PERFORMANCE ANNOUNCEMENT

As Of: November 30, 2005

GOLD

What Now?

    In the year 2003 Exxon Mobil stock was at $32 per share and gold was priced at $320 an ounce. I stated definitively at that time there are two things you can take to the bank: XOM is going to $45 per share and gold is going to $450 an ounce in the short run, and gold will go over $500 over the next year or two. Well, Exxon Mobil was the first off the starting line and raced to $65 a share, more than a 100% increase. Gold has taken longer, but has finally reached $500.

    Does gold deserve to be at $500 an ounce, and will it go higher? The answer is yes. The United States dramatically increased its money supply over the past decade. While this has been partially justified due to the dollar's standing as the primary international currency, the increase has also been a factor of U.S. consumption and the growing domestic and foreign trade deficits that are accumulating. The world is awash in cash. The interest rates on five and ten year US treasury bonds has been unusually low due to petro dollars from the Mideast being recycled, and due to Chinese foreign exchange income being lent back to the United States. Excess cash is having a hard time finding a home. A recent article in the Wall Street Journal pointed out the same situation with U.S. corporations. "Currently, U.S. companies are sitting on near-record levels of cash. Among industrial companies in the S&P 500, a grouping that excludes financial firms, which are required to hold hefty reserves, the amount totals nearly $631 billion on the books. That figure represents more than 7% of these companies' market value - the highest percentage since 1988." This high cash reserve is a reflection of the fact that companies cannot find satisfactory places to reinvest their profits. It is no wonder that some of these excess funds sloshing around the world should find their way into gold, an historically proven store of value.

    Physical demand for gold, particularly at the retail level, continues to grow thanks to the increasing affluence of India and China. Additionally, whereas central banks were disrupting the gold market by selling gold in the 1990's, it appears that countries like Russia and China are now adding to central bank reserves, and plan to purchase more gold as a way of diversifying away from the U.S. dollar. In spite of what the government economists would have you believe, a high gross domestic product is not necessarily a favorable thing under the current circumstances. A growing GDP is primarily (about 70%) driven by consumption, which is being fueled by debt. Increasing deficits debase confidence in the currency. As long as tax revenue minus government spending is a negative number, and foreign exports minus foreign imports continues to be a negative number, gold should continue on a long term uptrend. Once gold digests its recent gains and consolidates at the $500 level, I would anticipate reaching a $600 to $650 range over the next two years.