PRECIOUS METALS AT 25 YEARS HIGH – WHERE FROM HERE? April 19, 2006 Gold and Silver creates record highs, Precious metals rising – up and away, are some of the common headlines we have been reading/hearing off recent everywhere. In India Precious metals have reached record prices but in the international markets, they have been climbing and climbing fast towards their 1980 highs. Historical Prices In 1980 Gold made a high of US$ 850 and Silver US$ 50+. The rise that time was basically due to hoarding of Silver by Hunt Brothers. Somehow their plan did not materialize and they went bankrupt as both the metals feel back to their old prices at the same pace they rose. In India 1979-80 was the time when Gold and Silver prices Sky rocketed. At that time the India Rupee vs US Dollar was somewhere around Rs. 8 – 10. Today the Indian Rupee vs US Dollar is trading at Rs.45. Hence even at the current international prices of Gold @ $620 and Silver @ $14, both have surpassed the highs they made in 1979-80. After the fall both the metals have been at their low prices in the international market for a period of 20 years. Any rallies were sold and both the metals kept going lower. The Central Banks around World and the Miners used to sell their Gold whenever prices used to rise. It was in 2000-2001 when the major Central Banks of the World decided to stop selling Gold in the open market and to sell limited quantities as per agreement every year did the metal markets started to show signs of bottoming. In these 20 years of bear trend, Gold made a low of US$ 252 and Silver made US$ 4 before changing their trend. Adding fuel to the fire was a terrorist strike in US on Sep 11 th which changed the fate of Precious metals complex. Reasons to Own Gold & Silver: Traditionally precious metals were used just for investing but now its being used as a currency rather than just a metal. Some of the reasons are discussed below: 1) Deterioration of the US Economy: After the September 11 th attacks, the US economy has been deteriorating. The Federal Budget, which was in a Surplus, has turned into a massive deficit, which normally has negative impact on the economy. 2) As a result of the above factor, the US Dollar has become weak both fundamentally and technically. This has made people park their money in real assets like Gold and Silver rather than US currency. 3) There is a huge gap between the demand and Supply in both the metals for years, which was filled by recycled scrap and sales by Central Banks. 4) Metals are natural resources. Supply of metals from mines is expected to fall in the coming years due to dearth of exploration and natural exhaustion of mines. 5) De-Hedging by Miners and Producers: Seeing the rally in metals prices, all big mines stopped hedging their produce in derivates. This gave additional boost to the market. 6) With the continuous rise of metals prices, chances are more that the Central Banks which have sold Gold all the time would start buying back Gold. 7) Gold a hedge against inflation: Gold has a direct co-relation with Oil since it started trading freely in 1971. When we compare the ratio between the two, Gold still looks very undervalued. 8) Chinese citizens have been allowed recently to buy precious metals for investment. When similar event occurred several years ago in India, demand rose sharply. Seeing the Chinese population and its rising standard of living, demand can rise manifold. 9) Rising Geopolitical Tensions worldwide are another major reason for prices to rise. Iran and North Korea on the trying to become Nuclear Powers, tension in Middle East, ongoing threat by Al Qaeda has made people invest in hard assets rather than paper ones. 10) Opening of Commodity Exchanges and ETF has also helped in increasing the investment demand for these metals. Precious Metals: Where from here?? After coming to this high, the most common question one would ask, where from here?? Well keeping the above factors in mind, any argument against rising prices are weaker. The 20 years of bearish cycle in precious metals have ended and with the new millennium, a 20- year bull phase for the same has started. We have just covered 5 years of the bull phase. Another 15 years of this bull cycle would take the precious metals complex to heights. Hence one should keep investing in precious metals at every opportunity the market gives us. Warning: Market has been going up sharply off recent. Whenever markets have such kinds of rallies, they snap back the gains at an equal pace. Hence investors require Caveat in short term as nothing is above the law of gravity. We should use such pullbacks in prices to invest in the long term. By Krishna Kumar Nathani India Bullion Investor Services Private Limited. Chennai India The Author is the Head – Research of www.IndiaBullion.com . STATEMENT OF DISCLAIMER: Opinions expressed are subject to change without notice. This report cannot be construed as a request to engage in any transaction involving the purchase or sale of commodity. The Views expressed here are personal views and does not represent that of the firm. The risk of in trading commodities can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

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