GOLD

WHAT?

WHY?

A different class of asset

Most investment portfolios are invested primarily in traditional financial assets such
as stocks and bonds, as shown in the table below:

Domestic International Domestic International Real

equities equities bonds bonds Cash estate Other
(%) (%) (%) (%) (%) (%) (%)

USA 48 14 33 1 1 2 1

UK 39 28 12 3 3 6 9

Japan 27 17 32 11 5 1 5
Source: UBS Global Asset Management - Pension Fund Indicators 2004

The reason for holding diverse investments is to protect the portfolio against
fluctuations in the value of any single asset class.

Portfolios that contain gold are generally more robust and better able to cope with
market uncertainties than those that don't.

Adding gold to a portfolio introduces an entirely different class of asset. Gold is

unusual because it is both a commodity and a monetary asset. It is an 'effective
diversifier' because its performance tends to move independently of other
investments and key economic indicators.

Recent independent studies have shown that traditional diversifiers (such as bonds
and alternative assets) often fail during times of market stress or instability. Even a
small allocation of gold has been proven to significantly improve the consistency of
portfolio performance during both stable and unstable financial periods.
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Improving stability and predictability of returns
Gold improves the stability and predictability of returns. It is not correlated with
other assets because the gold price is not driven by the same factors that drive the
performance of other assets.

The chart below shows the (lack of) correlation between returns on gold and those of
a number of the world's leading stock market indices:
Analysis of the long run shows that the lack of correlation between gold and equities
in particular has persisted over time.

Lawrence (2003) in Why is gold different from other assets? tested the theory that
the lack of correlation between returns on gold and those on other commodities and
financial assets can be attributed to the existence of accessible above ground stocks
of gold.

Gold is also significantly less volatile than many equity indices and most
commodities. In this respect it tends to behave more like a currency. Simply by
reducing portfolio volatility, enhanced returns can be expected as demonstrated in
the table below:

portfolio 1 portfolio 2
(low volatility) (high volatility)
annual annual
return return
% value % value
initial value 10,000 10,000
year end 1 9 10,900 -5 9,500
year end 2 1 12,099 25 11,875
year end 3 9 13,188 5 11,281
year end 4 11 14,629 25 14,102
year end 5 9 15,956 -5 13,396
year end 6 11 17,711 25 16,746
arithmetic av. return 10% 10%
 std. deviation 1.10% 16.43%
compund return 9.996% 8.972%

Including assets with low volatility in a portfolio will also help to reduce overall risk.
Volatility, or risk, is measured here as the extent to which asset prices fluctuate
during a given period.

The chart below compares the volatility of gold with that of oil and stocks between
2002 and 2004.

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Gold as an alternative investment
In the search for effective diversification against a background of increasing
convergence among mainstream asset classes, investors are considering a variety of
non-traditional alternative investment vehicles. Prominent among these are hedge
and private equity funds, although gold, commodities, timber and forestry, fine art
and collectibles may also come under review.

Investors should give careful consideration to each of these alternatives in the light
of their particular requirements and may choose to invest in several of them.

Despite its relatively low expected returns gold offers superior diversification with
high liquidity and low cost.

Gold Supply and Demand – Q3 2005

• 56% rise in investment demand in third quarter of 2005
• Total gold demand up 7% in tonnes and 18% in dollar terms
• Seventh consecutive quarter of positive growth in total tonnage
demand, and tenth consecutive quarter of double-digit growth in total
value
• Year-on-year growth for gold jewellery in the first three quarters of
 2005 up 12% in tonnage terms and 20% in dollar terms

The third quarter of 2005 represented the seventh successive quarter of positive
growth in demand for gold in tonnes, and the tenth consecutive quarter of double-
digit growth in dollar value. Investment and industrial demand for gold grew more
rapidly than demand for jewellery, which reached new record demand levels in value
terms. Compared to the same period last year, demand in Q3’05 absorbed an
increase in supply of around one fifth despite a 10% rise in the gold price. Full details
are given in the press release

Data on the supply and demand for gold are compiled by GFMS Ltd. The company
provides a number of tables exclusively for the World Gold Council. The following
table shows a summary of gold demand. Links to more detailed tables, and to notes
and copyright information, are given below. Please note the restrictions on
disseminating these data.

End-use gold consumption1

Notes to tables.
Source: GFMS Ltd. 1. Identifiable end-use consumption excluding central banks. 2.
Provisional. 3. "Other retail" excludes bar and primary coin offtake; it represents
mainly activity in North America and Western Europe. 4. Exchange Traded Funds and
similar products including LyxOR Gold Bullion Securities, Gold Bullion Securities
(Australia), streetTRACKS Gold Shares, NewGold Gold Debentures,

GFMS should be contacted for further information or for past data. In addition certain
data are available on Bloomberg.
9

Short Hedges
One of the most common commercial applications of futures is the short hedge,
or seller’s hedge, which is used for the protection of inventory value. Once title to a
shipment of a commodity is taken anywhere along the supply chain, from wellhead,
mine, or manufacturing plant to consumer, its value is subject to price risk until it is
sold or used. Because the value of a commodity in storage or transit is known, a
short hedge can be used to essentially lock in the inventory value. A general decline
in prices generates profits in the futures market, which are offset by depreciation in
the value of the physical inventory. The opposite applies when prices rise.
Example 1 – Precious Metal Producer’s Short Hedge
The producer hedge is of particular use to precious metals mining companies,
especially during periods of high price volatility. In addition, the concept of price and
revenue forecasting has become important to producers because of the substantial
cost and lead time required of new mining ventures. Because precious metals
markets
are almost always in contango, gold, silver, and platinum group metals futures
have removed much of the risk associated with new mine price and revenue
forecasting.
Precious metals producers are able to use short hedges to help secure project
financing.
In February, an official of a new mining venture reviews the company’s most
recent gold production plans. The sales and production projections suggest that the
company will have 3,000 ounces of newly mined and refined gold available for sale
the following July. The executive considers the current price of the August gold
futures contract at $310.20 favorable, given the company’s total production costs,
including interest and depreciation, of $180 an ounce. As a result, the mining
executive
decides to lock in a profit by hedging his anticipated production.
Cash Market Futures Market
In February:
Spot gold price on the COMEX Division Sells 30 August gold
is $290.10. A mining company contracts @ $310.20
decides to hedge to lock in a per ounce.
sales price in excess of the break-even
production cost level of $180.
In July:
The price of gold drops over the intervening Buys 30 August gold
five months to $275.50. The mining contracts @ $278.20
company sells 3,000 ounces of gold at per ounce
this price, which is still above estimated
production costs but below the price prevailing
in February.
Cash Loss: $14.60/oz. Futures Profit: $32.00/oz.
Overall Profit: $17.40 per ounce