ANNUAL FORECAST for 2004 By:  Leonard Melman Published in “ICMJ’S Prospecting and MINING Journal   It is our strong opinion that 2004 will be a pivotal year for the economy, for the consumer and for the precious metals world. But before looking forward, please allow us to enjoy a momentary pat on the back as we recall our forecast for 2003 issued in December of last year... “We believe gold will fights its way through the $330-340 zone in the first quarter and then move upward in a series of strong rallies followed by modest corrections....Gold should then resume its rally and close out 2003 between $410 and 425...” Considering that gold just touched $412 in early December, we can only hope to do as well this time around.” We closed that forecast by stating, “...setting the stage for a truly electrifying performance in 2004.” Our view remains that 2004 will likely be very positive indeed for the precious metals. Here is why. 1 - The American and Canadian consumers are in debt up to their proverbial eyeballs. As economist Ian Morris of HSBC informed Barron’s Magazine in mid-November, “...The ratio of debt service to disposable income has set a record, even with low interest rates and tax cuts.” High debt levels have been common during the past several years, but consumers serviced much of that debt by refinancing their home mortgages at ever-lower rates of interest, thereby providing themselves with additional purchasing power while keeping their monthly outlays in check. However, those days are likely over. Mr. Morris notes that the rate of mortgage refinancing activity has dropped by eighty percent in the past year alone. As if to confirm this, one of America’s largest mortgage lenders, Washington Mutual Inc., reported in early December that it was slashing 2,900 additional jobs on top of the 4,500 cuts already announced and it was likely to cut staffing by another 2,000 positions in the first part of 2004. The effects of this trend could be ominous indeed. Not only will the American home-owning consumer not be able to borrow additional sums on their mortgages, but they will be forced to make payments on their indebtedness, rather than simply borrowing from a generous Peter (mortgage lenders) to pay the Paul of high-rate credit card and other consumer indebtedness. Those days are over and the impact on consumer purchasing power could be significant indeed. The importance to the precious metals markets is this: if the consumer cannot make new purchases without taking on ruinous indebtedness, the consumer-drive economy could falter both rapidly and significantly, thereby forcing the government to stimulate the economy in every possible manner. Historically, strong government action to stimulate economic growth has been positive for the precious metals. As a special consideration, we would note that 2004 is a Presidential Election year. Therefore, it appears probable that the Bush Administration will do everything it its power to get re-elected, including adopting every possible stimulative measure in order to sustain consumer purchasing power until the election takes place in early November. 2 - Inflationary pressures, particularly the costs associated with raw materials and the petroleum complex, appear to be rising. Please note the long term chart of the CRB Commodity Index which has broken out above 260 for the first time in several years (see chart). Also, please note that the price chart of Crude Oil has held firm above $30, despite the (presumed) end of the war in Iraq. In addition, and of utmost importance to home owners and industrial users, the price of natural gas has been exploding upward in recent weeks, soaring from barely $4.50 per contract in October to almost $7.00 by mid-December (see chart). The long term price outlook for these items appears strong. We note that worldwide auto production is expected to soar in the coming year, thanks to huge growth in both China’s and India’s auto industries. This should insure high demand for metals such as steel, copper, zinc and many specialty metals. Strong general economic growth in the last half of 2003 has also placed upward demand on these commodities. Regarding petroleum, the Wall Street Journal just published a study indicating that petroleum demand in China is growing by thirty percent per year and imports are expected to double by 2010, thereby significantly altering the world’s supply-demand balance to the demand side, thereby putting upward pressure on prices. Chinese consumers are purchasing cars at an incredible rate and the fleet of vehicles on Chinese roads is expected to grow from virtually nothing ten years ago to ONE HUNDRED MILLION autos and trucks within a decade. It is also worth noting that, far from planning to increase increasing output to meet this new surge in demand, OPEC is actually considering production CUTS in order to support the dollar price of oil. The combination of steadily rising demand combined with steady or reduced supplies could combine in the coming years to cause a dramatic increase in the price across entire realm of petroleum-based products. As a special case, natural gas is particularly vulnerable to a rise in demand without a corresponding rise in supply. As noted earlier, the price of natural gas has already risen spectacularly in late 2003 and the coming winter is showing every possibility of being colder than normal. Also, there is an ongoing process within residential and industrial production to choose clean burning natural gas over other heating fuel sources, thereby creating steadily increasing demand pressures, without a commensurate increase in supply. Natural gas prices, therefore, appear particularly vulnerable to upward price spikes which would further diminish consumers’ already endangered purchasing powers. 3) - America’s once high-flying currency has been plunging dramatically against virtually every other important currency and the great difficulty is that one of the historic means of strengthening a currency, that is by raising domestic interest rates, would likely crash the economy. Therefore, further weakness in the US Dollar seems likely. Historically, dollar weakness has been positive for gold. 4) - One of the limiting factors which has held down the price of gold through the years has been hedging programs by gold producers. Simply put, a hedging program is the process whereby a metals producer sells their production into the futures market in order to insure at least a minimum price for their production. This advance selling of production has served to limit price rallies in the past. Therefore, is was quite significant when Barrick Gold Corp. announced that they were completely eliminating their gold hedge program. In late November, Peter Munk, Barrick’s chairman and founder told an investment conference in London that Barrick’s, “commitment to hedging is gone...Hedging to us is no longer a requirement for running our business...” The termination of Barrick’s hedging program is yet another plus for gold in the coming years. 5) - Gold’s technical picture is stronger than it has been in years. Gold formed a strong base between $250 and $300, has now breeched the $400 mark and is holding well above rising trendlines. The next significant level of resistance is in the $500 area and above that, there is no important resistance until the all-time high near $800 is approached. Putting it all together, our outlook for gold is a move to near $500 before the end of the first half of 2004, then a ‘battle’ to overcome resistance at that level, then a strong move upward to near $650 by year-end. We would expect silver to rally alongside gold and close the year near $7.00 per ounce. In addition, we expect platinum to be an outstanding performer, quite possibly rising to challenge the all-time high just under $1,100 per ounce. One last consideration. To date, much of the rally in gold has been in response to the declining value of the U.S. Dollar and that has created a problem for advocates of the point of view that this is a truly powerful gold bull market. The problem is that gold has failed to rally strongly against virtually every currency except the U.S. Dollar. In fact, while the price of gold has gained over twenty-five percent in the past year against the dollar, it is up only an average of about five percent against the other currencies quoted on our lists. Historically, during past gold bull markets, the price of gold has rallied strongly against ALL unbacked, fiat paper currencies. That has not happened yet. It is one of the puzzle pieces waiting to fall into place before the power of this growing bull will become fully evident. When that situation occurs, then the investment community will be forced to acknowledge that many investors around the world were choosing gold above paper. Then the true fireworks could begin - perhaps in 2005, perhaps a little later.