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Gold Market Update

January 10, 2002
The 2001 Record
Philadelphia Gold/Silver Stock Index (XAU) up 6.6 %
Gold up 2.5 %
Dow-Jones Industrial Average down 7.1 %
Standard & Poor's 500 Index down 13.0 %
NASDAQ Composite down 21.1 %

The dollar gold price has been steady since our last Update (Dec. 26, 2001). It is up $ .20 an ounce from the end of last year, closing on Friday (01/04/02) at $ 278.90 an ounce. Due to weakness in the yen, the yen gold price has continued to be strong. Gold mining shares have been firm. The Philadelphia Gold/Silver Stock Index (XAU) is up 2.0 % since the end of 2001.

Gold Investment Demand

Gold has been known as a portfolio inflation hedge, especially since 1970. However it has historically been a deflation as well as inflation hedge. During past serious recessions stocks under-performed and financial defaults increased. Investors became more risk- and loss-averse and sought to preserve rather than grow wealth. Portfolios were redirected toward cash, T- Bills and gold. The investment demand for gold rose with each widespread financial and business contraction. Gold is a default risk-free and currency risk-free monetary asset. It is a supra-national "alternative" asset, and its price often has a negative correlation to stocks and bonds. Historian Bob Hoye states that in the five previous major financial bubbles (1720, 1772, 1825, 1873 and 1929), the real price of gold has climbed for three years on average after the bubbles burst. Following the last bubbles in London and New York gold's real price doubled. Post-bubble gains in 1825, 1873 and 1929 have progressively increased. Gold mining shares also performed profitably during the economic and monetary disorder of the 1930-34 period.

Our Gold Scenario

A sustained relatively tiny precautionary diversification of global portfolios into gold could be the key to a new bull market in gold. Overall global investment demand for gold in the third quarter of 2001 was 17 % higher than the prior year. In Japan it was 91 % higher. From 1997 to the present the dollar gold price has made a long "bottom", trading between approximately $ 255 an ounce and $ 315 an ounce. In our opinion, the price will break up out of its "bottom" if investment demand rises further and the mines and their bullion bankers reduce their hedges.

The market currently expects a sustained recovery from the recession later this year. Indeed, there are signs that the inventory correction may be "bottoming out". However, aggregate demand may remain inadequate in the face of global oversupplies, and competition may become more severe. Business fixed capital spending may be slow to pick up due to over-capacity and high corporate debt ratios. Rising costs and weak pricing power may keep profits under pressure. Consumer spending, already at a high level due to low interest rates and huge debt stimulation from government sponsored enterprises (housing), is vulnerable to higher unemployment and may have little room for a further upturn in income or debt growth. Credit quality may deteriorate further.

If the recession is prolonged, profit growth expectations are moderated, stocks resume their bear market and financial defaults grow, a move back to gold's traditional safe-haven role could occur. Conservative risk-averse investors could again adopt a policy of allocating say 5 % of their portfolios to gold-oriented assets. Global portfolios are currently far underweighted in the gold-oriented asset class. An investment-led recovery could gain momentum and lead a major rally in the gold price.

We suggest the accumulation of gold-oriented investments as part of a precautionary risk-averse strategy to preserve real wealth. A gold diversification policy could be prudent and improve a portfolio's overall performance as it did in 2001. The ratio of the Dow Jones Industrial Average to the price of gold has declined from a peak of 42 in February and again in June 2001 to a low of 28 in September. Then it rallied to approximately 36 currently. It was 1 in 1980. A "reversion to the mean" move could imply that gold could outperform the market for some time.

This material is for Broker/Dealer use only. This material has not been reviewed by the National Association of Securities Dealers. It was prepared by Van Eck Global solely for investment dealers to explain certain aspects of the Van Eck Family of Funds and not for distribution to the general public. If any information contained herein is used in oral or written form by an investment dealer or any representative with the general public, they must assure themselves that such use complies with the filing and other requirements of applicable federal and state securities laws, and that a current prospectus of the appropriate fund and current supporting data are furnished where required.

These weekly updates are available on our portfolio hotline information (800-826-2591) usually by 2:00 p.m. Mondays. Past performance is not indicative of future results.

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