The question: what can we believe?

Before going to war against Saddam Hussein a year ago, George Bush told us he was certain that the Iraqi dictator possessed weapons of mass destruction. None were found. During the last election, Bush promised a balanced budget with billions in surpluses. Instead the President unveiled a whopping $12.4 trillion budget with lots of red ink, which included $400 billion of military spending that somehow excluded the cost of military operations in Iraq and Afghanistan. Mr. Bush continues to advocate a strong dollar policy. Instead the greenback has lost more than 25 percent of its value against the euro and hit a new low with the yen. Of concern, is that Senator John Kerry actually sounds more fiscally conservative than Bush.

After an anemic start, the US economy is growing largely due to the biggest and fiscal stimuli in history. That a new asset bubble is forming is lost amid the histrionics of an election year. The indebtedness of the last burst bubble has not even been repaid when a new burst of consumer borrowing and massive government spending plunged the government into a sea of red ink, pushing total US indebtedness to an alarming 10 percent of GDP. In our view, Bush's economic policies have mortgaged America, which will test that nation's spending and tax policies.

The increase in debt almost matches the increase in net financial claims by foreigners. The United States needs to attract $1.5 billion a day to pay for its bills and has become overly reliant on foreign capital. Ironically, Asian central banks have financed a large part of America's deficit to stop their currencies from rising leaving the Europeans to shoulder much of the adjustment of the weakening dollar. To date, when Asian central banks buy US dollars most of that money went into US government bonds which ironically has pushed long-term interest rates to Japan-like levels despite exploding budget deficits and strong economic growth. Such an imbalance is clearly unsustainable and at some point, investors and central banks will be unwilling to finance these "outsourced" deficits. When that happens it will trigger yet another downward devaluation of the dollar and the inevitable flight will force interest rates and gold even higher.

The Sick Dollar Isn't The Issue: It's A Symptom

We are witnessing a complete breakdown of budgetary discipline before the presidential election. It appears that Washington has adopted a policy of benign neglect towards the budget and the dollar. The benign neglect of the dollar suits the Administration's needs in an election year, helping to spur economic growth by making its exports cheaper. Investors have largely ignored the collapsing US dollar. Indeed the dollar isn't even the real issue; it's a symptom.

With the CPI at its lowest level in forty years, Greenspan is unlikely to move on interest rates, particularly at the starting gate of an election year. Greenspan noted there was, "little evidence of stress pending US current account deficits". Indeed, the political calendar ensures the continuation of the main drivers for the stock market and gold, and that is the opiate of low interest rates. Ben Bernanke, the new Federal Reserve governor, echoed that the risk of a weakened US dollar is "quite low". Mr. Bernanke's reference to the slide of the dollar, not only reflects the benign neglect attitude toward the dollar but a naiveté when he said, "for now, I believe that the Federal Reserve has the luxury of being patient".

Guns And Butter

While the once mighty dollar lost over a third of its value from its peak against the euro, gold during the same two-year period skyrocketed more than seventy-five percent. To date, rhetoric has been the only line of defense of the dollar, and until the election is over, the Administration is unlikely to take serious concrete action. Bush's spendthrift ways has increased more rapidly than under any president since Lyndon Johnson. The savings-short consumer has an insatiable appetite aided by tax cuts, 50-year low interest rates and inflated housing prices, which has led to a record build-up of debt and the biggest credit bubble in history. So far, America's policymakers have been happy to accommodate this spending since it allows the United States to enjoy both "guns and butter".

Having run out of places to spend money on earth, President Bush is now looking towards the heavens. The White House's grandiose plan to put a man on Mars will add to an already bloated half trillion-dollar federal budget deficit. Two years ago, Bush inherited a surplus and forecasted a fiscal 2004 deficit of only $14 billion. But after massive tax cuts and huge spending increases, Bush now presides over a record and still climbing $520 billion deficit. Discretionary spending has risen by 12.8 percent in each of the last two years.

We have been here before. In the sixties, Lyndon Johnson, fought a controversial war in Vietnam and attempted to increase spending on his "Great Society" program. At that time the "guns and butter" deficit ran a meager 1.3% of GDP, which had economists crying alarm bells at the time. Of course the ensuing deficits resulted in the great inflation paving the way for Fed Chairman Volcker to bring inflation and a federal fund rate of 19% down. In the seventies, this debased the value of the dollar and gold went from $50 an ounce to $850, in gold's last real bull market. Today, Mr. Bush is following that same path.

America Is Dependant On Asia's Largesse

The US has become the biggest borrower in the world. The Asian countries have become the world's wealthiest lenders. These funds have become the economic lifeblood of America. Japan for example has spent a staggering $230 billion last year or more than 4 percent of Japan's GDP to preserve their export competitiveness but failed to hold the dollar. Intervention does not work and cannot continue forever. This breakdown of budgetary discipline not only undermines the dollar but as the economy booms, what little savings left erodes, making the Americans more dependant on Asia's largesse. Such profligacy increases Asia's leverage over America's economy and global policy decisionmaking.

China's foreign trade is expected to top US$840 billion, up 35 percent from 2002 making it the world's fourth largest trading nation. The trade surplus with the United States has soared over $125 billion and the Chinese have accumulated more than $400 billion in foreign reserves. China, the new 800 pound gorilla, is not only a major exporter, taking advantage of its cheap labour, but its domestic market and role as the factory of the world makes it a huge consumer of resources. China's economy is expected to grow by 9 percent this year, becoming the world's fourth largest trading nation, behind the United States, Japan, and Germany. The Asians will reap an unintended benefit from the Fed's massive printing job. Export sensitive China and Japan have also been printing overtime in order to buy the dollars needed to stem the rise in their currencies. This flood of new money has inflated the Asian balloon. Alan Greenspan warned that China itself, "will be confronted with the choice of curtailing its purchase of dollar assets or face an overheated economy with associated economic instabilities " and that the Asian central banks may soon reduce their "extraordinary" US dollar purchases. In time however, this widespread global debasement of currencies will lead to unwelcome inflation, more volatility and even higher gold prices.

The Answer: When governments debase the dollar, gold is the only effective hedge

Gold is a good to thing to have. Gold recently recorded a 15-year high, rising more than 70 percent from the low. We believe gold's historic role, as a superior asset class in a world of devalued currencies will emerge this year taking gold beyond $510 an ounce. Coincidently, Japanese Finance Minister, Sadakazu Tanigaki, stated the government will diversify its huge foreign exchange reserves and will "carefully consider whether it will change the composition of its US $673 billion foreign reserves, including its holdings in gold." At yearend, Japan's gold reserves totaled 765 tons or a meager 1.5% of total reserves. The Chinese, the new global juggernaut has only 600 tons of gold in reserves. That will change in a China-centric world. And, the Washington Agreement was renewed for another five years with the fifteen banks declaring, "Gold will remain an important element of global monetary reserves".

Gold's Bull Market Is A Young Bull

There is no question that gold's technical indicators are stretched and in need of a consolidation. Gold shares were overbought but they have been overbought for most of the quarter. An overdue US dollar rally could cause a short-term pullback with the downside risk to $380 a ounce. The camp looking for a correction is getting more crowded. Of more importance is that we believe we're in the typical consolidation phase lending itself to an attractive buying opportunity.

Many Canadian and South African producers were hard-hit by the strength of their currency. As such, we expect a continuation of the rotational correction whereby, overbought stocks will consolidate their moves. A "buy the dip" policy is not such a bad strategy. The hedgers have also moved up, an indication of a rising tide lifting all boats. But the rally affords an opportunity to take some profits here (even though they're hedged boats) because many of the hedgers are simply delivering into their hedges and not buying them back.

The sinking dollar, investor demand for bullion and continued terrorism worries should be enough to cushion any serious pullbacks to the market. In addition, dehedging will further underpin gold prices. However, there seems to be near term resistance between the $420 and $425 area. The key is to look beyond this correction. We view the expected pullback as an ideal purchase opportunity for the next run beyond $510 an ounce, which would represent only the second upleg in gold's bull market.

Emerging From A Twenty-year Slump

The gold mining industry is faced with a dilemma. The gold producers have not been finding sufficient reserves to replace the decline in their mines. Most of the reserve upgrades have been due to the higher price of gold, making previously uneconomic reserves economic. Over the past five years there have been few new discoveries due in part to the fact the industry was more concerned about staying alive than looking for more reserves. Many of today's discoveries, were found long ago and are still uneconomic at today's prices. These so called discoveries are too deep, possess weak engineering and are too low grade to be considered profitable. These projects will be exploited in the next cycle.

The majors have found themselves on a treadmill, which prompted mergers. However, mergers among the majors have been largely completed due in part to the change in accounting rules making "mergers of equals" difficult today. Goodwill is also a problem for the seniors. In addition, the prospect of hostile bids have been frustrated by the regulatory barriers of a tougher Securities Exchange Commission (SEC). As a consequence, the senior producers faced with the prospect of declining production and/or declining reserves must either explore or acquire reserves in the marketplace.

We believe that the industry's top tier companies must inevitably go down the food chain and acquire the smaller midsized companies such as Agnico-Eagle, Meridian, Goldcorp, and Kinross. Members of this group are most likely to be swallowed by the majors if their share prices do not improve. Equally interesting is the likelihood of the majors taking a trojan horse type toehold, developing "strategic partnerships" with many juniors; a form of " skunkworks" to give them exposure to mining plays. For example, Kinross recently struck a deal with Anatolia Mining to give them exposure to Anatolia's vast holdings in Turkey. Goldcorp was an earlier adopter of "strategic partnerships", sponsoring many mining companies surrounding its rich Red Lake Mine.

Year of Exploration

We believe that this year will also be the "Year of Exploration" and the winners will be those companies, who first discover the deposits of the future. Even the senior producers have increased their exploration spending. While the majority of exploration ventures turn up blanks, exploration is like fishing; if you don't put the line in the water you won't find anything. Similiarly, if you are not going to spend money on exploration you will not find anything. In addition, the upturn in the gold price as well as flow-through funding has made the raising of risk money easier for exploration companies. Consequently, we believe that this money will eventually go into the ground and there is a greater upside for the smaller companies. (See Unigold Report)

For that reason we continue to advocate the companies in Maison's "Top Ten Juniors" list. In addition most of these companies are also potential takeover candidates their exploration activities make these companies attractive targets for those in need of longer-life reserves and projects. The most interesting exploration/development projects are earlier discovered deposits like Eldorado, with plans for Kislagdag, Bema for its development program Kupol gold deposit, Miramar for its Hope Bay gold project, Crystallex for the mammoth Las Cristinas mine, Northgate Exploration for Kemess North and Philex for the Boyongon gold project in the Philippines.

Agnico-Eagle Mines Ltd.
Agnico-Eagle shares have recovered following the rockfall at the LaRonde Mine in northwestern Quebec. In our last report, we stated that the Company had turned around its problems due to the fact the company was mining within sixty feet of the rockfall. The proportion of ore from the lower levels has increased and we believe the Company is ahead of its development. Of greater importance, is that the Company is pursuing an aggressive exploration program that will increase reserves. Agnico-Eagle has an excellent pipeline of regional plays, including LaRonde II, Lapa, Goldex and the Bousquet property. Agnico- Eagle now controls over twenty kilometers of favourable geology along the prolific Cadillac-Bousquet break, which is itself a company-builder.

At Lapa only eleven kilometers east of LaRonde there is a resource of 4.3 million tonnes at 0.273 ounces of gold per tonne or 1.2 million ounces (1.5 opt cut). A new reserve estimate is expected shortly. The company has done metallurgical work and there are synergies with LaRonde. We believe that Lapa is Agnico-Eagle's next gold mine. The Goldex project is a large tonnage low-grade deposit with a resource of 1.53 million ounces. Goldex is the largest undeveloped resource in the Val D'Or camp and three slots are planned to test the feasibility of bringing the deposit into production. Goldex could produce 160,000 ounces and is heavily levered to the gold price. Bousquet was acquired in September 2003 from Barrick and is immediately to the west of the LaRonde mine. A deep drilling program is planned for the next nine months testing deeper extensions.

At one time Agnico's shares were trading at a premium, but the operating problems extinguished that premium. However, with the rockfall and operational problems behind them, we believe that Agnico-Eagle's share performance will improve once investors focus on the exploration milestones. At current prices, Agnico-Eagle compares well to other companies and with its long mine life and excellent development potential, Agnico-Eagle shares are a buy. Moreover, zinc and silver byproduct credits lowered Agnico's cash cost to less than $65 per ounce. At the very least, the company is a takeover candidate for a major looking for exposure to a large regional camp.

Bema Gold Corporation
Bema's shares were among the best performers lately, due in part to its growth profile. Last year, Bema's consolidated gold production was 250,000 ounces compared to production of 117,000 ounces. This year, Bema should produce 300,000 ounces at a cash cost of $271 per ounce. Bema anticipates reopening the Refugio Mine in Chile later this year with joint venture partner Kinross Gold. The proven and probable reserves were bumped up to 3.4 million ounces of gold and Refugio should produce 250,000 ounces at $225 per ounce cash cost over a ten-year mine life.

Refugio is a smaller project in contrast to the all important high-grade Kupol project in northeastern Russia. Following an extensive drill program, Bema raised its indicated mineral resource to 1.8 million ounces and the inferred resource to 4.2 million ounces. The gold/silver deposit is growing in size and mineralization extends over 3.1 kilometers to a depth of at least 300 meters. Bema plans to have seven drills working in late May to conduct a 57,000 meter diamond drill program. Because of its northerly location, logistics and infrastructure are a definite factor and the economics of a scoping study should be completed by late spring. Bema plans to spend more than $40 million to develop this promising deposit and Kupol could be in production in 2007. Bema recently issued a $70 million 7-year convertible bond in Europe to pay for its share of reopening Refugio and financing the development at Kupol.

Bema also expects news from Cerro Casale in Chile where Placer Dome is currently updating a feasibility study. Cerro Casale is owned by Placer Dome Inc. (51%), Bema (24%) and Arizona Star Resources Corp (25%). The mine is to be a large copper and gold open pit mine, but the $1.3 billion price tag and hefty Chilean royalties make this project difficult even at current commodity prices. We do not put much weight in a go ahead decision at this time, particularly given Placer Dome's already heavy commitments for other projects. At the Petrex mine in South Africa, Bema produced 132,000 ounces and hopes to produce 200,000 ounces. That is the good news. The bad news is that the skyrocketing rand has pushed Bema's cash cost to $394 per ounce. Even with the expansion of the mill facility, Bema will still have a healthy exposure to an unsettled part of the world.

Overall, we like Bema's growth profile and the Kupol deposit is a company builder. As such, we expect Bema with more than 350 million shares outstanding and a solid balance sheet to be an attractive tidbit for one of the majors interested in Russian assets and growing production.

Crystallex International Corporation
Crystallex is a much-maligned gold producer with operations in Venezuela. The company's primary asset is the Las Cristinas property in Venezuela, containing 10.2 million ounces of proven and probable gold reserves (Crystallex has the fifth largest reserve base ahead of Goldcorp and Meridian). A full feasibility study was recently completed by SNC-Lavalin. The Venezuelan government accepted the feasibility study with few changes, which acknowledges Crystallex's title to Las Cristinas. Initial plans call for a 20,000 tonne per day open pit facility with the potential to double that capacity to 40,000 tonnes per day. Production startup is expected in early 2006 with initial production pegged at about 300,000 ounces at an average cash cost of $182 per ounce over a whopping mine life of 34 years. The capital cost is estimated at US$243 million (excluding $38 million refundable VAT). Plans are afoot to double the output to 500,000 ounces of gold from a 40,000 tpd facility with an estimated capital cost of US$360 million.

Why is Crystallex not higher? What is wrong with this picture? First, Crystallex had to restate its financials. That was done and a new accounting firm was retained. Second, investors were concerned that Crystallex's management ranks were too thin and the Company could not execute their ambitious plans. That also changed with the addition of Todd Bruce and Ken Thomas as well as Robert Fung's upgrade of the Board of Directors. Third, investors were concerned about Venezuela. Crystallex has been able to operate in that country for years, surviving five presidents and has worked very closely with the government's Corporacion Venezolana de Guayana (CVG). Unlike other mega deposits, there is no mining risk, no towns to move and with the acceptance of the feasibility study, acknowledgement of title. Crystallex actually enjoys government support for this project. There were numerous questions as to whether Crystallex actually owns title to the deposit. Controversy has surrounded Las Cristinas, dating back to when Placer Dome originally attempted to put the deposit into production. We note that there have been so many legal opinions (the majority in favour of Crystallex) that we have no doubts as to the property rights owned by Crystallex.

Simply CVG was vested with the mining rights by government decree. CVG has contracted with Crystallex to exploit those rights in exchange for a royalty and cash. Under this agreement, Crystallex has the right to exploit Las Cristinas gold resources for up to forty years in exchange for already made payments and the completion of certain infrastructure requirements.

Consequently, we believe that Crystallex is an undervalued jewel that the majors would like. Given the 10 million ounces plus reserves and resources, the shares are worth between $6-$7. Crystallex's other operations are relatively minor. If Crystallex's other Venezuelan operations are included we would add another $0.75 per share. Crystallex recently completed a $50 million financing, putting it in good financial shape. With almost 140 million shares outstanding (basic), the shares are widely held. Buy

Kinross Gold Corporation
Kinross is now the seventh largest gold producer in the world and should produce 1.8 million ounces this year. Kinross is also the fourth largest North American producer with with over 25 million ounces of gold equivalent reserves and resources. The Company has spent much of last year cleaning up its balance sheet and the shares are now widely held and very liquid. Kinross has grown through acquisitions but recently found the pickings slim. Accordingly, the Company has boosted its exploration budget to $24 million and like others spent much of the money around its existing properties. At the Buckhorn high-grade gold deposit in Washington for example, the Company plans to expand the Kettle River facility and should be able to squeeze another 100,000 ounces per year for at least five years at a cash cost of only $160 per ounce. At Kubaka, the Company is still negotiating with the Russians to bring the newly acquired Birkachan deposit and Tsokol into production to extend Kubaka's mine life. And, of course the Refugio mine in Chile will add to production later this year. Kinross has announced plans to acquire an interest in Anatolia Mines, which has an excellent Turkish exploration project with a 4 million ounce resource. We believe Kinross' strategy of supporting regional gold camps is a positive strategy.

However, should Kinross not be able to grow, then Kinross' almost 2 million ounces of unhedged annual production is an excellent tidbit for one of the majors needing an escape hatch to reduce their own heavily hedged operations. At current levels we recommend Kinross shares be bought. The company is well leveraged to the gold price and thus a higher gold price could boost the underlying valuation of Kinross' open pit operations.

Philex Gold Inc.
Philex is an overlooked Canadian exploration company active in the Philippines. We have followed this company for some time because of the 50:50 joint venture with Anglo American PLC. Anglo has been operating on Philex's Boyongon large copper/gold porphyry deposit discovered in 2000. Anglo has aggressively delineated two major high grade copper/gold zones and last year scout drilling discovered a new deposit in the northwest edge of the property. Anglo attempted to acquire the property from a local landlord but was unsuccessful. Anglo has so far disclosed that it has not been able to establish enough tonnage to support a large scale mining operation (Anglo's threshold is in excess of 5 million ounces). However, under the Joint Venture agreement, Anglo is responsible for all exploration costs up to feasibility study. In March 2002, Anglo acquired an additional ten percent stake for $20 million, which allowed Philex to pay down some debt and valuing the deposit at almost $2.50 per Philex share.

Should Anglo not find sufficient reserves to meet its threshold, Anglo could walk leaving Philex with 100 percent of the orebody. We believe the possibility of regaining a 50 percent stake is highly likely and that Boyongon has sufficient reserves for a smaller scale operation. In addition, while Anglo has spent three years drilling, Boyongon still has a lot of blue sky potential. The management of Philex have been conservative stewards of Philex funds and are capable of finding a joint venture partner to replace Anglo. Consequently, given our expectation that they have found three million ounces of gold equivalent ounces, we view the shares as extremely undervalued.