ANNUAL FORECAST for 2005 By:  Leonard Melman Published in “ICMJ’S Prospecting and MINING Journal   One of the most important techniques in financial analysis is that of gathering information and developing reasonable conclusions regarding a subject by utilizing a significant number of different indicators. The world of precious metals is no different. There are numerous factors which affect supply/demand balances and ultimately, the price of the metals themselves. These might include considerations such as special demand factors, restrictions on supply, monetary background indications, inflationary expectations, developments in related securities markets, political unrest, potential for significant military activity and action in the precious metals markets themselves. Seldom has this writer seen a convergence of so many influences seemingly pointing the way toward higher precious metals prices than has developed during the past several months and we expect these influences to grow throughout 2005. First, it has obvious for some time that the strongest single influence on the dollar-denominated price of gold has been relative strength or weakness in the US Dollar. One of the most convenient means of identifying that relative strength is action in the “US Dollar Index” commodity contract and it tells a clear story of continuing dollar weakness. The index peaked in early 2002 at approximately 121 and has been declining in a steady downtrend since, reaching a new low of 82 in late November before recovering slightly to the 84 area. This represents a decline of THIRTY-TWO percent in just over two years. The trend is still hard down, the US continues to run mammoth budgetary and Balance-Of-Trade deficits and interest rates are still much too low to provide any support for the beleaguered American currency. Is the US likely to balance its federal budget in the immediate future? Not really. Is the US likely to show a surplus in its Balance of Trade numbers in the coming months and years? Not really. Therefore, since the accumulation of dollars in foreign hands has been an underlying factor in US dollar weakness, it is difficult to foresee significant strength in the US currency for some time to come. Second, the demand/supply equation in the world of petroleum is undergoing a rapid revaluation. While just two decades ago, the excess of available supply over current demand appeared more than sufficient, matters have undergone a serious “reversal of fortune.” For example, in the early 1970s, demand was estimated at approximately fifty-three million barrels per day (MBPD) and peak available production was near seventy-three MBPD, leaving an excess of twenty millions. Now, however, the relevant figures are demand at near eighty-one MBPD and all-out supply capacity at near eighty-TWO, meaning the world capacity to deliver petroleum is virtually tapped out. This leaves the world facing two unfortunate realities, without readily available solutions. Demand is still rising at a rate of two MBPD per year meaning demand will likely exceed available capacity before the end of 2005. Next, discovery of new giant pools of petroleum has been declining steadily since the early 1970s and has now virtually dried up. The only new discoveries have been relatively small and many of them are uneconomic at any reasonable price, leaving the question, “Where are new supplies to come from to satisfy ever-growing demand?” Third, the world’s ability to deliver sufficient raw materials to satisfy its immense manufacturing capacity is in doubt. Transportation facilities are stretched to the limit. Immense quantities of base metals, coal and precious metals - vitally needed to keep the wheels of industry and commerce humming - are in short supply and becoming ever-more expensive. This problem is compounded by the fact that metals’ prices were kept at exceedingly low levels during the 1990s and into 2002. This factor limited exploration, development and new mine production. Even with the all-out effort to explore and develop now ongoing, it will be several years before substantially increased production of required minerals comes on-stream. In the meantime, prices could continue to rise sharply in the coming year. Fourth, all of the factors noted above could fuel a resurgence of inflation. We have already seen rising petroleum prices, escalating base metals prices and exploding coal and steel prices. The decline of the US Dollar could also fuel future price inflation of all imported items and those increases, should they occur, would lead to the vicious circle of the dollar falling further which would ignite even greater inflation, which, in turn, would lead to further falls in the dollar. Compounding the problem is the reality that one of the only cures for a falling currency is to raise domestic interest rates, SHARPLY if needed. Unfortunately, such a remedy would not only add additional increments to inflationary costs but could destroy the real estate market which has been the only reliable generator of individual consumer wealth for the past several years. A substantial rise in interest rates would crush new home buyers who are on any kind of mortgage other than multi-year, fixed rate. The number of homes financed by variable rate or short-term mortgages is in the millions. Fifth, tensions within the international terrorist situation could become acute and the fear is growing that a major terrorist attack would take place in such a manner that would disrupt international commerce, perhaps by sabotaging the Middle East petroleum delivery system. The Iraq War appears insoluble, Iran appears clearly on their way to producing nuclear materials, Pakistan and India seem to be in perpetual conflict, tensions between Israel and her Palestinian neighbors, while appearing to diminish for the moment, could ignite into full-scale war and hostile North Korea has joined the nuclear club - all making for a world as unstable as we have seen in three generations. All of these factors combined lead to the conclusion that any form of reliable economic and international stability is out of our reach during 2005 and the only true debate is the degree of uncertainty, instability and perhaps even panic the world is likely to encounter in the coming year. This is indeed a fertile ground for speculation in the world of precious metals, particularly given the fact that the long term charts for gold, silver and platinum are already in confirmed uptrends (see charts). Accordingly, we offer these forecasts: Despite the resistance from those powerful sources noted earlier, we remain convinced that gold will continue to advance strongly during the coming year. It is our expectation that gold will move relatively quickly to the $500 region during the first quarter, encounter some heavy resistance in that area and then break out to near $600 by year end. Silver should trade inside the $6-8 zone until mid year, then move to near $10 and platinum appears likely to continue its sustained rise to close at about $1,000 per ounce entering 2006. However, as always, it must be noted that even the most likely looking markets frequently behave in unexpected manners. Therefore, CAVEAT EMPTOR - let the buyer (or investor) beware.