Editor's Note: This report was written before
gold's dramatic breakout on December 18, 2002.

GOLD: DON'T FADE THE BREAKOUT
Prepared by Friedberg Commodity Management, Inc.
A little over two months ago, we expressed some doubt about the immediacy of a push to new recovery highs. We reasoned that the resumption of the up-trend necessitated a weaker dollar and/or a complication in the imminent U.S. war with Iraq and/or an acceleration of inflation. None of these appeared on the immediate horizon. Though extremely bullish for the long term (see our June 3 issue, "Why is gold leading the charge against the dollar?"), we felt that the market had gotten a bit ahead of itself (witness the extraordinary speculative interest in gold shares), and that a pause was in order. Also, our relatively bullish view on the dollar had colored our near-term expectancy. But, as is axiomatic of our trading world, neither bull markets nor bear markets wait for anyone.

In a few short days, bulls took a third stab in 7 months (and the fifth stab in three years) at the $325/oz. Maginot Line and managed to overcome it. Precisely because we feared that bull markets don't wait for anyone, we advised in October to "wait for now or buy the ($325/oz.) breakout."

The ingredients for an explosive move are all present. Open interest on the COMEX has risen 40,000 contracts in recent days and is approaching record highs. With bullish speculators in control of the market, the heavy short position--commercials and professionals selling the top of the trading range--will be forced to pay up in a big way. War jitters will not make it easier.

More significant, as we discussed in our June issue, is the existence of a hedge book of approximately 3,000 tonnes, the equivalent of about 10 months of fabrication demand. Should hedge-lifting continue to accelerate (rumors have it that over 500 tonnes were repurchased in the past few months), we are likely to witness price-gapping, signaling the inability of the market to accommodate desperate producers.

Because rising prices lift spirits, investment demand, which had been totally absent for many years, is certain to grow. Though the merits of gold as an inflation hedge are questionable, especially when compared with inflation-linked, interest-bearing securities, its merits as a store of wealth in highly uncertain times are not. Ever-increasing controls over cash movements brought about by the war on terrorism and on drugs, war and the risks of freezing enemy balances, debt defaults, which thanks to Argentina and the IMF are likely to become more common, and even the vulnerability of fiat money to nuclear/chemical wars, are only some of the concerns that will begin to feed the bullish case for gold.

Despite higher prices, and perhaps dramatically higher prices, the plans designed by the leading Western central banks leading to full demonetization of gold are not likely to be changed (though, we should note, the U.S. is not a signatory of the accord).

It remains to be seen, however, how China and some Asian countries that own sizeable dollar reserves react. Their initial reaction should not be long in coming. In the unlikely (?) event that they become buyers on the rise, prices are likely to soar well past historic highs, and a new gold standard will have arrived. Should they, on the other hand, shun the advance, the technically-driven sharp spike in gold prices will not be easily sustained. Prices should settle well above present levels but well below historic highs.

We advise full exposure via gold bullion, or preferably futures, and only selected exposure to un-hedged gold mining companies.


December 16, 2002

Friedberg Commodity Management, Inc.
181 Bay Street, Toronto, Ontario
888-755-4556
www.friedberg.com

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