Last week we had a classic gold market pullback. The reaction was sharp and caused a little consternation amongst the fainthearted. We are nowhere near the top of this gold market and any weakness should be used as a great buying opportunity.

My data continues to indicate that the South African gold stocks are likely to out perform their North American counterparts during the next phase of the bull run. My offshore precious metal portfolio holds DROOY, GFI, Kinross, Hecla and Coeur d'Alene and this week I add two more recovery stocks. I am well aware that there are other more speculative stocks but I am looking for good performance from well established stocks, not secondary promises. Kinross is in the portfolio as a recovery stock.

Last week I sent a short email advising investors to climb into GFI under $13. It closed at $13,30 on Friday and I do not believe it will go back under $13. If you missed that phenomenal buying level you will now have to chase the stock.

Durban Deep remains my number one selection. Not only did it stun both global and South African analysts with its great results but it blew away all the negative rubbish that many commentators have been regurgitating for the last few months. When there is blood in the streets it is buying time. I reiterate that you will receive more in dividend payments from the South African producing mines than today's share prices before this gold market has ended.

Silver is still fantastic. Its relative strength remains the best of all the precious metals and I remain totally bullish on this market. Stay with those silver stocks. We have only just completed the base patterns and are not really into the full lift off phase.

I must draw your attention to the huge support level on the Dow at 10450. For the Dow to remain positive it must hold above this support. A drop under this level would indicate an end to the rally.

In this week's issue I am going to reproduce a report that I have prepared for several local finance houses. It shows the long term potential for the South African gold stocks.

• Swiss Franc is not a commercial currency; it is the world's leading investment currency.
• The upside target is SF720 from the current SF500.
• Gold is a non interest bearing yellow metal.
• What global forces will make a non interest bearing yellow metal out perform the world's leading investment currency?

• In 2002 the JSE Gold index broke above the major resistance at 2300. This was a powerful breakout.
• It has since pulled back to test this support level.
• There has been very heavy volume for the past two years.
• This indicates a potentially powerful market.

• The Rand price of gold is believed to determine the earnings of the mines.
• From 1987 the JSE gold index underperformed the Rand price of gold.
• But since late 2000 the JSE gold index has outperformed.
• The chart pattern indicates that there is likely to be continued upward movement in the gold market that will lead to serious out performance by the shares over mine earnings.
• Relative to the 1986 to 1996 levels the current ratio is undervalued.

• There is only $50 billion of tradable gold shares in the global market.
• This is minute in comparison to all the top US company's share capital.
• Coca-Cola's share capital is $125 billion, whilst General Electric is $333 billion.
• The total global gold share capital is less than half that of Coca-Cola and less than one sixth of GE.
• Gold shares are the most tightly held sector of the global investment arena.
• Any minor perception of a move to gold as a hedge will put enormous buying pressure onto the gold shares.
• The chart of Anglogold (AU) looks ready for lift off and this is one of the leading institutional gold stocks.

• The Rand price of gold has a resistance level at R3000 per ounce.
• This translates to around R89 000 per kilo.
• The short term upside target out of this data is to R3650 per ounce.
• That is equivalent to R120 000 per kilo.
• The long term target is R4500 per ounce or R140 000 per kilo.
• At this level the gold shares will go ballistic.

• But DCF valuations do not take into account the fact that gold shares dramatically outperform the mine earnings in a bull market, as discussed above.
• Nor does DCF consider the tightness of tradability of global gold stocks.

This is illustrated by the fact that at the present gold price of R89 000 per kilo the current Anglogold share price of R290 is already trading at its DCV based on R110 000 per kilo.

I look for the gold shares to completely outperform valuations based on the usual economic and earnings data.

Dr. Clive Roffey

7 February 2004

chartist@global.co.za
www.shareaction.co.za

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Gold Action is a fortnightly commentary on global gold markets produced by Dr. Clive Roffey who has been a leading independent commentator on gold markets since 1969.