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July 11, 2005

Terrorism and Geopolitical Risk
by Mark O'Byrne

Weekly Markets
Precious Metals - Gold as Safe Haven;
FT on Platinum; JP Morgan & Barclays
Oil - Saudis admit can't meet Oil Demand
Commodities - Goldman Sachs Commodity Chart
Currencies - British Pound Weakening
Bonds -
Stocks - Inflation Adjusted S&P Chart
Property - UK Property/ Earnings Chart

Weekly Commentary
Terrorism and Geopolitical Risk

Opinions
FT: Lex, Fred Bergsten, Eamon Dunphy, Irwin Stelzer, Damian Kiberd, David Smith, BIS

Weekly Markets

Precious metals were mixed for the week.
Oil and the majority of commodities were up.
Stock markets were up for the week despite the bombings in London.
Bond markets were sold off slightly with a consequent rise in yields.

Precious Metals

Gold is lower by $4.40 or 1% for the week; closing at $422.70.

Silver is higher by $0.11 or 1.61% for the week.

Platinum settled at $865 and was down some 1% for the week.

Gold gained almost $5 an ounce to lead the precious metals set higher in the wake of a string of London bombings targeting the city's transportation network and innocent civilians during rush hour.

As news of the attacks spread, gold prices rose from the $423/oz level to above $428/oz before subsiding slightly to $425/oz-$425.70/oz range. Silver broke back above $7/oz, gaining as much as 10 cents at one point. Platinum also moved up and was last quoted at $865.10/oz.

The London Stock Exchange bellwether index, the FTSE 100, fell 150.7 points, or 2.8% to 5,078.9. That is the market's biggest decline since before the second Iraq War. The LSE instituted "fast market" rules to alleviate trading pressure but as the day progressed the FTSE and other European stock markets began to rally and the precious metals gave up their 'safe haven' gains. The flight to safety also saw bond prices rising with yields therefore falling. Safe haven national currencies also benefited with the Swiss franc gaining against the US dollar and British pound.

Gold denominated in Euros fell for the week to nearly EUR354 but remained above the EUR350 mark which was significant multi year resistance and may now become resistance or support to the downside. It has now had three weekly closes above EUR350.

Platinum has outperformed nearly all other asset classes in recent years. From January 2000, when it was at $350 per ounce, it is now up to $865 per ounce. Thus it is up some 250% in 5 years.

This trend is likely to continue as the twin threats of global warming and the inevitable peak production in global oil supplies result in increased demand for platinum for the production of more environmentally friendly transport technologies.

The Financial Times' James Mackintosh and Kevin Morrison reported that "The car industry is preparing for the day when oil wells run dry by investing billions of dollars to develop clean and efficient hydrogen-powered vehicles. But the new fuel comes with its own built-in commodity crisis. Today's experimental hydrogen fuel cells use so much platinum that there is not enough of the precious metal to replace all the world's petrol engines. As Kazuo Okamoto, the new head of research and development at Toyota, Japan's biggest carmaker, says: 'With the current type of technology we know already that [platinum supplies] will not be sufficient.' . . . At the current 60g or so of platinum in each fuel cell, the world's 780m cars and trucks would use 46,800 tons of the metal - just below the 47,570 tons estimated to be still in the ground."

Jon Bergtheil of JP Morgan importantly acknowledged the 750 tonne annual gold supply/demand deficit: "Gold in fact needs rising Central Bank and investor sales each year as mine supply (which has peaked) is now deficient by 750 tonnes per annum (or 23% of current fabrication demand) in supplying annual jewellery and other fabrication demand. At a growth rate of 3.5% per annum in fabrication demand, non-mine supply will need to be 1400 tonnes per annum by the end of the decade in order to balance the market . . . the underlying positive momentum behind gold is the fact that Central Bank sales are no longer the threat they were in the nineties but are now a vital necessity to balance the market"

Barclays Research noted that gold has often reacted to terrorist events in a delayed manner: "Looking at the gold price this morning, trading round $423.50, a level it has been trading around for most of the week, one could be excused for assuming nothing of note had happened over the past 24 hours. Sadly, that is far from true. . . . This gold price reaction is not without precedent. After the Madrid bombings, gold performed similarly, indeed prices were nearly 2% lower two days after the event, before prices then rose significantly over the subsequent two weeks . . . the past 24 hours will also confirm that in this environment, gold cannot be sold aggressively short."

Many analysts believe that the greenback will resume its long-term downtrend and put gold back on the front foot. Alastair McIntyre, director of precious metals at Scotia Mocatta Hong Kong sees gold in a corrective phase after "getting ahead of itself" in recent weeks. He expects the metal to stay under pressure for a while longer as the dollar continues to benefit from rhetoric surrounding the Federal Reserve's latest interest rate hike but says eventually markets will refocus on the U.S.' yawning deficits. "From a macroeconomic perspective nothing has changed," McIntyre said. "Exporting countries are running these massive current account surpluses against the massive current account deficit of the U.S. but eventually the market has to correct and the only way that can happen is for the dollar to weaken. Probably when fund managers return from the summer break and take a hard look at the dollar you'll see further signs of dollar weakness and gold strength," he said. McIntyre expects the metal to go as low as US$422 in its current correction before climbing slowly back to US$475 towards the end of the year, that is, as long as it holds US$419.

Adding to gold's ability to push higher when the dollar retreats, but not necessarily follow Euro dips all the way down, is the metal's emergence as a small but significant diversifying asset in the portfolios of many investors internationally.

Gold: Honest Money - Fry, Daily Reckoning
John Embry on Gold - Report on Business TV
Former Wall Street Whiz Kid Says Gold Equals Insurance - Resource Investor
Gold jumps after London underground incidents - Reuters
Investors scurry for Gold - Finance 24
China allows commercial banks sell gold bars traders - Reuters, 6-07-05
China 'to allow Bank Gold Sales' - Reuters via CNN
ECB Gold Sales Repeatedly Cap Price Around $440 - GATA - Red Nova via Yahoo
Are Gold and Silver Manipulated? - Droke, Safe Haven, 8-07-05
Moneyisation - Schmidt, Safe Haven
Marc Faber on the Inflation verses Deflation Debate - Audio, Financial Sense
Japan ranks first in world gold and foreign exchange reserves list - BVOM, 6-07-05
The Mysterious Gold Order - Australasian Investment Review, 5-07-05
The US National Debt To the Penny - Bureau of the Public Debt, US Treasury Department
Historical Debt Outstanding - 1950-2000 - Bureau of the Public Debt, US Treasury Department
The Future of the Dollar - The Passing of the Buck - The Economist
All that Glisters - Buttonwood, The Economist
The Trouble with Paper Money - The Economist
Is the US$'s Role as the World's Reserve Currency Drawing to a Close? - The Economist
Precious Metal Demand Shock Possible - Economist - Mining Weekly

In order to read the complete newsletter please click here or on Gold Investments Weekly Newsletter - Terrorism and Geopolitical Risk.

Mark O'Byrne
www.goldassets.co.uk

Brief Profile
Mark O'Byrne is Executive Director of Gold and Silver Investments Limited (www.goldassets.co.uk). He is regularly quoted and writes in the international financial media and was awarded Ireland's prestigious Money Mate and Investor Magazine Financial Analyst of 2006. He is a financial analyst who believes that due to the current macroeconomic and geopolitical situation, saving and investing a small portion of one's wealth in precious metals is both prudent and wise. Gold and Silver Investments Limited believe that hard tangible assets and monetary assets such as gold and silver, the world's oldest forms of money, will once again become the safe haven assets of choice in the coming years. The increasing economic and geopolitical uncertainties at the dawn of the 21st Century mean that gold, silver and platinum will become increasingly important in the new century as a means of preserving financial wealth.

Gold & Silver Investments Limited is a precious metals brokerage company which sells and buys a wide variety of gold, silver and platinum numismatic and bullion products to all class of investor, companies and institutions in Ireland, the UK and internationally taking payment in all major currencies. We assist our clientele in diversifying their assets with a comprehensive range of precious metal coin and bar products and by allocated and unallocated precious metal storage facilities licensed by the Chicago Board of Trade (CBOT), Comex and Nymex and by other precious metal storage programs.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important weekly financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth. We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles precious metal savings and investments. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

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