Happy New Year!

Though you wouldn't know it from the perpetually bullish chatter among most gold bugs, the year just past actually gave us an interruption of the bull market, which began over three years ago. The yellow metal itself rose by a mere 5.4%; and in just this first week of the new year seems as though it wants to surrender even that. This modest return is in stark contrast with the 24.8% and 19.5% gains logged for gold-related equities, which as a sector surrendered around 12% after sizzling-if at times volatile-lurches higher the past couple years.

Such returns-or the lack there of, in the case of gold stocks-are interesting, given the plethora of news and events of recent months that should have pushed gold much higher:

--The U.S. dollar was in virtual free-fall at year-end. While this did briefly push gold (though not gold stocks) to nominal new bull market highs in the first week of December, the dollar's better health for the first nine or so months of the year didn't help gold investors.

--Crude oil prices surged to record (nominal) highs, in part due to continued turmoil in Iraq and elsewhere.

--Gold's supply-demand equation as a commodity improved in 2004. Demand for jewelry strengthened, rebounding from a late 2003 swoon. Producers continued buying back hedges.

--News from central banks, especially in the latter part of the year, could hardly have been more gold-friendly (by way, at times, of being U.S. dollar-unfriendly). Everyone, led by China and Russia, badgered the U.S. and openly talked about diversifying their reserves away from dollar assets. Middle Eastern countries began favoring the euro; and were regularly rumored to be buyers of gold as well. Most incredibly, recent announcements from Italy and Germany suggest that the 15 signatories to the renewed Washington Accord might NOT sell all the gold they had previously prepared to market for.

--Last but not least, investment demand picked up in 2004, highlighted by the blockbuster launch of the new street Tracks gold ETF.

That all the above resulted in what was, by recent standards, a poor year for gold bugs in revealing. If I may, it also vindicates our predictions of last January, when we said that-though gold would see new highs of around $450.00 in 2004 (we were off by eight bucks) - the year would be volatile. We warned anew that one needed to be a TRADER, especially where gold shares were concerned.

Here's what YOU hopefully learned in 2004; lessons that you can now use in 2005 to be a successful investor in this sector:

--Arguably more so than is the case with most other commodities, gold is generally "hostage" to movements in the U.S. dollar. No, this is not always the case; however, given our view that the greenback may already be embarking on yet another short-term BULLISH move, one would do well to keep exposure to the gold sector to a minimum for the time being.

--TIMING IS EVERYTHING! Scarcely three months' worth of 2004, September, October and November, were worth being heavily invested in gold shares. If you loaded up in late summer and lightened up anew after Thanksgiving (the second year in a row where that was the most profitable course of action), GREAT! Much else, and you were lucky to have broken even on you gold holdings for the year.

--Economics matters with gold stocks. I have long been critical of gold bugs' propensity to indiscriminately throw money at this sector. The past year, however, some sobriety was apparent. Longer-term this is good news, as it means that-when it finally does occur again, and it will-a surge for gold equities will begin from more reasonable levels.

The year ahead, I believe, has even more volatility in store than we saw in 2004. Presently, it's my belief that the pattern of the last two years will be repeated. A dollar rally and a possible early-year extension of the correction in crude oil prices could easily push gold down to the $375-400 per ounce level once again. Gold stocks would shed 20-30% from present levels. Following this, as I explain in great detail in my January, 2005 Special Report on gold (with a bonus section handicapping other commodities prospects for the year ahead) we could again see some latter-year strength.

One of the MANY factors we'll be watching is the Fed, together with the markets' perception of how successful it's doing its job. Eventually, Chairman Greenspan (or his successor) may well be presiding over a disaster; a currency crisis and soaring market interest rates will be but two aspects of it. But don't discount the Fed's ability to keep things together for much of 2005. Particularly after another rate hike or two, U.S. rates will be sufficiently higher than those in the euro zone to keep both the dollar and the Treasury market in one piece. If in addition to this oil does NOT quickly return to its 2004 highs, the government's inflation measures will moderate; and gold will be relatively less attractive.

Make no mistake: The long term trend for gold remains up, just as the overall stock market remains in a secular bear market-perhaps ready now to reassert itself-in spite of the strong cyclical move higher of 2003-2004. The question now is whether we'll have to wait longer in 2005 for a sufficiently attractive rally in the gold sector than we did in 2004.

For more information on Chris Temple's gold/commodities outlook for 2005, visit www.nationalinvestor.com