For markets of November 22^nd

General Comments:

As the white metals suffered a bit last week, the gold market continued its sharp rally as expected. This market is still almost entirely influenced by the US Dollar, which continues its death spiral, plumbing new lows virtually every day. While the US administration publicly maintains that its "strong Dollar" is unwavering, the financial markets remain unconvinced. Comments by Dr. Alan Greenspan on Friday only emboldened the USD bears when he was quoted as saying, "it seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point". Gold was up $8.70 for the week, pushing into new 16 year highs.

While the gold price slavishly followed the Dollar, the white metals suffered a bit coming under some long liquidation. Silver was down fractionally while platinum, maintaining its reputation for capricious volatility, fell by $14.50 as bearish fundamental news was released by Johnson Matthey. Palladium was totally ignored as prices were just fractionally lower.

The most significant news of the week for the gold market was the wild success (so far) of the new Exchange Traded Fund for gold. After trading about 6 million on Thursday, we have seen this fund trade about 12 million shares (!!) per day amidst superb liquidity. While its sisters in London and Australia could never measure up to expectations, the US version is certainly going gangbusters. It is still too early to qualify this fund as the panacea that the World Gold Council and gold bugs fervently hoped for, so far it is most impressive.

However, there is a fly in the ointment that I have not seen mentioned in any other newsletter, although it is clearly delineated in the prospectus. Please understand that gold is considered a "collectible" by the IRS, and as such, all profits are taxed at a different rate than other investment vehicles. Two quotes from the prospectus will verify this status.

**(from page 67) Shareholders generally will be treated, for US Federal income tax purposes, as if they owned a pro rata share of the underlying assets (emphasis added) held in the Trust.

**(from page 69) Under current law, gains recognized by individuals from the sale of "collectibles", including gold bullion, held for more than one year are taxed at a maximum rate of 28%, rather than the 15% applicable to most other long-term capital gains.

I remain very hesitant to discuss tax treatments as I am most unschooled in these matters BUT it appears to me that the new gold ETF carries a greater burden of taxation than other investment vehicles such as futures. I STRONGLY encourage you to consult your tax professional on this matter. To compare tax rates between the ETF and the futures market, at the highest tax rates:

As noted, the difference in taxation between these two investment vehicles is rather large, especially in all transactions under a year in duration. In other words, the average retail investor would pay 1.5 times the tax on profits earned in ETF than in the futures markets on short term trading, and about 20% more tax on those trades over a year. Again, while I have taken pains to verify this data, I ask you to consult your tax professional.

While the EFT offers fabulous liquidity, and enormous ease of transaction for many stock market investors, it is not the most effective nor efficient method of trading gold. It is my belief that the volume will ALWAYS seek the most beneficial venue, and as such, investors in the new fund must determine if the ease of transaction is worth the additional tax burden. While the new ETF is very welcome to the market, energizing gold bulls, it appears NOT to be a better mousetrap.

Last week, the French National Bank announced that it will sell 500-600 tons of gold over the next 5 years to reduce the state's large budget deficit. As the market completely and totally expected such news, it was largely ignored as the sales will take place within the newly signed Washington Accord. In the later part of the week, the German National Bank stated it will decide if it will also be a seller, and if so how many tons, by the end of this year.

In a very bullish development, GFMS announced that producer de-hedging (the repurchase of previously sold forward positions or the like), continued at very high levels last reported in the second half of 2002. This information must be taken very bullishly as producers continue to pare back their global hedge books EVEN WITH GOLD AT SHARPLY HIGHER PRICE LEVELS. Most analysts (including myself) would have guessed that the current rally in gold might have deterred such actions to some extent, but we were wrong. Also, actual repurchases of sold forwards totaled 3.0 million ounces, a goodly percentage of the drop of 4.6 million ounces in the global hedge book, another very bullish data point. The global hedge book now totals 60.4 million ounces, about 75% of one year's total production.

While the loco London market has been on the wane in recent years as investors/speculators turned to derivatives marketplaces, this trend is now reversing as the precious metals find greater foothold in both the financial press and in the psychology of the market. In October, gold ounces transferred for the LBMA increased by 18.5% to 14.7 million ounces daily. Silver ounces transferred rose to 92.0 million ounces per day, a gain of 12%.

The news for platinum and palladium was none too bullish last week, as Johnson Matthey declared that the platinum market will grow by less than 1% and will be very close to a fundamental equilibrium of supply and demand in 2004. There is an old saw in the commodity business that high prices cure high prices, and this is occurring in the platinum market as years of lofty price levels have strongly encouraged production while discouraging demand, especially from those "discretionary" purchases, such as jewelry. The palladium market is set for another 1 million ounce surplus in 2004. While knowledge of these important market fundamentals of supply and demand are crucial to the investor or speculator, it MUST BE considered that the actions of the speculator may have a very outsized effect on the prices of these metals. Both of these markets are very thin, and any interest by speculative forces can either shoot prices sharply higher, or sharply lower.

On to the Commitment of Traders reports, as of November 16th, both futures and options:

As open interest burgeoned to new all time record highs, with gold up about $4 during the reporting period, long speculators continue to add to their already large positions. They were joined by the long commercials, probably jewelry concerns locking in their cost of gold in the future, while the short commercials continue to accumulate contracts, even as prices go higher. The ratio of long specs to short specs is 4.43 to 1, rather high but not at the classic danger point of 5 to 1. As noted in the last newsletter, I remain bullish on this market but it must be noted that the gold price is only following the demise of the USD. Any rally in that currency will force gold lower. Gold is still not in its "second wave" of its long term secular bull market, when it will rally against all or most currencies. Recommendations will follow.

Silver prices were marginally higher during the relevant week, with open interest mostly unchanged. There was very LITTLE change in the ownership of contracts, and as such, it seems a bit foolhardy to make much of this data. Long specs are a bit over 5 times the size of the short specs, a sign that any long liquidation could force a very sharp sell off in prices, as we have seen before many times. However, it is more likely that silver prices will trend higher, following gold. I remain mildly bullish but would prefer to long gold than silver due to the lessened risk.

GOLD RECOMMENDATIONS:
(positions and recommendations are available to clients and subscribers only)

SILVER RECOMMENDATIONS:
(positions and recommendations are available to clients and subscribers only)

PLATINUM RECOMMENDATIONS:
(positions and recommendations are available to clients and subscribers only)