institutional portfolios from RBC Asset Management and Gold's place in the economic cycle from RBC Capital Markets. Panel discussions centered on how institutional investor's see Gold; investing in new frontiers of the former Soviet Union and the South African investment case. A key note luncheon speaker was Peter Munk, Chairman of Barrick Gold Corp.

The conference (summary can be found at www.euromoneyseminars.com but note course materials are not available to the public), attended as it was from representatives of the banking and investment dealer community, central bankers, captains of the gold industry and institutional investors has the potential to be an important watershed for the gold community. One of the weaknesses in the gold market over the past few years has been a distinct lack of support from the institutional community. That may be changing. Gold is sitting on the cusp of breaking out and closing over $400 for the first time in almost 8 years. When gold broke out and closed over $400 in the 1970's it was the launch pad to $800 plus. Keep in mind that in 1980 when gold peaked at $800 plus it is the equivalent to almost $2000 today.

If the institutions get more involved in the Gold market, as we suspect they well particularly as we go past $400, there is the potential for an explosive move in the market. The gold market is, as noted in MBF's presentation, quite small. All the gold ever mined and is above ground is today worth only about $1.2 trillion. Above ground silver is worth about $0.7 trillion. The global financial market's assets are worth more than $50 trillion. The market cap of all the gold companies is only about $80 billion and silver companies $2 billion. Microsoft alone has a market cap of about $280 billion while the world's top 10 stock markets have a market cap of $23 trillion which is down 28% from the peak in 2000. A shift of 1/10 of 1% of the global financial assets alone would result in the purchase of upwards of 4000 tonnes of gold well in excess of current annual production levels.

We have long emphasized that gold is a monetary asset despite the fact that we have been off the gold standard now for over 30 years. Since the world went off the gold standard we have witnessed an explosion in money and debt growth. Over the past few years it has taken almost $7 of new debt to purchase $1 of GDP in the US. The US consumer, corporations and government today owe $3 for every $1 of GDP. The US is locked into an unsustainable trade deficit that is now a cumulative $4 trillion and adding upwards of $500 billion per year unless something changes the downward direction. The current budgetary deficits are approaching $500 billion annually.

It was Alan Greenspan no less who famously declared in 1966 before the gold standard was abolished that "Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights". We wonder how he feels about that statement today. Since 2001 the US Dollar has fallen in value some 25% while gold prices are up well over 50%. The purchase power of the US$ has fallen over 90% since the world came off the gold standard. And huge deficits and debt levels are not just limited to the US as Japan, Germany and France amongst others have huge debt to GDP ratios. Numerous other countries are constantly teetering on the verge of bankruptcy and many African nations are financial basket cases.

Gold and silver have been in supply deficit for years as demand regularly exceeds supply. Differences have been made up through central bank sales and central bank leasing for gold and use of above ground supplies for silver. But central banks are no longer selling gold in any great numbers and leasing has slowed. Above ground supplies of silver are virtually gone. The leased gold has now caused a shortfall of at least 5000 tonnes of gold and could be as high as 15000 tonnes. Only higher prices well create the conditions to make up these supply shortages now and could still cause a huge short squeeze as the amounts of gold derivatives outstanding exceeds all estimates of global supply.

A new focus by institutional investors on gold as a strategic investment, monetary asset and store of wealth will be very welcome if the sense from the recent London gold summit is realized. When the stock market was at its peak in 2000 the Dow Jones Industrials/Gold ratio was 45:1. Today it stands at under 25:1 and is falling. In 1980 when gold peaked at over $800 the DJI/Gold ratio stood at 1:1. At the depths of the Great Depression the ratio was just under 2:1. Even if the ratio were to fall to only 5:1 gold would need to rise to near $2000 or the DJI to fall to 800 under current prices. After we came off of the gold standard gold rose over 2300%. If that were to happen today Gold would rise to $6300.

Holding gold and silver or gold and silver companies is simply the best available risk/reward situation available in today's markets. The bear market in stocks is not over and that is clear from the gross overvaluations that remain today even after three years down. Any economic downturn will be accompanied with considerable unwinding of the massive debt obligations. It is simply a case that it is unsustainable. We can't help buy note that money supply (M3) has actually declined the past two months. This may be setting the stage for a classic credit squeeze that will leave many a party bankrupt (in a year that has already seen record bankruptcies). Precious metals have been the place to be over the past few years and events are starting to come together that will ensure it will remain that way for a number of years yet.