In 2008, retail demand for gold was the primary catalystfor the increase in the Gold price. Retail demand increased121% to 232 tons. And because of this, bullion dealersreported shortages in bars and coins, according to theWorld Gold Council1, a Gold-mining-industry association.

“Gold's universal role as a store of value has shonethrough … helping attract investors and consumers to allforms of Gold ownership,” James E. Burton, chiefexecutive officer of the World Gold Council.

However, if you'd just looked at Gold's performancealone, you'd never be able to tell demand was so strong.Indeed, in the third quarter alone, Gold prices tumbledalmost 6% – and were actually down as much as 20%,until a mid-September rebound narrowed that loss.

Reasons?Whereas overall demand was indeed a record, most of thatdemand came from the retail side. But like commontradable stocks, institutional demand exerts much moreinfluence on the market than consumer-led retail demand.

As markets continued to collapse in 2008, institutions andhedge funds were forced to liquidate assets across theboard. This so-called “de-leveraging” took place primarilydue to asset-allocation policies of large institutionalinvestors.

Simply put, institutional investors typically employ anasset-allocation model that's designed to manage risk andmaximize returns by setting a percentage for eachcategory of assets. Those ratios can change over time assome assets surge in value, while others hold steady oreven decline. Thus, assets that perform well (compared toothers) could comprise 20% of the portfolio value insteadof the 15% limit allowed under accounting rules.

And these multi-billion-dollar portfolios are oftencontrolled by precise asset allocation guidelines that setstrict maximums and minimums for each asset category.

For example, Harvard's endowment aims to have 13% ofits portfolio to be composed of “private equity”investments. But private equity now accounts for morethan its assigned allocation. So, to get back to that 13%target, it's selling $1.5 billion in private equity assets,according to Fortune2.

One purpose of such asset-allocation models is toprevent a massive loss in case one class of assets takesa big hit. But in this case, institutions were selling Goldbecause, in the third quarter, it fell 6%, while the rest ofthe stock market skidded 14%.

The logic is confounding, but the bottom line is that Gold'svalue is incredibly suppressed considering demand hasmoved to an all-time high.

Communications giant Bloomberg3 conducted a PreciousMetals Survey across 20 leading firms, to ascertain theoutlook for Gold in 2009. After hitting record highs insummer 2008, Gold pulled back in the second half of theyear but was at an average of $872 an ounce last year.There is a relatively wide disparity between the forecastsof the many participants and there are more bulls thanbears with only a few of the 20 participants calling for alower average price in 2009. Some of the most bullishwere Citigroup and Merrill Lynch (covered later in thisissue). Most agree that this year will be an ugly year forfinancial institutions and most economies in thedeveloped World, except perhaps for precious metals.Here is a snap shot of some of the key findings andforecasts:

Gold may climb into 4-digits in the first quarter and mayremain in 4-digits for the rest of the year. The potentialhigh is $1800 per ounce with a low of $850 (which maybe reached early in the first quarter of 2009).

The evidence suggests (see rest of issue) that 2009 isshaping up to be the key "break-out year" for Gold. Afundamental reason on why it will become a "break-outyear" is that the average investor will start becomingaware of Gold and begin buying. Despite its remarkableperformance throughout this decade, few people ownGold. That may begin to change in 2009 as the financialdisruptions potentially worsen and people seek a safehaven for their money.

Since early 2001, Gold has nearly quadrupled at best. Ithas relentlessly carved higher highs and higher lows ona secular basis. Its dollar price has increased everysingle year. Such results are possible only if globaldemand has indeed exceeded supply growth since 2001– and it has. It is very difficult to find another asset classthat can even approach such performance in theincredibly chaotic markets of the last 7 years. Gold isand has become an elite class of its own.

Once again, Gold's fundamentals are more bullish todaythan ever before. Despite relatively high prices, minedsupply is shrinking. Central banks' relative power in thismarket is waning dramatically. And thanks to bothnatural market forces and artificial manipulationcontrivances, global investment demand for Gold is likelyto grow tremendously from today's levels.

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A Review: 2008 The Outlook for 2009

1 www.Gold.org2 www.Fortune.com3 www.Goldprice.org/news/2005/04/bloomberg-gold-price-survey.html

2INVESTING IN GOLD 2009

A recent report by Citigroup4 warned of the possibility ofgeopolitical instability in the coming year including civilunrest and massive political instability internationally.The report warns of " ... further economic instability,which could lead to political instability in some nationsand possibly even domestic regional unrest or worse.

Citigroup asserts that Gold will benefit from both the"gloom & doom" and "muddle-through & monetization"scenarios, possibly regaining $1,000 per ounce at thebeginning of the year and even doubling or tripling in thelong term.

In their analysis (published December last year), twoCitigroup analysts declared:

"Gold appears to be entering a powerful new phase ofinvestment demand tied to safe-haven and monetizationthemes, and that the overwhelmingly vast and complexpool of nested financial derivates would ultimately resultin cascading defaults and ruin for major portions of thebanking system. Frankly, we're surprised that Gold is notalready at $2,000 per ounce."

Citigroup MetalsAnalysts Ask:Why is Gold Not Already

at $2,000/oz?

4 http://www.Gold.ie/citigroup_gold_report.pdf5 http://www.Scoopit.co.nz/story.php?title=Merril_Lynch_Rich_turning_to_

Gold_for_Safety--1

The analysts forecast that the Gold price will go higherthrough 2009-10 and maintain year-average forecasts of$950/1,000 per ounce. However;

"Should the macro environment deteriorate moreseriously than Citi economists expect, we would not besurprised to see Gold climb to multiples of these levels.In the near term, we expect Gold to be highly sensitive tomacro developments, given the potential for safe-haveninvestment demand to ride on top of seasonal strength inphysical fabrication offtake."

Another heavy weight predicting a good year for Gold isMerrill Lynch.

Merrill Lynch5 recently revealed that some of its richestclients were so alarmed by the state of the financialsystem and signs of political instability around the worldthat they were now insisting on the purchase of Gold bars,shunning derivatives or "paper" proxies.

Merrill predicts that Gold could soon blast through its alltime-high of $1,030 an ounce, and could hit $1,150 bymid-year 2009.

Merrill also feels that Gold should do well regardless ofthe economic situation i.e. should deflation set in andshake the economic system it will serve as a safe-haven,and should the massive monetary stimulus plans put inplace by governments gain traction and set off inflation,it will also come into its own as a store of value. A “win-win situation either way”.

This deteriorating economic picture is likely to be acatalyst for Gold to perform well as a "safe haven".

In particular, what may ultimately give the Gold price themajor boost that some economists expect could be thewholesale dumping of U.S. assets by investors around theworld as they lose patience with the U.S. economy andthe planned bailout plan by the Federal reserve.

A blog by Professor Willem Buiter6, one of the world's topeconomists and a former member of the UK's MonetaryPolicy Committee for the Bank of England states : "Therewill before long (my best guess is between two and fiveyears from now) a global dumping of US dollar assets,including US government assets. Old habits die hard. TheUS dollar and US Treasury bills and bonds are still viewedas a safe haven by many, but this may not continue forlong…”.

He goes on "The past eight years of imperial overstretch,hubris and domestic and international abuse of power onthe part of the Bush administration has left the USmaterially weakened financially, economically, politicallyand morally, even the most hard-nosed, GuantanamoBay-indifferent potential foreign investor in the US mustrecognise that its financial system has collapsed."

What the above may suggest is that there is a ‘battle ofthe safe havens' taking place in the financial sector. Muchof the world continues to be imbued with the ‘dollar isking' scenario (consider the dollar rally during the latterpart of 2008). What Buiter seems to suggest is thatsooner or later “the economic chickens will come hometo roost and that the World will gradually realise that theUS economy is inherently almost terminally weak and thiswill lead to a flight again from the dollar, probably startinggradually and then accelerating”.

Gold will be the likely beneficiary as the other traditionalsafe haven, and the faster the dollar falls, the steeper therise in Gold price will be in dollar terms at least. In otherwords Gold will ultimately win the battle of the “safehavens” and reign supreme as the de-facto currency ofchoice.

Immediate factors that may positively impact theGold price:

Geopolitics: the Israeli attacks on Gaza earlier thisyear were a reminder of the chronic problems in theMiddle East, with Iran and Pakistan other potentialflashpoints.

Physical delivery requests are mounting at theCOMEX (commodity) futures exchange, which couldwell result in an immediate shortage of Gold at year-end. The Futures market looks about to breakdown,giving control of the Gold price back to the physicalmarket where available stocks are low.

Gold preserved value through the storm of 2008, andthe economic outlook for 2009 looks no better, whileinvestors are increasingly concerned about thebubble in the bond market. In the investment cyclethe next step could be a bond crash and a flight toprecious metals.

The dollar rally looks to have stalled, which may leadto dollar devaluation and Gold appreciation. Thiscould also boost the oil price – usually a positive forGold.

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Battle of the“Safe Havens”

6 www.Maverecon.Blogspot.com

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Some market commentators are suggesting that there isa significant catalyst already inherent in the U.S. economythat could help vault Gold prices to $1,500 an ounce bythe end of 2009. And it has to do with the much debated$700 billion rescue plan.

The thinking goes: since the U.S. government is pumping(or is planning to pump) money into so many banks, themoney has to come out somewhere. The philosophybehind the rescue plan is simple: by providing a portion ofthe $700 billion to foundering U.S banks, the TreasuryDepartment believes it can provide banks with badlyneeded capital, and get them to start lending money oncemore – jump starting the economy in the process.

Since September 2007, U.S. Federal Reservepolicymakers have cut the benchmark Federal Fundstarget rate nine times – from 5.25% down to the current1.0% rate – to increase bank-to-bank lending and bank-to-consumer lending.

Right now however, banks are not boosting lending.Instead, they are using the cash to finance buyouts ofother banks7. Even so, that money will “come out” intothe economy in the form of higher stock prices for banks.

That will make consumers/investors wealthier, and could(in the long term) lead to more confidence in the marketand economy. If consumers are more confident, they willspend. As that happens, prices should begin ticking upward(inflation), adding another set of thrusters to Gold prices.

As Gold prices increase, more investors may leave thesidelines to invest, potentially causing the surge in Goldprices to accelerate and as Gold goes up, it gets morepopular and investors start piling into it

4INVESTING IN GOLD 2009

7 http://www.moneymorning.com/2008/10/30/banking-system-bailout-money/

The U.S. bailoutand the Gold Price

Source: kitco.com

Supply is another major issue – it is commonlyacknowledged that going into 2009, Gold mining supplyworldwide has failed to grow during the seven-year bullmarket in Gold – and failed badly. Global Gold miningoutput peaked in 2003. Even the record Gold price of 2008saw world supply fall.

In the third quarter of 2008, the World Gold Council8

reported that supply was down by 9.7% from the previousyear. Consequently, many commentators do not believethe Gold price can stay depressed for long given thesefundamentals.

Central BanksSales of Gold by European central banks is likely to belower than expected over the next year as the globalbanking crisis boosts the appeal of bullion as a “safe”reserve asset. Some analysts are also predicting thatbanks elsewhere in the world, most notably in Asia andthe Middle East, may even become buyers of Gold in anattempt to diversify their reserves away from the dollar.

Under the terms of the Central Bank Gold Agreement,signed in 1999 by key European institutions includingGermany's Bundesbank and the European Central Bankand renewed in 2004, members can sell up to 500 tonnesof Gold a year.

But in the fourth year of the latest agreement, which isnearing its end, sales fell well short of this ceiling, to justover 357 tonnes.

With banks worried by the outlook for the financial sector,sales could be even lower in the final year of the pact.Given the damage done to a lot of other paper assets thatwere formerly considered secure, there will be greaterrisk aversion among central banks, boosting Gold'sstatus within central bank reserves.

A key reason why central banks want to hold onto Gold isthe instability of their most common reserve asset, thedollar. Gold traders are paying close attention to reportsfrom Beijing that China is thinking of boosting its Goldreserves from 600 tonnes to nearer 4,000 tonnes todiversify away from paper currencies. Should this be true,it could lead to a significant material change for the Goldprice.

Gold dealer reports an “unprecented”shortage of metals

A surge for demand in Gold and silver has resulted in anunprecedented shortage of the metals for retail investorsin recent days, according to Gold and Silver Investments9,a Dublin-based firm that allows retail investors tospeculate on movements in the value of precious metals.

Gold and Silver Investments recently reported that thesupply of Gold and silver available for small retailinvestors suffered a dramatic deterioration during thelater part of 2008, as wholesalers reported thatgovernment mints and refiners, the primary suppliers ofthe metals, had stopped offering new supplies. Accordingto the company, Gold and silver were now only easilyaccessible in the primary market, which consisted ofcentral banks and other major traders of the preciousmetals.

According to Gold and Silver Investments this situation is“absolutely unprecedented,” and that shortages werelikely to drive up the costs of Gold and silver in thesecondary market:

“This did not happen even in the 1930s and the 1970s, andwill result in markedly higher prices in the comingmonths.”

5

The Gold Supply

8 www.Gold.org9 www.Gold.ie

6INVESTING IN GOLD 2009

Factors to consider when investing in Gold

An investment in Gold should be based onmacroeconomic considerations. If the investor expectsor fears rising inflation, destabilizing deflation, a bearmarket in stocks or bonds, or financial turmoil, Goldshould do well and exposure is warranted.

Understanding the internal dynamics of the Goldmarket can be helpful regarding investment timingissues. For example, the weekly position reports ofcommodity trading funds or sentiment indicatorsoffer useful clues as to entry or exit points for activetrading strategies. Reports on physical demand forjewelry, industrial, and other uses compiled byvarious sources also provide some perspective.However, none of these considerations, nonmonetary in nature, yield any insight as to the broadmarket trend. The same can be said for reports ofcentral bank selling and lending activity. Centralbanks are bureaucratic institutions and in theirjudgements they are essentially market trendfollowers.

A reasonable allocation in a conservative, diversifiedportfolio is 0 to 3% during a Gold bear market and 5%to10% during a bull market.

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Equities of Gold mining companies offer greaterleverage than direct ownership of the metal itself.Gold equities tend to appear expensive in comparisonto those of conventional companies because theycontain an imbedded option component for a possiblerise in the Gold price. The share price sensitivity to ahypothetical rise in metal price is related to the cashflow from current production as well as the valuationimpact on proven and probable reserves.

Bullion or coins are a more conservative way to investin Gold than through gold mining shares. In addition,there is greater liquidity for large pools of capital.Investing in the physical metal requires scrutinizingthe custodial arrangements and the creditworthinessof the financial institution. It is also advisable not tomistake the promise of a financial institution to settlebased on the Gold price, for example by a “GoldCertificate” or a “Structured Note” (i.e. a derivative).Instead, be adamant on actual physical possession ofthe metal. Insist on possession in a segregated vault,subject to unscheduled audits, and inaccessible tothe trading arrangements or financial interest of thefinancial institution.

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Holding precious metals in a portfolio can provide distinctbenefits in the form of speculative gains, investmentgains, hedging against macroeconomic and geopoliticalrisk and/or wealth preservation.

Successful investing is about the diversification andmanagement of risk. In layman's terms this means nothaving all your eggs in one basket. Some exposure toGold should be included in all diversified portfolios. In thesame way that every major Central Bank in the worldcontinues to maintain huge reserves of Gold bullion sotoo should private investors invest, save and own Gold. Agood rule of thumb would be a minimum allocation ofaround 10% to Gold and related Gold-investments suchas Gold miming companies or Exchange Traded Funds(ETFs).

DiversificationGold is a unique asset class and was possibly the firstasset class to exist. Gold has been a store of wealth, acurrency and a commodity for thousands of years.Furthermore, there is a growing body of research, whichsupports the notion that Gold is treated by investors as aunique asset class and fluctuates independent of bothother asset classes and some macroeconomic indicatorssuch as GDP and inflation.

A number of studies overseas and one recent study byPriceWaterhouseCoopers in Australia have all found thatGold is insignificantly or negatively correlated with themajor portfolio asset classes.

International researchThe body of research studying the statistical benefits ofholding Gold bullion in a portfolio is slowly growing. RoyJastram wrote the cornerstone piece of this research in1977: The Golden Constant—The English and AmericanExperience 1560-1976. Jastram’s book investigated theprice and purchasing power of Gold over time and duringdifferent periods such as inflationary and deflationarytimes. He concluded that Gold bullion has held itspurchasing power parity with other commodities andintermediate products over the very long term. In thisstudy, the use of commodities as a basis of comparisonenabled construction of a long-dated index whichrepresented a CPI-style index (CPI did not exist 400 yearsago).

In 1998, Harmston (another financial historian) updatedJastram’s research, while also looking at the relationshipbetween Gold bullion and other asset classes.Harmston’s study covered the US (from 1796), Britain(from 1596), France (from 1820), Germany (from 1873)and Japan (from 1880). Harmston ran a series ofregressions and showed that there was a positiverelationship between the annual movements in bonds andT-bills with the annual movements in the Dow JonesIndustrial Average Index (DJI) for the period 1968 to 1996.Over the same period, Harmston found that Gold bullionhad a negative relationship with the DJI.

What does this mean for the investor?Many consider it an accepted practice in the financeindustry that assets with low or negative correlation candecrease portfolio risk and expand the efficient frontier(see Markowitz theory on portfolio analysis). This givesrise to a problem for most investors because most stocksare relatively correlated with one another and most bondsare relatively closely correlated with each other. Savvyinvestors, therefore, are required to find investments thatare not closely correlated to stocks or bonds and includethese in their portfolios as a hedge. One of the mainbenefits from investing in Gold bullion is that it is eithernegatively correlated or independent from other assetclasses or financial and macroeconomic measures. Manyalternative assets exist, perhaps with low correlation tothe major asset classes. However, in contrast, to most ofthem Gold bullion is highly liquid, fungible, easily storedand requires no management. Research suggests thatGold is one of the best asset classes for diversification.

7

The Golden Rulein Risk Management

Rightly or wrongly, investing in Gold is often compared toinvesting in cash. This is in part because Gold has beenused as money for thousands of years and often it tradeslike a currency although it also has some of the traits ofa commodity.

Regardless of how you choose to categorize it, Gold isoften considered a currency. The summary below clearsup some common misperceptions about Gold, relative tocash, and shows that, when the concerns of the averagepersons with respect to cash are taken into account, Goldcomes out on top.

Defining Gold versus CashWhen Gold is compared to cash, most people don’t realizethat there are two main different ways of holding Goldbullion in a bank account: (1) allocated Gold, and (2)unallocated Gold. Using this terminology, cash on depositat a bank is technically “Unallocated Cash”. Therefore,one should compare unallocated Gold to cash on deposit.However, lets proceed with comparing Allocated Gold toCash on Deposit as most people who think of Gold, thinkof it sitting in a vault, and not being lent out and thereforenot collecting a return.

Allocated Gold is not lent outOne of the main reasons you keep money in the bank isthat it (hopefully) pays a rate of return (the interest rate).Modern finance theory tells us that in simple terms, thegreater the risk, the higher the return should be. Cash ondeposit earns a rate of return because the bank lends outyour cash – in effect you have loaned the bank your owncash. That is why you earn interest on it. The bank lendsout this money at some multiple (in some countries inexcess of 10 times) greater than its total deposits. Youhave just taken a risk on: (1) the banks credit worthinessand, (2) that the bank has made a good decision to lendout this money. The more money the bank lends out, orthe higher the credit risk of the person/institution towhom the bank has lent the money, then the more riskyou have taken on by depositing cash at the bank. Theonly control you have over this risk is by not keeping yourcash on deposit with the bank. This is similar tounallocated Gold: it is lent out to a 3rd party, often to amultiple of what is actually on deposit, and it earns a rateof return which is called the lease rate.

By comparison, allocated Gold is not lent out, does notcarry any credit risk on the bank or a 3rd party, andtherefore does not earn any income. Indeed, allocatedGold may bear a holding charge to cover the costs ofstorage and insurance.

The bank owns your cashIf you deposit allocated Gold with an institution, you ownthe Gold. You can turn up to the bank and demand yourGold to be delivered to you. It is like holding it in your ownsafety deposit box. Cash on deposit, on the other hand, isnot owned by you. It is owned by the bank and therefore ifyour bank went into bankruptcy, then all cash on depositwith the bank would be shared amongst its creditors(unless it is bailed out by the government or throughinsurance). Having cash on deposit means that you rankas an unsecured creditor of the bank. Furthermore, ifeveryone demanded all their cash from the bank at thesame time, there would not be enough cash to pay people.In small amounts, you can usually demand your cash,however even insignificant cash cannot be paid ondemand.

Gold is always acceptedProvided that Gold has its authentication verified, Goldhas always been accepted. It has been used as a store ofwealth and as a currency for many thousand years. Andas Alan Greenspan said in May 1999:

“Gold still represents the ultimate form of payment inthe world …..Gold is always accepted.”

In contrast, cash is not always accepted. A central bankcan withdraw a note at any time, Gold however, isaccepted anywhere in the world. It can be a currencywithout borders. Cash has borders and this is mostpronounced when the government is unstable, thecurrency is not liquid or the government is printing toomuch money.

8INVESTING IN GOLD 2009

Why Goldis better than cash

Gold is relatively scarceWithout getting too deep into the debate as to whetherGold has scarcity value, it is worth pointing out that GoldFields Minerals Services (GFMS) estimate that only about150,000 tonnes of Gold has ever been mined. At a Goldprice of US$370/oz, this values the total world Gold stockat US$1.7 trillion. To put this in context, the total cashstock (M1 money - being cash & checkable deposits) inthe United States is approximately US$1.3 trillion.Knowing that money exists in every country and how thatmoney is multiplied, the implications are that that Goldis scarce, relative to cash.

Gold is produced, money is printedGold forces discipline; Gold’s production process fromexploration through to the minting of Gold bars can takeas long as 30 years, but let’s say that it generally takes10 years. Compare this to cash, which can be printed atwill by each of the world’s governments. On this subject,consider the remarks by the then Governor Ben S.Bernanke (of the Federal Reserve Board), before theNational Economists Club, Washington, D.C., November21, 2002:

“Like Gold, U.S. dollars have value only to the extent thatthey are strictly limited in supply. But the U.S.government has a technology, called a printing press (or,today, its electronic equivalent), that allows it to produceas many U.S. dollars as it wishes at essentially no cost.By increasing the number of U.S. dollars in circulation,or even by credibly threatening to do so, the U.S.government can also reduce the value of a dollar interms of goods and services.”

Assuming you have already decided to own Gold todiversify your overall portfolio, you may then ask thefollowing question. What form of Gold should I purchase?Should I buy physical metal such as bullion coins or bars,or would mining stocks be better?

It is often recommended by portfolio managers to own acombination of both physical metal and mining shares tomaximize performance, and minimize risk. Owningphysical metal enjoys certain advantages over owning themining stocks and visa versa, but a combination providesthe best way to protect and grow a portfolio in difficult anduncertain financial times. Gold investors must choose forthemselves how to split up their Gold allocation. It isimportant for investors to be certain that the Gold itemsthey own are the ones that will best serve their purposes.While each investor’s circumstances are different, thediscussion that follows should give some ideas on how tobest divide Gold holdings.

What are the differences between owningphysical metal and owning stocks?

The obvious difference is risk. On the investment pyramidof risk, physical ownership of Gold would be on the lowesttier (least risk) with cash and life insurance, whileownership of Gold mining shares would be classified onthe second or third tiers (higher risk) depending onwhether you own shares relating to a major Goldproducer or a junior mining company. In general terms,owning physical metal is more of a “saving”, whilstowning mining shares would be considered more of a“investment”. There is an increase in risk when investingin stocks. However, with increased risk comes greateropportunity for return. Thus both should be considered.

A second factor to remember is that a Gold mining shareis not Gold. It is a company stock first and then secondlycan be construed as Gold. A Gold mining share is NOT asubstitute for the physical metal. It represents a claimagainst potential Gold deposits in the ground and not theactual Gold itself. Stock ownership often has inherentrisks that are associated with investing in company stock.Stocks often represent debts, liabilities, risks – monetary,environmental, political, etc. Physical Gold is an asset,the only financial asset that is not simultaneouslysomeone else's liability. Owning physical Gold isessentially risk-free as long as you retain possession.Obviously its value can go up or down according to marketfundamentals/fluctuations, but you can hold it securelyin your hands. Physical Gold does not need cash flow ormanagement to insure its ultimate survival.

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Gold Ownership:Bullion or Stocks?

During a bull market in Gold, the physical metal priceswill go higher, but the Gold mining shares are leveragedto the physical price. In other words, as the price of Goldrises, profits from mining stocks rise even more inpercentage terms. Generally, over the longer term, theshare prices of the major Gold producers rise by a factorof two to three times more than the price of Gold.Successful early stage junior mining and explorationcompanies can rise by a factor of 5 to 10 times more thanthe price of Gold. The reason for this leverage is that arising Gold prices do not have any effect on the cost ofproduction. Therefore, for companies that are alreadyprofitable, incremental revenues received from sellingGold at a higher price flow straight to the bottom line. Aprice rise also increases the value of “in the ground”reserves without capital investments. For miningcompanies that are not profitable, a rise in the Gold pricecan suddenly lift them into profitability.

Any potential investors would need to consider what theirobjectives are for considering Gold before they cancorrectly decide what class of items to purchase. Somepeople who are more savings oriented, tend to emphasizeowning the metal, while others who are looking to makea big return would tend to emphasize the mining stocks.Mining stocks can produce spectacular returns at times,but can also exhibit volatility.

10INVESTING IN GOLD 2009

Some other items to consider:

Physical Gold ownership does not pay dividends.Mining stocks can pay dividends when profitable.

Physical Gold ownership has protected investorsduring periods of economic depression, wars andpolitical unrest. Mining stocks could be negativelyaffected in such times as stock markets may beclosed or adversely affected for a time.

Physical Gold can be used for barter or purchasinglife sustaining items during crisis times. Miningshares would be harder to use for such purposes.

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Leverage is the simple answer. It is not uncommon forearly stage junior mining and exploration companies(hereafter, Juniors) to experience huge gains (10 timesor more) very quickly as news of a discovery is made. Butbefore talking more about leverage here are some facts:

In the mining world, it is no secret that the majority ofeconomic mineral deposits are found by the junior miningcompanies or prospectors. There are several reasons forthis. Junior explorers are not slow-moving bureaucracieslike many established and large resource companies(hereafter “Seniors”). This makes Juniors able to makefast decisions both in the boardroom and in the field.

Seniors generally have a different role to play, namely, tofund and place into production deposits discovered anddeveloped by Juniors. But perhaps chief amongst themost important reason Juniors tend to make mostdiscoveries is that they are hungry and entrepreneurial, inother words: the talent, motivation and dedication of theirmanagement team. Exploration is, to some extent, acreative enterprise.

It is often said in the mining business, that if anexploration geologist finds a mine it is likely that he willfind others. It is a fact that fewer than 5% of allexploration geologists will ever have the credit of adiscovery that leads to a mine, which proceeds to theproduction stage. This is because those few select, giftedexplorers who find numerous mines, seem to possess asixth sense that moves them to succeed in this area. Mostof the true and successful leaders in mineral explorationare geologists that don’t necessarily fit into the corporateculture. They are field geologists who do not generally sitbehind desks, stare at computer monitors and talk on thephone, preferring instead to be out in the field. Whilst themajority of geologists may have a firm grip on the theoryof mineral exploration, they cannot take it to the next levelto unravel Mother Nature’s secrets.

As is often the case Juniors are managed by men andwomen who have had success working for both Seniorand other Junior companies. So why would someonewant to be a director of a junior mining company that hasno revenue and sometimes not even a decent salary tooffer. It is the potentially huge rewards that can comewhen a discovery is made that attracts the top talent ofthe mining sector into the Juniors. In other words, theywant to work for themselves and get the big payoff,instead of earning a nice salary with some kudos if theymade the discovery whilst working for a Senior company.In a major mining company, a successful explorationgeologist who made a significant discovery might get apat on the back and a new credenza, if they’re lucky. As

part of a junior mining company, the geologist who madethat same discovery might profit considerably from the$10 million, $20 million, or a $100 million capital gainfrom any discovery made on the part of their efforts. Inthe life cycle of a mining share, it is the exploration phasethat provides the biggest move (leverage) in share price.The best and brightest ´´mine-finders´´ of course knowthis and are highly motivated to search the world over tomake a new discovery. When they do, the monetaryrewards are substantial, for both the management teamand its investors.

Because the mining sector has been in a long-term bearmarket, very little major corporate mining money hasbeen going into the search for new deposits. Explorationexpenditures declined drastically from 1997 into 2001 asthe brunt of the bear market took its toll. Since then, wehave seen the start of what looks to be a major bullmarket in the precious and base metals. Explorationbudgets are cranking up again as the search for newdeposits is greatly needed to replenish depletingreserves. With this renewed interest in exploration,demand for good exploration companies is increasing inthe capital markets and the junior mining sector is onceagain showing spectacular gains. As the spot prices ofthe minerals continue to rise, we are also likely to see anexponential rise in the share prices as additional capitalcomes their way.

Richard Russell (a prominent writer on mining andcommodities investments), has this to say about thecurrent bull market in precious metals:

“..I believe that fortunes will be made in the years aheadby those who are now establishing major positions inGold and Gold shares. These primary moves last longerthan anyone thinks possible – and they take the itemshigher than anyone thinks possible. We are now in aprimary bull market in Gold. I believe Gold (and veryprobably silver) will make fortunes for those who nowtake major positions in the precious metals…”

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Why Invest in Junior &Exploration Companies?

Huge LeverageThe increase in the mineral prices not only focuses moreattention on the sector, but also causes even more moneyto be spent on exploration thereby increasing theprobability of finding new deposits. It also increases thevalue of any potential discovery through leverage. Mineraldeposits are gauged, in financial terms, by the ``NetPresent Value of Future Cash Flows`` formula should thedeposit be mined. Say for example we find a million ouncedeposit of Gold and an engineering study suggests itcould be mined over ten years at a cost of $250 an ounce,including capital. Let’s assume Gold is at $350 an ounce.Lets also assume a 10% discount rate (over 10 years) andwe find that the deposit would be worth roughly $70million. However if the Gold price were to increase to$400 an ounce (a 15% increase) the value of the sameGold (with the same parameters) increases to $100million (almost 50%). That is over 300% leverage to theGold price. Increases, obviously, have an incrementbenefit.

Suggestions for Gold InvestorsOptions for acquiring Gold can take several forms.Investors interested in Gold may want to considerinvestments in Gold producing companies either as analternative to or along with any bullion type of investment.Improved sentiment towards precious metals isproducing an equity financing boom for Gold companies,from substantial producers to junior explorers. There is atremendous demand for Gold shares at the moment. TheGold price is rising and many astute investors are turningto the smaller ´´Junior´´ Gold mining companies thatenjoy a debt free history, un-hedged production and largereserves still to be mined. Many investors feel thesesmaller mining companies will continue to reflect themovement of Gold as it continues to advance, albeitwithout the unnecessary risks attributed to investmentsin both the bullion and futures markets.

While Gold continues to rise, the search is on to find these“Junior” mining companies still in an early stage ofgrowth. In addition, a race is on by the “Senior”companies to take over smaller mining companiesholding proven reserves, and investments in Seniorcompanies which have recently acquired large reservesshould also be considered.

With the expectation of aggressive returns, however,great attention must be paid to the technical factors of:yields, testing results, reserves and operational cost(s).

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The fundamental Reasonsto Invest in Gold: A Recap

Global Currency Debasement

The US dollar is fundamentally and technically veryweak and could fall dramatically. However, othercountries are very reluctant to see their currenciesappreciate and are resisting the current fall of the USdollar. Thus, we could be in the early stages of amassive global currency debasement, which may seetangibles, and most particularly Gold, risesignificantly in price.

Invest Demand

Many experts believe that, when the retail investingpublic recognizes what is unfolding, they will seek analternative to paper currencies and financial assetsand this will create an enormous investment demandfor Gold. Under such circumstances, it may beprudent to own both the physical metal and selectmining shares.

Financial Deterioration in the US

In the space of a few years, the United States FederalGovernment budget surplus has been transformedinto a yawning deficit, which has all the signs ofpersisting. At the same time, the current accountdeficit has reached levels which historically portendcontinued weakness in the United States.

Dramatic Increases in Money Supply in the US and Other Nations

US authorities are concerned about the prospects fordeflation given the unprecedented debt in the US. FedGovernor Ben Bernanke is on record as saying theFed has the ability to issue new currency and will useit to combat deflation if necessary. Other nations arefollowing in the US’s footsteps and global moneysupply is accelerating. Historically, this can create avery “Gold friendly” environment.

Existence of a Huge and Growing Gap betweenMine Supply and Traditional Demand

Gold mined is roughly 2500 tonnes per annum, andtraditional demand (jewellery, industrial users, etc.)has continued to exceed this by a considerablemargin for a number of years. Some of this shortfallhas been filled by Gold recycling, but selling fromvarious Central Banks has been a primary source ofabove-ground supply.

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Mine Supply is Anticipated to Decline in the nextThree to Four Years.

A combination of traditional demand continuing toexceed mine supply, buying prompted by ongoingworldwide economic weakness, and an expecteddecline in mine supply, may very well lead to greatermid-term shortages. Mine supply will contract in thenext several years, irrespective of Gold prices, due toa shift away from high grading (which was necessaryfor survival in the sub-economic Gold priceenvironment of the previous five years), and thenatural exhaustion of existing mines, andenvironmental pressures on cleaner miningprocesses.

Large Short Positions

To fill the gap between mine supply and demand,Central Bank Gold has been mobilized primarilythrough the leasing mechanism, which facilitatedproducer hedging and financial speculation. Someevidence suggests that between 10,000 and 16,000tonnes (perhaps as much as 30-50% of all CentralBank Gold) is currently in the market. This is owed tothe Central Banks by the bullion banks, which are thecounter party in the transactions.

Low Interest Rates Discourage Hedging

Interest rates are low. With low rates, there isn’tsufficient impetus to create higher prices in the outyears. Thus there is incentive to hedge and Goldproducers are not only not hedging, but are reducingtheir existing hedge positions, the resultant effect ofwhich is removing Gold from the market.

Rising Gold Prices and Low Interest RatesDiscourage Financial Speculation on the ShortSide.

When Gold prices were continuously falling andfinancial speculators could access Central Bank Goldat a minimal leasing rate (0.5 – 1% per annum), sellit and reinvest the proceeds in a high yielding bond orTreasury bill, the trade was viewed as a lay-up.Everyone did it and now there are numerous staleshort positions, which must be filled with actualpurchases. However, these types of trades now nolonger make sense with a rising Gold price anddeclining interest rates.

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Gold is under-valued, under-owned and under-appreciatedas an investment tool. It is most assuredly not wellunderstood by most investors. At the beginning of the1970’s when Gold was about to undertake its historicmove from $35 per oz to $800 per oz in the succeedingten years, the same observations would have been valid.The only difference this time is that the fundamentals forGold may be better.

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The Central Banks are Nearing an Inflection Pointwhen they will be Reluctant to Provide more Goldto the Market.

Far Eastern Central Banks who are accumulatingenormous quantities of US Dollars are rumored to bebuyers of Gold to diversify away from the US Dollar.

Gold is Increasing in Popularity

Gold is seen in a much more positive light incountries beginning to come to the forefront on theworld economic scene. Prominent developingcountries such as China, India and Russia have beenaccumulating Gold. In fact, China with its 1.3 billionpeople recently established a National Gold Exchangeand relaxed control over the asset. Demand in Chinais expected to rise sharply and could reach 500tonnes over the next few years.

Gold as Money is Gaining Credence

Islamic nations are investigating a currency backedby Gold (the Gold Dinar). The new President ofArgentina proposed, during his campaign, a Goldbacked peso as an antidote for the financialcatastrophe which his country has experienced, andRussia is talking about a fully convertible currencywith Gold backing.

Limited Size of the Total Gold Market ProvidesTremendous Leverage

All the physical Gold in existence is worth somewhatmore than $1 trillion US Dollars while the value of allthe publicly traded Gold companies in the world isless than $100 billion US dollars. When thefundamentals ultimately encourage a strong flow ofcapital towards Gold and Gold equities, the trillionsupon trillions worth of paper money could propelboth to unfathomably high levels.

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Conclusion

DISCLAIMER: All information contained in the report is obtained from public sources. No compensation of any kind is taken from any companies that are mentionedin this report. The sources used are believed to be reliable but the accuracy of this information is not guaranteed. Readers are advised that the report is issued so-lely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy anything. The opinions and analyses included he-rein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy,completeness or correctness. Any information upon which a reader intends to rely in assessing future economic decisions should be independently verified.