Gold is a barometer of investor anxiety. Last year gold was the leading asset class gaining 25 percent, outperforming all the world's stock markets, major currencies and world's hedge funds. Historically gold has a negative correlation or inverse relationship to the stock market and US dollar. The US dollar index has fallen almost 17 percent against the major industrialized currencies, its biggest drop since 1987. Over the same period the Dow Jones Index fell 17 percent for the third consecutive year in a row, only the third time that this has occurred over the last hundred years. Indeed, gold is the ultimate hedge asset class. After hitting $390 an ounce in February, gold retreated on expectations that the countdown to war was postponed. Gold was seen as a safe haven and the war premium was quickly extinguished following Blix's speech to the UN. While gold's stellar performance has been remarkable, we believe that we are only at the beginning of a multi-year bull market. The average price for gold last year was $315 an ounce and our expectation is that $375 an ounce will be the average this year. Gold's role as a store of value is the basis for our belief that gold will trade at $510 an ounce this year.

Gold's Move Preceded Iraq

The price spikes of gold and oil over the past year has surprised most investors and the conventional wisdom is that the sharp rises are attributable to the sabre-rattling with Iraq. Some believe that a quick war with Iraq, as was the case in the Gulf War, will be a positive catalyst for the economy lifting the veil of uncertainty over the stock market. Gold and oil then would quickly lose their war premiums. Overlooked is that much of the increase preceded the Iraqi war drums. Gold has been going up for other factors and the prospect of war has only exacerbated this trend. While the intensifying geo-political tensions have influenced gold's performance, the main driver was the lack of confidence in the US dollar and the stock market. When the fog of war ends, the structural imbalances will still remain in the economy, underpinning even higher gold prices.

Another myth is that since gold shares have lagged bullion, they must have reached their peaks. Again that is wrong. Gold shares and bullion do not always go hand-in-hand. Following gold's move to $330 an ounce from the $253 an ounce low, gold shares outpaced bullion. However, when gold spiked above $330 to $390 an ounce, gold shares were laggards. Part of the reason is that the TSE gold index is heavily weighted to the big cap companies such as Barrick and Placer Dome, which are heavy hedgers. These companies were non-performers because the upside is capped whilst the unhedged midcap producers and the leveraged juniors have quadrupled. Pundits also argue that the huge hedge funds have shorted gold shares and put a long position on gold. And, once the war is over they will flatten that trade. We do not subscribe to this view since the reported shorts are attributable more to the arbitrage opportunities following the Kinross amalgamation and/or the recent unit offerings with warrants. Our view is that a more likely influence for gold shares' non-performance was the successive rounds of offerings as investment dealers took advantage of the rising price and flooded the market with paper.

The Big Drivers For Gold

A big driver for gold's move is the positive changed supply/demand fundamentals. Last year, total global demand was 3,900 tonnes, of which jewelry accounted for almost 3,000 tonnes. Total fabrication demand was almost 3,500 tonnes against global mine output of only 2,500 tonnes. Scrap sales, central bank sales and producer hedging filled this deficit. Mine supply is expected to be down again because no new deposits have been found and it will take a few years to bring onstream those discoveries found in the eighties.

Physical Shortage of Gold

Further reinforcing gold's rally is the looming physical shortage of gold as central banks and the bullion banks attempt to recover the bullion they have lent to third parties in the form of gold loans. The mining industry has scrambled to deliver against their hedges and even bought back hedges, which serves to provide a solid base to gold's uptrend. We expect this trend to continue. The lack of contango and dehedging will force the industry to become net buyers, supporting even higher gold prices. To date, we believe the industry has bought back only about 10 percent of the estimated global hedge book.

Gold has become the default currency of the world. With the collapse of the US dollar, gold is the second largest held reserve in the world. Indeed, gold's recent strength is due to the lack of currency alternatives, not the impending Iraqi war. Of greater importance is the message that a $500 an ounce gold price will send to the world. Gold has historically served as a beacon, keeping investors protected from the financial shoals. In the nineties, that beacon dimmed as investors refused to take heed of the past and preferred to leverage up the financial system. Following the nineties' legacy of debt, gold's beacon is shining every brighter.

Deficits Do Matter

There are a number reasons to take heed of the brightening picture for gold. Since the dollar's turning point in July 2001 (before Iraq became headlines) it has fallen 17 percent. The cause of the US dollar decline is clear. Today, the US dollar is fundamentally overvalued and over-owned. Americans have again become the world's largest debtor and foreign investors are pulling out of the US. It must borrow about $200 million from the rest of the world each day just to cover the savings gap. The Americans must absorb almost $2 billion of overseas capital to finance the shortfall. Alternatively, the Fed must print as many dollars as is required to pay for the twin deficits - fiscal and balance of payments. The price of debt has not gone unnoticed. Deficits do matter. Fed Chairman, Alan Greenspan warned, "once debt to GDP begins to rise, there's just no self-correcting mechanism, the debt just continues to rise." Greenspan further cautioned, "short of a major miracle in immigration, economic growth cannot be safely counted upon to eliminate deficits and that difficult choices that will be required to restore fiscal discipline." In the past four years, America's current account deficit soared from $128 billion to over $435 billion and will be a whopping $600 billion this year or 6 percent of GDP.

New Decade Of Red Ink

And then there is the other deficit, the budget deficit. President Bush has taken a $200 billion budgetary surplus and turned that into a projected record $300 billion deficit in 2003, exceeding the last record budget deficit of $290 billion in 1992. President Bush is attempting to fight a war and keep the economy strong without raising taxes. It can't be done. Vietnam was the last bitter lesson where policymakers learned that they could not have both "guns and butter" at the same time. History shows that inflation always follows wars that are not paid for. Duct tape is of little use here. With the Fed reducing interest rates eleven times to near zero, the Bush administration resorted to other weapons in its arsenal, unveiling a $2.2 trillion budget with deficits into the next decade. The funding of the US economy comes just when the absence of savings and growing government deficits requires a desperate need for external financing. Using Washington's numbers, the tide of red ink already represents 3 percent of GDP, a level last seen in the late 1980s when the US faced a current account deficit representing 3.5 percent of GDP. Then, the US dollar lost almost half of its value.

Guns And Butter Must Be Financed

Like Lyndon Johnson, President Bush has optimistically called for a 100-hour perfect war with Iraq. Politicians are always optimistic about both the amount of time and the cost of waging wars. The Gulf War was not a seven-day war, but lasted a month and half and was financed by the Saudis and Kuwaitis. The Vietnam War was supposed to last only a few months but dragged on for twelve years and cost ninety percent more than forecasted. The Korean War lasted three years and of course WWII lasted almost six years. Little is said of the cost of the Iraqi War, whose aftermath or reconstruction cost is estimated to be between $50 billion to $300 billion. Even less is said on how and who is to pay for this war.

Déjà vu - That Seventies Thing

In the fifties and early sixties, inflation was dormant. But by the late sixties because of the war and government reflation, inflation picked up. In the seventies, the commercial paper market quadrupled in size in only four years. Money was cheap despite increasing inflation. Credit card borrowing ballooned as well and credit card debt soared to record levels. With the explosion in debt came the over-issuance of money and the inevitable explosion in inflation. The ensuing high interest rates did not even slow the real estate market, it mortgaged it. Indeed it was the explosion of loans that played a major role in the strong recovery from the '73-'75 recession. Between 1968 and 1981 the stock market moved sideways giving rise to "stagflation". However when inflation soared, interest rates went up because America had too much debt and not enough gold. The US dollar collapsed.

During the seventies, the flawed economic policies led to a 70 percent fall in the dollar. President Nixon severed the gold link in 1971 and the gold standard discipline disappeared with it. The US dollar became worth exactly what America said it was worth - not very much it seems. Then in 1979, Jimmy Carter appointed Paul Volcker to stop inflation with higher interest rates, curtailing credit. The prime rate was at 15¼ percent and treasury bills yielded 12 percent. At the beginning of the seventies, gold was $50 an ounce. At the end of the decade the US dollar sank further and gold spiked up to $850 an ounce in January 1980 as investors sought protection from further debasement of the greenback.

That Sucking Sound Is Coming From China

The market may have discounted war, but it hasn't discounted the massive dollar debasement that lies ahead as Bush attempts to reflate his way out of the debt morass. We detect a seachange from financial assets to hard assets. In addition, our view is that the upswing in commodities is not due this time to the missing anchovies but is attributable to China sucking in the world's resources and acting as the locomotive of the world. China now accounts for nearly five percent of the world exports, seven times that of India. Indeed, China last year received more foreign direct investment than every other country including the United States. Flush with the largest foreign currency reserves in the world, China has embarked on diversifying its reserves from the dollar by purchasing euros and, in December purchased 100 tonnes of gold to hold 500 tonnes. China's gold reserves are now about 2%, which is increasing every month, which compares to an 11.2% world average. Gold is going to be a good thing to have.

Twin Deficits Fuel The Dollar's Decline

Gold has finally emerged as a tangible asset in lieu of other paper investments. Hard assets are in as Wall Street loses its appetite for financial assets. The protracted countdown to war with Iraq only increases the economic and geopolitical uncertainties. Meanwhile, like the seventies, the CRB Index hit a five-year high indicating that inflation warning signals are flashing. The US dollar bubble has burst amid worries over the prospect of the debasement of the US currency, leaving little incentive for foreign investors to continue to finance President Bush's growing global aspirations. We believe that the need to finance the twin deficits will tax the government's borrowing needs and lead to higher inflation. History shows that the darker side of a weaker dollar, however is more inflation, higher interest rates and a severe economic downturn. Gold is an excellent alternative investment.

Summary And Investment Conclusion

In our opinion, gold has completed the second leg and now requires a consolidation after breaking through the twenty-three year downtrend at $330 an ounce. Once gold breaks through the $375-$390 an ounce resistance area, we believe that gold's next target is $510 an ounce this year. More important we are only at the beginning of gold's multiyear bull market.

We believe that investors have a second chance to establish positions in gold shares. Once bullion consolidates the recent move, we expect that bullion will move to a higher trading range. This will move prices of gold stocks substantially higher. Our picks continue to be focused on the mid-cap producers with rising production profiles. We continue to rate Kinross, Goldcorp, Agnico-Eagle, and Meridian as attractive buys. We continue to recommend to swapping out of Placer Dome into Newmont who has superior growth potential and virtually unhedged policy and superior management.

We continue to believe that we are in the early cycle of a gold bull market. We think that there will be another major move in the gold price. Once investors become convinced that gold will not pullback, gold stocks will outperform. Bull markets climb walls of worry and we see nothing different this time. Our enthusiasm for gold stocks is due to the fact that the bandwagon is still relatively empty. Not everyone is convinced of our view; inflows to precious metals have been limited, activity has been centered with the momentum and hedge fund players. Second, most of the producers have done their financings and there likely will not be another round of financings, capping performance as they did in the last go around. Because of gold shares inherent leverage, we continue to expect that the best times lie ahead. Indeed, a review of our Top Ten junior producers show that the stocks on average gained over 90 percent. As for the downside risk, we continue to emphasize producers and near producers rather than just the pure exploration vehicles. At this time, it is too early to gravitate down the food chain by purchasing exploration or grassroots players though selective exploration companies look attractive. We expect the major producers who are short of reserves will rather spend their money by gobbling up smaller tidbit-sized companies. In the exploration sector, normally the winners are those companies that finally discover the deposits of the future, but for that we need risk money and it appears to be early days yet.

Rather than play the exploration companies, we continue to concentrate on the small cap producers or early development plays, which possess excellent ore bodies and have shown superior price performance. Our view is that one year from now, the bigger companies will use them as takeover targets. We like: Crystallex, Bema Gold, Campbell Resources, Eldorado Gold, Claude Resources, High River Gold, Miramar Mining Corp, Northgate Exploration, Philex Gold, and St. Andrews Goldfields.

Top Ten Juniors		Price	52 Week Range		Shares	Market	Prod'n	Market Cap
	Symbol	25-Feb	High	Low	Mil	Cap	0z (000)	per/oz
Bema Gold	BGO	1.69	2.94	0.54	257.0	434.3	85	5,110
Campbell Resources	CCH	0.50	0.95	0.26	54.3	27.2	35	776
Crystallex Intl	KRY	1.77	3.85	1.89	79.6	140.89	110	1,281
Eldorado Gold	ELD	2.10	2.51	0.48	169.0	354.90	105	3,380
Claude Resources	CRJ	1.48	2.45	0.62	53.1	78.59	49	1,620
High River Gold	HRG	2.35	2.92	0.85	97.3	228.66	140	1,633
Miramar Mining Corp	MAE	1.72	2.23	0.94	105.5	181.46	100	1,815
Northgate Exploration	NGX	1.82	2.25	1.06	150.8	274.46	275	998
Philex Gold	PGI	0.64	2.11	0.72	40.2	25.73	55	468
St Andrews Goldfields	SAS	0.22	0.40	0.14	54.3	11.95	0
Average    1,599

Recommendations:

Agnico-Eagle Mines Ltd.
Agnico-Eagle reported results that were in line with expectations producing over 260,000 ounces at the LaRonde Mine in Quebec. Teething problems at LaRonde appeared to have been resolved and the company will report a better first quarter than the latest quarter. This year Agnico-Eagle will produce a 44 percent improvement in production to 375,000 ounces at $125 cash cost per ounce reflecting the expansion of the LaRonde mill to 7,000 tonnes per day. Agnico-Eagle's deep exploration program continues with three machines and we expect additional reserve additions beyond the four million ounce reserve reported at yearend.

Agnico-Eagle also plans to reopen the Goldex project located in Val D'Or, Quebec about 35 miles east of LaRonde. Goldex has almost two million ounces of resources and could produce 225,000 ounces at a cash cost of $200 per ounce from a 10,000 ton per day facility. We expect that Goldex's new scoping study will be released in June. Goldex could be brought into production for less then $100 million in a few years and is an excellent low-grade project that could provide feed to the LaRonde complex. Indeed, Agnico-Eagle has other potential mines in its portfolio. The company reported a new high-grade discovery, which is open to the east and at depth, at the Lapa property, located in Cadillac Township about seven miles east of the LaRonde. Agnico-Eagle could earn an 80 percent interest by delivering a bankable feasibility study to Breakwater Resources Ltd. Agnico-Eagle is following up a successful sixteen-hole drill program and added a third drill to the $2.2 million program. Grades are excellent and ore could easily be trucked to the LaRonde complex. Agnico-Eagle is a mid-tier Canadian gold producer with a long mine life, strong balance sheet, excellent exploration prospects and a rising production profile. We recommend the shares here.

Barrick Gold Corporation
While Barrick reported results in line with expectations, the results were aided by a $22 million tax credit. Barrick produced 5.7 million ounces at a higher cost due to production problems. About six of Barrick's fourteen mines reported lower production due to the maturation of the deposits. Indeed, we believe it was those production problems, which led to the departure of Randall Oliphant and the appointment of Greg Wilkins as president. Reserves on the other hand were higher as proven and probable reserves received a boost from Alto Chicama in north central Peru and Veladero in South America to 86.9 million ounces from 82.3 million ounces of gold. Barrick also lowered its spot deferred position from 18.2 million to 15.9 million ounces at yearend of 2002. For the first time, Barrick rolled over a spot deferred contract rather than deliver against the hedge program receiving the higher spot price. While the rollover resulted in Barrick receiving a higher price than it would have received, most investors took this move negatively since they would like to see Barrick reduce its overall hedge position. While Barrick has more than eighty per cent of its reserves unhedged, investors want 100% of the upside and believe that a hedge book that ties up three years of production is too high. We expect that the new president, Greg Wilkins will make significant changes since hedging has become a "lightening rod" for investors. Barrick shares have lagged the overall market, falling 13 percent versus a 25 percent increase in the gold price.

We believe that the management change will provide an excellent opportunity to redirect Barrick. First, we expect there will be some management changes since running over fourteen mines and building another four will sap existing management's talents. Second, we look for a change in Barrick's hedge book. While the hedge book helped the company when gold prices were flat or falling, the hedge book is of dubious value when prices are heading up. We believe that Barrick should aggressively reduce its hedge book, below the 12 million ounce target. Consequently, given the high calibre array of assets and the $1 billion cash position, and a possible new direction, we believe that the combination will offset the overly large hedge position, which now stands at a negative mark to market value of $639 million.

Bema Gold Corporation
We have initiated coverage of Bema Gold. Bema should produce 300,000 ounces due in part to a pickup in production from the Julietta mine in eastern Russia, which will contribute about 80,000 ounces. Bema recently completed the acquisition of EAGC Ventures Corp., which was an opportunistic acquisition of Petrex Gold Mines, which owns the Golden Reef's assets in East Rand, South Africa. Bema's Refugio mine in northern Chile, which is 50% owned with Kinross was put on "care and maintenance" status a couple of years ago, will reopen and should produce about 100,000 ounces next year. Bema also announced an agreement to acquire a seventy-five percent interest in the high-grade Kupol project in northeast Russia. Kupol hosts a large epithermal gold and silver vein system. Bema will spend $8 million on Kupol this year and drilling will begin in May. Bema has a number of potential mines that could reopen under a higher gold price regime. We view Bema as a buy here with excellent leverage to the gold price from a portfolio of development mines and a strong cash position of $30 million.

Cambior Inc.
Cambior reported a loss in the fourth quarter due to lower production. Last year, Cambior produced 560,000 ounces and should produce 520,000 ounces this year as Omai winds down. Doyon continues to be plagued with high costs and Sleeping Giant's (50% owned) shaft-deepening feasibility study will be out shortly. Cambior unwisely increased their hedges to 1.3 million ounces, which was 300,000 ounces more than they promised the Street. Cambior appears to have given lip service to reducing its hedge book and the purchase of over 115,000 ounces has caused a credibility problem for management at a time when they appeared to have recaptured credibility following the hedging disaster of a few years ago. Management just doesn't get it. Based on the current hedge book, the bulk of the company's production is hedged for the next few years and thus there is no upside for investors. Given management's credibility problems, a declining production profile and concerns over whether Gros Rosebel in Suriname is a satisfactory replacement for Omai, we believe that the shares should be sold. Cambior is "dead money" until the current management is changed by shareholders.

Crystallex International Corporation
Crystallex is continuing work at the 100% owned Las Cristinas gold project in Venezuela. The company has retained Mine Development Associates (MDA) of Reno Nevada to update and develop a mine plan. Crystallex also added experienced mine developer, Ken Thomas to its senior management team. Earlier a three-phased program was contemplated but we expect a two-phase program to develop the 10 million ounce deposit. While Placer had earlier planned to mine the saprolite, it appears that there is much more transition ore and thus Crystallex is looking at a higher output plan. We believe that Crystallex's Las Cristinas is a high quality gold deposit for any of the majors and continue to recommend the shares. Indeed, Crystallex shares today are trading lower than when they were awarded the Las Cristinas project. As current levels, the risk reward is limited.

Eldorado Gold Corp.
Eldorado results were in line with expectations. Eldorado should produce the identical amount of ounces this year as last year. Earlier we had expected the Brumal satellite deposit to contribute feed to Eldorado's Sao Bento complex, but it appears that more work is required. Eldorado has conducted a development program at Sao Bento and is considering a shaft deepening program to access deeper ore. At Kisladag in Turkey, the company estimated a resource of almost 8 million ounces and a full bankable feasibility study is scheduled in March. At Kisladag, the company has submitted its environmental impact study and is waiting. We expect Eldorado to begin construction this year and we continue to recommend the shares. Eldorado is a quality junior producer and with the Kisladag development, the stock would be an ideal takeover candidate now that GoldFields has reduced its interest.

Goldcorp Inc.
Goldcorp reported excellent results due to a solid contribution from the crown jewel, Red Lake Mine. Exploration extended the reserves of the high-grade zone (HGZ) and drilling supports developments to the east. Goldcorp at long last announced the go-ahead to build another shaft to a depth of 7,150 feet with the capacity of 4,000 tonnes per day. The mill capacity will also be increased to 1,000 tonnes per day, allowing Goldcorp to produce over 700,000 ounces after completion of the expansion. The total cost of the project will be funded from cash flow, and Goldcorp expects this will cost almost $85 million. Goldcorp has an excellent balance sheet with cash and short-term investments at $260 million. Goldcorp's gold holdings now stand at 196,000 ounces in inventory due to withholding 10% of its production and purchasing physical gold in the open market, Rob McEwen correctly believes that not only is gold a good investment but gold is money. The company is in excellent financial shape with no debt, no hedges and an excellent production profile. Goldcorp will spend $12 million on exploration and the new shaft will allow higher output and production efficiencies. As such, we continue to recommend the shares for a potential doubling in share price.

High River Gold Mines
High River reported results in line with expectations and produced almost 140,000 ounces at a total cash cost $194 per ounce. High River has a fifty percent joint-venture interest in the New Britannia mine in Manitoba with Kinross as the other shareholder. High River also holds an almost 56% equity interest in JSC Buryatzolto, which owns and operates two gold mines in southern Siberia, Russia. Last year High River increased its interest in "Bury" to consolidate its results and connected the 86-kilometer power line, which significantly reduced operating costs. High River is in midst of developing the Berezitovoye gold project, also in Russia. Japanese-based Jipangu has liquidated its investment to be replaced by Harmony of South Africa.

IAMGOLD Inc.
IAMGOLD has successfully merged with Repadre and should produce over 420,000 ounces this year. With royalty and investment income, the company has excellent cash flow and an array of assets that provides good leverage to the gold price. IAMGOLD has equity interests in four African mines and with Joe Conway and Paul Olmsted coming over from Repadre, the company has excellent management. With a solid balance sheet and cash flow from the royalties, which includes the Diavik diamond royalty, the company is poised to join the second tier group of companies. We expect an upward revaluation and recommend the shares here.

Kinross Gold Corporation
After lengthy delays due to regulatory barriers, Kinross successfully completed its threeway merger with Echo Bay Mines Ltd and TVX Gold Inc. Kinross will produce over 2 million ounces and like Agnico-Eagle has a number of potential mines in its inventory. Kinross plans to spend about $50 million on reopening the Refugio deposit in Chile, the Birkachan deposit in Russia and the Emanuel Creek deposit near Kettle River which will add about 350,000 ounces a year. Now that the Kubaka mine in Russia has resolved its ownership interest, we expect Kinross to aggressively develop the Birkachan discovery, which will add another 150,000 ounces next year. Kinross has over 300 million shares on a pro-forma basis and is one of the few senior North American gold producers with a strict non-hedging policy. Kinross operates and maintains joint venture interests in over twelve gold mines located on four continents. Now that the merger is finally consummated, Kinross will again begin consolidating the gold industry - can Hemlo be far behind? We continue to recommend the purchase of Kinross shares.

Placer Dome Inc.
At long last Placer Dome completed the takeover of AurionGold of Australia. Placer's management has been busy reducing exposure from AurionGold's hedge book but the hedge book is still at a lofty 24 percent of reserves at 12.6 million ounces representing almost 3.6 years of hedged production. We continue to believe that the combined hedge book is still too large, which will hurt Placer's share performance.

Meanwhile Placer has clawed back the seventy percent interest in Donlin Creek in western Alaska from its joint venture partner NovaGold Resources. Placer is committed to spend $30 million towards a feasibility study by 2005 and develop the isolated deposit. Donlin Creek was a former Placer project but infrastructure and grades will keep the capital costs high. Power and environmental issues must be resolved and the $600 million dollar project will not be completed until 2007. On the other hand, at Pueblo Viejo in the Dominican Republic, Placer is working on a full feasibility study to see whether it can reopen the former mine by early 2005. Placer is talking about bio-leach technology to extract the 16 million ounces from the sulphide ores, but so far there has been very little information. Pueblo Viejo is an excellent project but metallurgy is more important than reserves here. At Placer's South Deep project, there seems to be an ongoing dispute with its partner and Harmony Mines next door, reminding investors just how difficult it is to operate in South Africa.

Placer reported disappointing results reflecting hedging losses and higher costs. Placer is accident-prone and together with the heavy hedge book, overly large exposure to South Africa and a dysfunctional decision-making style. Moreover with almost two-thirds of their production from only four of their fourteen mines, we see little growth potential. Recently the company announced plans to spend $33 million at its Zaldivar copper mine in northern Chile - whatever happened to the "pure gold" mantra? We rate the shares a sell here, particularly when one of the most exciting announcement was about a "fuelless" underground vehicle.