Global Watch - The Gold Forecaster
Indian Demand/Western Areas - The Price of Hedging!

Julian D.W. Phillips
Oct 31, 2005

Excerpts from the "Global Watch - The Gold Forecaster."

Indian Demand this week
No the Indian market is not yet happy with the present gold price and has stayed out of the international market, according to Daman from India. He gave us this report: -

Indian Diwali sales are now officially declared to be their dullest best in last 9 years of Diwali months. The festival of Diwali, itself, is on the 1st of November, next week.

The State Trading Corporation, an authorized Gold Importer, has just filed NIL returns for Gold turnover for September and will repeat the same NIL for October, if nothing happens in next 3 days. To give you perspective on this, this organization imported 20 to 30 tonnes a month in the last 6/7 years during these Diwali months.

Certainly, the second half of 2005, like 2004, is a poor period for gold importing in India! It was this time last year that the gold price rose internationally and the discount at which the Indian market could buy [due to interest arbitrage] disappeared. This year the lull can be attributed to high international gold prices not being accepted yet by the Indian market. On top of this the Rupee itself is down 2% over the recent months, adding to the Rupee cost of gold.

Stable prices holding their ground until they are thought of as cheap attract the biggest volume of buyers in India. It's all a matter of timing!

Western Areas - The Price of Hedging!
Western Areas has just reported just how bad poor hedging of future production can knock the income of a mine and how currencies can move against what appeared to be a prudent policy at the time.

65% of their production of 62,000 ounces of gold has been sold at $292 an ounce and the balance at the spot market price, in the last quarter.

The hedging loss on its own was R51 million loss on the call options. In addition there's an option premium payable, which is around $5 million a quarter. This will rise next year and the year after, by a small amount. All in all, the position looks tenuous because of hedging. However, with the plans they have, IF the gold price holds or rises and IF the Rand holds its present levels or falls, the mine will turn the corner in 18 to 30 months time! In real prices this means that Western Areas made a loss of R13 million, instead of a profit of R50 million. This same opportunity cost may well not be so stark at other mines but it is growing by the day and in many cases will be greeted with some shock.

As the gold price rises, most hedged positions of future gold production are delivered to the other side of the hedge the Bullion banks. The perception this gives is that the loss is not one purposely taken, but an inevitable earning of less income because the price of gold rose since the hedge was established. But when the gold price rises as much as it has in the last year or so, the opportunity cost rises alongside it. As you can see from the above, this can look horrendous and threaten the continuation of the operation. We expect the rise in the gold price to continue. This will exert heavy pressure on the Producers with outstanding hedged positions to unwind them or face embarrassment over this policy of hedging. After all prudence may well not be good management in this rapidly changing world. Fortunately most producers have had an aggressive policy of de-Hedging, so the fair lady may be caught despite the faint hearts?

Having said that, Western Areas is looking at the worst picture it can at the moment. It is a tremendous mine [South Deep operation in particular], tightly held between J.C.I. and Allan Gray [an Investment house of good repute], so the remaining shares will react quickly to good news [and not so badly to bad!]. This could be a good time to buy some on a two-year + view!

Oct 28, 2005
Julian D.W. Phillips

321gold Inc