I had lunch with Raymond Goldie, a Vice President and Senior Mining Analyst at Salman Partners here in Toronto, about six months ago. Ray is one of the smartest and most knowledgeable base metals analysts I know. During lunch I told Ray that I was bearish on base metals, particularly copper, because I did not believe the copper price was sustainable nor did I believe that Chinese and Indian demand for raw materials was properly understood by the market -- in short, that I thought the market is far too optimistic about the impact China's internal economy is having on base metal consumption. Ray did not tell me that I had taken leave of my senses, but he did say that he did not expect the price of copper to fall significantly until the end of the year. He was right.

Ray explained that the copper market would most likely remain tight until the end of labour negotiations in Chile since these often coincide with strikes that could disrupt production and delivery of copper to the market. The copper price was over $3.20 a pound during the first week of December and the sharp decline since then coincides with the end of labour negotiations, just as Ray said it would. Now that the market has no more fear of imminent supply disruptions, the copper price is correcting.

The next logical question is how low we can expect the copper price to fall. I talked to Ray this morning and asked him that exact question. He said he expects copper to trade down to around C$2.50 a pound by the middle of next year. Some other analysts are more bearish, and expect copper to be below $2.00 by the end of 2007. Ray also believes that copper could fall below $2.00 but he does not have any particular timeframe in mind; he did, however, say that his long-term copper price forecast is somewhere between $1.35 and $1.50 a pound. If we see copper below $2.00 I think it will be time to start looking at copper investments again. Until then, I will just sit back and enjoy the show.

While copper and other base metals prices have been under pressure this week the price of gold has held up very well. As you may recall, my biggest nervousness about the gold price is that a decline in base metals prices could drag the gold price down as well. The fact that gold held up this week gives me a little more encouragement that the worst may be over for gold -- but not enough that I would cast caution to the wind just yet.

In contrast to copper, the gold price in US dollars is up more than 20% this year. This increase in the gold price can be explained by the decline of the US dollar exchange rate and the increase in US dollar inflation.

The US dollar fell 10.37% against the euro, 12.51% against the pound and 7.62% against the Swiss Franc this year. On average, the decline of the dollar against these major currencies comes to 10.2%. In addition, the dollar was devalued by 9.6% as measured by the increase in M3. Adding 10.2% and 9.6% together we get 19.8%, which corresponds very well with the 20.2% increase in the gold price this year. I suspect we will see a similar rise in the gold price next year, if not more. But every time I think I have the market figured out it throws a curve ball, so I never take such forecasts too seriously.

I wrote about Japan and the yen carry trade quite a bit this year, explaining that the end of Japan's policy of Quantitative Easing and their announcement that they are ready to start raising interest rates implies the yen carry trade is over. This week Japan decided to leave their short-term interest rate unchanged at 0.25%. While Japan leaves its interest rates unchanged the yen carry trade is alive and well. The yen has appreciated by only 0.4% against the dollar this year and has, therefore, been falling against all the other major currencies alongside the dollar: it is down 10.7% against an average of the euro, pound and Swiss franc, and is even down 3.5% against the Chinese renminbi. Not surprisingly, the gold price in Japanese yen is up 20.7% this year.

Gold acts as a store of wealth and a protector of capital in all currencies.

I believe it is only a matter of time until the dollar starts falling against the yen as well, and that will most likely be the last shoe to drop. When it happens, I expect to see the dollar decline further against most currencies and the gold price (in US dollars) to rise to around $1,000 an ounce.

Special Event
I will be speaking at the Cambridge House Resource Investment Conference to be held in Vancouver, BC on January 21st and 22nd. On the day before the conference Cambridge House is testing a day of workshops during which I, and several other newsletter writers, will hold mini-seminars and introduce two companies of our choice. I chose two companies that I have substantial investments in and both of which epitomize what I look for in a small exploration company.

Space for this event is limited and will be allocated on a first-come basis, so if you would like to attend please register early. I have attached a direct link to the registration site below:

www.cambridgehousecollege.com/registerpve.asp

Happy Holidays,
Paul van Eeden
December 22, 2006

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