INFLATION AND GOLD

We continue to believe that gold will trend higher. It will undergo corrections in price, but gold’s price longer term will reflect the declining dollar and the rising specter of inflation on a worldwide basis.

Inflation will drive up the prices of many commodities. Food prices for example will continue to move higher globally as China, India, and other nation’s expanding middle classes consume more of the world’s food. Increased demand for energy and base metals from emerging economies keeps upward pressure on the cost of living and the cost of operating businesses which begets more price increases. As the purchasing power of money deteriorates, gold benefits. These are long-term trends which we do not believe will be reversed by the banking/derivatives crisis in the U.S. and Europe, because the solutions to the crisis that are being implemented are highly inflationary. While the crisis is recessionary, we believe the possibility that we will enter a deflationary cycle is remote.

THE SCRAMBLE FOR COMMODITIES

From The Times January 28, 2008 China's growth could spark political tensions By: David Robertson

China’s booming economy is expected to consume more than half of the world’s key resources within a decade, according to Rio Tinto.

The rapid industrialization of China’s economy means that it is likely to consume a majority of the world’s supply of all the major metals and minerals, potentially leading to clashes with other countries over access to resources. Rio Tinto, the world’s second-largest miner, said last week that China already accounted for 47 percent of all iron ore consumption, 32 percent of aluminum and 25 percent of copper.

Tom Albanese, Rio’s chief executive, has predicted that within the next couple of years this will move to 58 percent of all iron ore, 45 percent of aluminum and a third of all copper. He said: "Even with the assumption that the current growth intensity will slow, we are looking at China consuming a higher percentage of global supply."

Vivek Tulpule, Rio’s chief economist, said that with China likely to consume more than half of the world’s key resources within a decade, political concerns would be raised as the country seeks to control access to the resources its economy needs.

In 1990, China accounted for only about 5 percent of all copper demand and 3 percent of aluminum and iron ore. The country is already the largest buyer of nickel, copper, aluminum, steel, coal, and iron ore. Only in oil does it fall behind, coming second to the United States.

By 2015, China will be consuming nearly a billion tons of iron ore a year. To meet this demand, large mining companies are ramping up production in areas such as Western Australia’s Pilbara region, which is geographically one of the closest ore deposits to China. Rio Tinto expects to increase its production in the Pilbara from 160 million tons a year to 320 million tons by 2013. BHP Billiton, the world’s largest miner, hopes to achieve 300 million tons by 2015.

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