1. Supreme confidence that one's own mindset is the "correct" mindset
2. No faith at all that the Central Banks can continue to exert control over the financial markets

The following chart (courtesy bigcharts.com) shows the Gold and Silver Index relative to the Oil Index and the Dow Jones Industrials Index over a 20 year period.

Gold shares have flat-lined whilst the DJIA has risen 700% and the Oil Index has risen 600%

20 years is a long time to be on the wrong side of any market, no matter how "right" one believes one's self to be.

As with silver, the swing factor that causes the gold price to rise is "Investment", and the following charts - reproduced from an April 28th 2005 report by Phillip Klapwijk on behalf of GFMS, and published at www.gfms.co.uk/Market%20Commentary/GS05_presentation_web.pdf shows what has happened to investment demand over the past few years. Clearly, 2003 represented a year of unusually strong investment demand.

Perhaps of greater interest is the fact that Central Bank disgorgement has been high since 1998, and quarterly net official sales of gold have been extraordinarily strong in Q4 '04 and Q1 '05.

It will be instructive to look at the above in context of the gold price itself - which is facilitated by the following chart - courtesy TFC Commodity Charts

• In 1997, with net disinvestment, the price fell from $370 to $280



• In 1998 whilst there was net investment, the price fell from $280 to below $260. Presumably, the fall in the gold price had something to do with "CBGA" (Central Bank Gold Agreement) sales of around 375 tons - into a market where total mine supply had peaked at around 2,800 tons a year; and has been relatively flat, to slightly declining, ever since.



• In 1999 the gold price rose back up to $280 - in the face of slightly rising investment demand offset by rising Central Bank sales (supply). The price rise over the year seems odd in the face of acceleration in producer hedging.

• In year 2000, there was again net disinvestment, and the price fell from $280 to about $265; as both Central Bank sales and producer hedging remained high.



• Then, in 2001, something changed. There was net disinvestment (but significantly less than the previous year) and Central Bank sales remained constant. Nevertheless, the gold price rose from $260 to $280, notwithstanding a slightly lower (but still substantial level) of producer hedging. This is counter intuitive, and may have had something to do with the contango - which fell from 5.5% to 2%.



• In 2002, the trend towards a reduction in producer hedging continued. Central Bank sales remained constant, and Investment demand started to rise. All of this contrived to cause the gold price to rise from $280 to $320



• The "big" year for gold was 2003. In that year, Producer hedging fell further, and investment demand grew to outstrip Central Bank's increased disgorgement. The price rose from $320 to $420



• By 2004, the producers had learned their lesson, and hedging fell further from its peak of around 4,500 tons to around 2,750 tons. Central Bank selling also fell further but, because investment demand fell from around 1,000 tons to 400 tons, the gold price only managed to rise from $400 - $420



• In 2005 something very unusual has occurred: Central Bank sales in the last quarter of 2004 and the first quarter of this year have almost equalled the total sales for the entire 2004 year - and yet the gold price has remained virtually constant at around $420.

Why is this so?

Central Bank sales have hovered around 500 - 600 tonnes a year since 1999. In the first quarter of 2005, Central Bank sales have jumped to over twice the amount sold in the same quarter of the previous two years. In fact, sales in Q1 '05 have been roughly 50% of the total annual Central Bank sales since 1999. What gives? Is there a "desperation" growing to keep the gold price from exploding upwards?

The answer may lie in the emergence of Gold Exchange Traded Funds, as can be seen from the following chart:

With the addition of streetTracks and iShares, the ETFs have accumulated over 300 tons of gold in total, of which 200 tons were acquires since January 2005. Clearly, this sudden growth in bullion demand must have been satisfied by the Central Banks.

This begs the question as to how much longer the Central Banks can continue to satisfy excess market demand?

The following chart - reproduced from a recent GATA report published on the internet at www.gata.org/Wener.html shows that the USA bloc (the group of Nations who are predisposed to want the gold price to remain flat-lining) has reduced to 8,698 tons, of which the USA itself "seems" to have 8,136 tons or 94%.

Given that no one is allowed to audit the US inventories - highly suspicious - there is a question regarding how much (if any) of the US gold is still in deep storage within Fort Knox.

Regardless of the answer to this question, the US Treasury is supposedly barred by law from disposing of this gold without Congressional approval, and it would therefore appear at face value that the emergence of the ETFs has the potential to change the gold landscape.

They seem to be providing a vehicle to satisfy latent demand of private investors who previously had no means of playing in this market and, in an environment where the USA Bloc has lost its capacity to continue dumping further supplies of gold into the markets, the Central Bankers have two choices:

1. Convince other holders of gold bullion - notably Europe - to continue selling into the markets in order to suppress the price.
2. Resign themselves to the fact that the gold price should be allowed to rise.

The following summary table - reproduced from the same GATA report, shows that by far the majority of the world's gold supplies are now located in Europe

Against a background where the viability of the Euro as an alternate currency to the US Dollar has been put under the spotlight of uncertainty, it is highly doubtful that European citizens - who are starting to become politically vocal - will sit back and meekly accept their "hard currency" foreign exchange reserves being frittered away.

Conclusion

It would appear that the flat-line Frankenstein gold monster may be in the process of rising from the dead. The ETFs are changing the demand landscape whilst the supply landscape shows that the Central Banks who are predisposed to co-operate with the USA have a waning capacity to satisfy any demand spikes.

In short: The "no" votes in France and Netherlands were not just blips on the Radar Screen. They have the capacity to dramatically change the world's financial landscape.

Brian Bloom

Australia, June 5^th, 2005