Why Gold?Why Gold?Why an allocation to gold may benefit investment

portfolios

June 2005

Arguments for an allocation to gold in a diversified portfolio include:

1.Gold can find favor as a “safe haven” against inflation or financial crisis.

2.Gold often trades inversely to the U.S. dollar, making it a useful hedge in times of dollar depreciation.

3.Gold can viewed as an alternative asset class.

4.Gold, and even gold stocks, typically are not closely correlated to either the stock or bond market.

All the gold ever mined would fit into a storage room about 55 feet long, 55 feet tall and 55 feet wide.

1. The Gold Supply is limited

2. Gold can serve as a “Safe Haven” in times of crisis

Gold experienced a fierce bull market in the ’70s as inflation accelerated Gold vs. CPI

$0

$100

$200

$300

$400

$500

$600

Jan-70 Mar-71 May-72 Jul-73 Sep-74 Nov-75 Jan-77 Mar-78 May-79

30

40

50

60

70

80

90

100

Gold (left scale)CPI

Inflation appears to be picking up again according to official government figures and anecdotal evidence.

Source: John Williams’ Shadow Government Statistics

Gold in Mexican Pesos

500

1000

1500

2000

2500

3000

3500

Jan-

91

Jul-9

1

Jan-

92

Jul-9

2

Jan-

93

Jul-9

3

Jan-

94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Gold can provide “insurance” against unforeseen events or financial catastrophe. Gold's value as a safe haven can be illustrated by its behavior during periods of financial turmoil.

Mexico Crisis

Gold in Thai Baht

6500

8500

10500

12500

14500

16500

18500

Jan-

91

Jul-9

1

Jan-

92

Jul-9

2

Jan-

93

Jul-9

3

Jan-

94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Asian Crisis (represented by Thai experience)

Crisis

Gold in Russian Rubles

100

1100

2100

3100

4100

5100

6100

7100

8100

9100

Jul-9

3

Nov

-93

Mar

-94

Jul-9

4

Nov

-94

Mar

-95

Jul-9

5

Nov

-95

Mar

-96

Jul-9

6

Nov

-96

Mar

-97

Jul-9

7

Nov

-97

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Russian Crisis

Crisis

3. Trading inversely to the dollar, gold can hedge dollar depreciation

Gold vs. Dollar Index (12/90 - 5/05)

$250

$300

$350

$400

$450

$500

Dec-90 Sep-92 Jun-94 Mar-96 Dec-97 Sep-99 Jun-01 Mar-03 Dec-04

70

80

90

100

110

120

130

GoldDollar Index

In our view, there are a number of threats to dollar stability. These include:

Record trade deficits - which typically weaken currencies…

U.S. Current Account Deficit Q3 '90 - Q1 '05

-170

-150

-130

-110

-90

-70

-50

-30

-10

10

Sep-90

Aug-91

Jul-92

Jun-93

May-94

Apr-95

Mar-96

Feb-97

Jan-98

Dec-98

Nov-99

Oct-00

Sep-01

Aug-02

Jul-03

Jun-04

$Bill

ion

s

Source: Bureau of Economic Analysis

Foreign Holdings ofLong-Term U.S. Securities

$0

$500

$1,000

$1,500

$2,000

85 87 89 91 93 95 97 99 01 03 Q105

Source: Federal Reserve Z-1

Treasuries

Stocks

Corp. Bonds

Agencies

$Billions

And the risk that foreigners choose to hold fewer dollars (i.e. sell dollar denominated investments, putting pressure on the U.S. currency).

Foreign investors, including central banks, have been heavy buyers of U.S. Treasuries.

Foreigners are big holders of U.S. debt. Is this enthusiasm sustainable?

Foreign Holdings of U.S. Treasuries1985 - Q1 '05 (as % of total)

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Q105

Source: Federal Reserve Z-1

Have some of the biggest buyers of U.S. Treasuries had enough? Will hedge funds (Caribbean Banking Centers) continue to be reliable buyers?

Holdings of US Treasuries by Selected Countries ($ bill)

0

100

200

300

400

500

600

700

800

2001 2002 2003 2004 Q1 2005

Source: U.S. Treasury

Japan

China

UK

Caribbean Banking Centers

4. Gold can serve as an alternative to overvalued assets

Dow to GoldDow Jones Industrials divided by Gold Price

1920 - 2004

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000

Stock mania

Stock mania

Gold mania

But is the gold bull market already over?

After peaking near $455 in December 2004, the spot gold price fell to $417 in May 2005. Did the December peak mark the end of the bull market in gold?Gold Price (1/00 - 5/05)

$250

$300

$350

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$450

$500

Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05

Or is gold’s recent performance a minor setback in what will ultimately be viewed as a long bull market?

Gold Price (1/80-5/05)

$200

$300

$400

$500

$600

$700

$800

$900

Jan-80 May-82 Sep-84 Jan-87 May-89 Sep-91 Jan-94 May-96 Sep-98 Jan-01 May-03

After all, gold’s recent decline was coincident with the sharp rise in the dollar…

Yet the long-term threats that drove the dollar lower from 2002-2004 are still in place.

Gold vs. Dollar Index

$410

$415

$420

$425

$430

$435

$440

$445

$450

Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05

80

81

82

83

84

85

86

87

88

89

90

Gold

Dollar Index

Some bullish trends for gold

While financial assets flourished, gold was in a 20-year bear market. These trends seem to have reversed

Maturity of gold mines coupled with lack of exploration has constrained supply.

Asia, a traditional buyer of gold, is becoming more economically powerful

Gold accounts for an historically small amount of central bank reserves. There are signs this relationship may change. (Japanese Finance Minister Sadakazu suggested in Jan. 2004 that official reserves should include more gold. Japan’s Prime Minister in March 2005 suggested that reserves should be diversified).

Bonds offer less competition to gold with real U.S. interest rates negative

5. What about gold stocks?

While gold stocks are not perfectly correlated with gold, the correlation is closer than the relationship between gold stocks and the general stock market.

50

75

100

125

150

175

200

Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05

XAU Gold Stock IndexGoldS&P 500

All series indexed to 100 as of Jan. 31, 2000

While gold bulls and bears will argue about the nature of gold, certainly gold is not just another commodity:

“Gold will remain an important element of global monetary reserves.”Wim Duisenberg, speaking for the 15 European central banks, Sept. 25, 1999

“Gold still represents the ultimate form of payment in the world… Fiat money in extremes is accepted by nobody. Gold is always accepted.”Alan Greenspan, speaking to the House Banking Committee, May 20, 1999