(Based on the G.F.M.S. Gold Survey 2003 summary of the findings given by Philip Klapwijk Director of GFMS.)

(We have reported GFMS figures as given for the first half under GFMS. Where they have indicated a years estimate we have reported that under 2003 est. GAM estimates are for the full year. GAM does not give 'net implied Investment' preferring to break the figures down, due to the different nature of each component)

As always the consummate professionals G.F.M.S. have provided invaluable information on the gold story for the first half of 2003. Along with these G.F.M.S. have drawn certain conclusions which are, as with us all, best estimates of what the future holds. These estimates are often founded on past information and on assumptions which change and vary constantly. In the gold market in particular, new factors change the market action and resulting gold price as quickly as a the weather changes. To this end we make observations on the figures and conclusions and assumptions of Mr. Klapwijk and G.F.M.S. giving you alternative conclusions based on the same figures, but on some different assumptions.

Gold Price Forecast

'GFMS forecast that gold prices could well post a high in the mid$390s and possibly breach the $400 mark before the year is out. The consultancy, however, did warn that a retreat could occur after or even before the assault on these levels is made but they do not expect the correction to push prices through the $350s. This was forecast to generate an average price of $368/oz for the second half of 2003.' Philip Klapwijk commented, 'to get into the $390s or even higher, investment's going to have to live up to its potential. But the grounds for this seem good; stocks are still looking shaky, the dollar's probably heading south and the political situation doesn't seem to show much sign of calming down. Of course, a lot of recent interest has just come from trend following speculators. But underlying that, there's a definite, if still modest, pick up in longer term interest from people seeking a hedge against current insecurities.'

Observation

Whilst we concur with the underlying picture painted by G.F.M.S. GAM feels that the price estimate on the upside may prove conservative Any correction to be experienced should be to a level higher than the G.F.M.S. forecast. With clear physical demand evident, even in the lower $370's, any downward reaction in the price will only go below $370, because of an overreaction by the market and be short lived, so provide a buying opportunity below $370. G.F.M.S. confirmed that longer term interest from people seeking a hedge against current insecurities, although at present modest, is being seen in the market. We believe that this interest will grow steadily as current insecurities worsen.

With the Rupee in the ascendancy, because of the excellent economic climate in India, the Rupee price of gold is relatively cheap. In addition the recovery in gold demand on the back of the excellent harvest combines with the strong Rupee to see a potentially strong recovery in physical gold demand to peak levels. Indeed, the evidence that Mr. Klapwijk quotes of the acceptance of current gold prices by the physical trade, will join to delay any downturn in demand, until prices possibly somewhere over $400 are seen in the market.

Supply Highlights

Future Central Bank Sales

'G.F.M.S. notes that higher sales by the central banks, mainly from outside of the signatories to the European Central Bank Gold Agreement, are a possibility if prices were to reach such [higher] levels. The first half also saw a further decline in central bank lending. Full year net global sales are estimated to fall slightly to below 550 tonnes.'

Observation

Contrary to the view held by G.F.M.S. GAM is of the opinion that central Banks from outside the signatories to the European Central Bank Gold Agreement, are not so price sensitive, as much as they are sensitive to the world's leading Central Banks view of gold. Although some may be tempted to sell, such as Canada [which has sold their extremely minor amounts, aggressively] the larger nonsignatories, [who have bought gold in recent years, such as China and Russia] may well come to the market as buyers, not sellers of gold. The positive attitude by the Central Banks towards gold as a reserve asset will serve to encourage such purchases, albeit tacitly.

The future Central Bank Gold Agreement will affect not only ALL the world's Central Banks, but dominate the gold price itself!

Producer Dehedging and Hedging

'Net outstanding producer hedge positions in the first half declined by a record 308 tonnes though the pace of this dehedging is forecast to slow considerably to 220 tonnes in the second half. Buy backs, a major component of the first half, are not expected to feature as strongly in the second half. G.F.M.S. forecast a substantial drop in producer dehedging in the second half of the year from the higher than expected and record levels seen in the first half. Klapwijk added, 'a drop of 88 tonnes from the first half may sound disappointing but that still puts dehedging at over 200 tonnes, which isn't a bad contribution to demand. But hedging is well worth keeping an eye on we're now looking at forward prices last achievable in early 1997 and it wouldn't come as that much of a shock if some miners decided to get on with some new hedging. G.F.M.S. adds, 'despite the narrow contango, we could see fresh hedging as some producers are tempted to lock in forward prices at levels which were last achievable in early 1997.'

Observation

A sea change towards Hedging by Producers has occurred in the last year, not solely dependant on price levels. The fact that prices around those last seen in 1997, are now being approached again, and were prices which warranted a hedging policy, will not be sufficient to incite new hedging. Not only has the price climate change from the negative to the positive since 1997, but the cost of hedging has risen to include the jobs of those who have hedged, as demonstrated by Barrick. With Shareholders casting a stern eye at executives wanting to hedge, the brave ones who want to, will have to convince these jaundiced shareholders such high gold prices are unsustainable. Such an argument could well prove a difficult one to sell.

Dehedging meanwhile, as Pierre Lassonde of Newmont, pointed out will continue, until remaining levels of hedged production have reached far lower levels. Undoubtedly the higher the price goes, the greater the loss of opportunity and possibly real loss, will result from existing and continued hedges. We believe that hedging will continue at high levels, in the face of rising prices.

Fabrication

'Fabrication is forecast to decline in the second half but the consultancy sees strong untapped potential in the price sensitive markets such as India and the Middle East. Their demand was seen as being likely to respond well to prices in the $360s and even more so in the $350s which, on top of reduced scrap flows, would help defend the downside.'

Observation

With SARS and the Iraqi war out of the way and a general perception that the MidEast victory in Iraq has virtually removed the prospect of debilitating mideast wars in the future, the prospects for a reinvigoration of gold interest in the middle East will be as G.F.M.S. has forecast. The ideal climate for gold in the developed world is a healthy economic environment, together with uncertainty in the future much the climate being enjoyed and to be enjoyed, for the next year or so. The only doubt about the G.F.M.S. prognosis is the extent of the recovery in the U.S. The E.U. is in recession, so will continue to see the current decline.

Mine Production

'G.F.M.S. forecast that full year mine production will rise 0.7% to just over 2,600 tonnes. However, the reduction in pipeline projects and currently scheduled mine closures are expected to bring about a fall in output over the next few years.

First half 2003 witnessed a sharp rise in weighted cash costs, which increased by a significant $38/oz to average $214/oz. Higher global energy charges coupled with stronger producer currencies against the US dollar were behind much of the rise. In particular, South African cash costs in US dollar terms soared in the first half by 61% yearonyear, whilst Australian cash costs increased by $39/oz, representing a rise of 22% from the prior year.'

Observation

Never has it been more true than the profitability of a mine is reflected in the currency in which it is paid for its product, not simply the $ price of the product in the market place. Together with taxes and royalties, currencies define the real income to a mine. Just as buyers of metals benefit from a strong local currencies, so sellers of metals benefit from a weaker currency. Happily, these countries are becoming sensitized to the plight of their exporters and are favouring a weakening of their currencies, much the same as Japan keenly feels the joy of a weak Yen. Producers should be hedging their currency exposure, vigorously. [Investors should make themselves aware of the policy on currency hedging of the companies in which they are invested, before committing themselves].

South Africa is in a steady process of lowering interest rates, not simply in line with dropping inflation in South Africa, but to weaken the Rand to strengthen the exporters profits. Similarly Canada has dropped interest rates. We expect the U.S. acceptance of a falling $(deservedly so) to be countered by international efforts to weaken currencies against the $ in attempts to protect export industries and forex reserves. Hopefully this will lead to the resurrection of not a few potential mining projects in line with the increase in profitability. Sad to say we accept that not sufficient importance will be given to mining projects early enough, to have any short to medium term impact, so we concur with this projection of G.F.M.S. completely.

Demand Highlights:

Jewellery fabrication

'..fell by more than 4% yearonyear in the first half to 1,240 tonnes though the decline in output excluding scrap was that much steeper at 11% down. The overall fall was mainly due to a slump in East Asia and Italy whose exports suffered at the hands of the Iraq war and SARS on top of sluggish world GDP growth. In contrast, India and Turkey saw gains. GFMS notes that a combination of sluggish economic growth, poor consumer confidence and higher gold prices were the key drivers behind the 1.8% decline in first half 2003 world fabrication. The fall in first half jewellery output was much sharper, at more than 4%, as strong gains in India and Turkey were offset by sharp falls in Europe and East Asia. The greatest decline, in both percentage and absolute terms was recorded in Europe, largely as a result of significantly weaker Italian output (itself due to softer export markets). East Asian jewellery fabrication was also markedly lower, as the SARS impact, together with the factors noted above, led to a decline in demand across the entire region. In contrast, India posted a doubledigit percentage rise in the first half due largely to the second quarter decline in the Rupee gold price. Middle East jewellery production was also higher in the first half, although this was almost entirely due to higher Turkish fabrication.

G.F.M.S. commented that the higher gold price will naturally have a negative impact on fabrication, although, that said, price sensitive markets like India have to a significant extent already adjusted to the stronger price. As a result, demand should pickup noticeably on any correction down to the $360 level or below. Higher local gold prices saw scrap flows jump by 26% yearonyear to 513 tonnes in the first half. Much of the rise came from the price sensitive markets of the Middle East, especially Egypt, East Asia and India. However, higher volumes were also received from much of the industrialised world.'

Observation

The causes of the decline in the first half, being Iraq, SARS, sluggish GDP growth, together with poor consumer confidence and higher gold prices, auger well for the second half, as Iraq, SRS have ended. GDP growth in the U.S. is being forecast to recover strongly [though not as vigorously as many think], but continuing poor in Europe. Acceptance of higher gold prices is being seen in the markets as physical buying is observed at above $370, currently. Hence, in this instance, the reality may not prove so negative as the G.F.M.S. forecast.

The increase in Scrap supply should be linked to the fall in fabrication, the two going hand in hand. Hence if an improvement is expected in jewellery, so a fall in scrap supply will occur. Should higher prices for jewellery be accepted in the market, so not only will scrap supply drop, but it will only reappear at higher prices than before. We expect this to be the case, until gold prices are somewhere above $400.

Investment in Gold

• 'World Investment in the first of half of 2003 fell by 3% as a result of the 43% slump in bar hoarding.
  The latter was chiefly due to Japan where hoarding levels returned to ‘normal' after the banking scare of
  early 2002.
• Bullion coin sales were flat yearonyear at 36 tonnes.
• In contrast, implied net investment (a residual that captures ‘western' investment) saw a jump of over 55% to 140 tonnes.

A strong implied figure for the second half, plus a smaller fall for bar hoarding, means World Investment is forecast to rise over 40% yearonyear to 280 tonnes in the second half, or 60 tonnes more than producer dehedging. Higher levels of investment are needed to offset a reduction in producer dehedging and the continued weakness of fabrication demand, if the gold price rally is to be sustained and extended in the fourth quarter.'

Observation

Investment levels in the above category can be defined as gold purchases in whatever form, provided the intention is for it to be held for the longer term. As such, the key point made by G.F.M.S. is that Investment demand is forecast to rise 40% total in 2003. We expect the factors prompting such investment continue and intensify in 2004 and so lead to even greater increases from 2004 onwards..

Speculation

'However, GFMS cautions that in the near term a partial liquidation of existing speculative long positions is likely to drive gold temporarily lower. The report comments that much of the investment demand seen todate has been short term and speculative in nature. Most buying has come from funds operating on the Comex, as evidenced by the spectacular growth in the long futures positions of noncommercials. In GFMS' view this phenomenon has resulted in gold moving ahead 'too far and too fast'.

Observation

GAM agrees wholeheartedly with this expectation, provided speculative long positions remain what they have traditionally been. Should Investment buyers have chosen to acquire gold in large quantities, quietly, without too much disruption of the gold price, Comex is an ideal camouflage. This will only be apparent if, the buyers take delivery of the metal they have bought. Should these buyers keep hold of their stock of gold, it is unlikely that they will be panic sellers causing the same fall in the gold price experienced after the Iraqi war, but it is safe, in the light of recent history, to expect a correction to some extent. As we expect the gold price to rise further than G.F.M.S. we expect a correction, but back to levels the same as, or higher than the market is currently experiencing.

Future basis for a gold price rise

G.F.M.S. further states 'that the associated decline in the price will be seen as a good buying opportunity. This is especially so, given the positive (for gold) economic conditions of low shortterm interest rates, a weaker dollar, falling bond prices and (arguably) overvalued stock markets. Growing interest in gold as a portfolio hedge from a wider group of investors should therefore result in more buyside interest. In addition, a move into gold from a wider group of investors could be assisted by the launch of additional Exchange Traded Funds in Europe and North America in the coming months.'

Observation

GAM agrees completely and sees this basis, plus additional factors [primarily the prospects for the renewed Central Bank Gold Agreement] as being the foundation for a multi year 'bull' market in Gold.

Conclusions

Having commented on the G.F.M.S. figures and pointed to certain expectations, our comments would not be complete or in context, if we did not point out some salient features of the gold market. Unlike any other metal market, factors affecting the price can alter in a moment. In this market we have seen suppliers buy huge amounts over long periods. We have seen buyers going short on a regular basis. It is a market where, as prices increase, so does demand and not supply. In a falling market supply has increased, in the past, over long periods. It is a market where the major holders of gold keep it in its original form underground, because of the security it brings to a nation and its exchangeability 'in extremis'.

In the future we expect to see demand for it to increase, along with the price and its desirability in the monetary system, not alongside a thriving economy, but where the future of those economies are dubious. Hence the demand / supply picture cannot be seen in isolation but must be synthesized with huge and vital extraneous factors making price prediction, solely on the basis of supply and demand, inadequate.
It will be the extraneous factors which will mould the demand / supply factors into the gold price in the next few years.

We at Gold-Authentic Money will continue to monitor these gold market developments and inform our subscribers, hopefully to their profit.