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Sharp Increase in Physical Demand for Gold

19th September 2001
In the week following the terrorist attacks on the USA, gold prices have been sharply up. We believe this is due to two factors:-

Physical Demand
The demand for krugerrands and sovereigns has been increased considerably. Many investors appear to be switching quite large amounts from cash or other investments into gold coins. Amounts range from under £1,000 to over £100,000. Many of the buyers appear to have undertaken considerable research into investments. If not professional investors, then they are certainly serious amateurs.

Change in Sentiment
It's perhaps too early to know for certain, but we believe that market sentiment may have been altered significantly by last week's events. We do not suggest that people are buying gold because of the terrorist attacks, but because they have received a wake-up call to the vulnerability of equities and major currencies. If this is correct, then we think that whatever the price movements during the next few weeks, then gold demand will continue.

It has been fashionable, since the gold price peaked in 1974 - 1980 to disregard gold as an investment. Most of the comments by the financial press in this period concentrate on the gold price decline since 1974. While this may be accurate, it ignores the huge leap in prices from $35 to $850 per ounce which preceded it. On any kind of intelligent and balanced analysis, this should be taken into account. If gold had peaked not at $850 but at $450 or $350, most of this negative comment would never have appeared. Most experienced investors know that major price swings in either direction get overdone, and eventually correct themselves. Although it is sensible to be aware of new developments in investing, we believe that logic makes a better basis for investment than fashion.

Short Term
Gold prices over the next few weeks may well depend on news of American military action against terrorists. If there is a major attack by either side, we expect to see a sharp increase in demand and higher prices. We would hesitate to suggest a maximum level. If events point towards caution and resolution of conflicts, then gold may retrace its steps by $15 to $20 to pre-attack levels. It may be a pure guess whether to jump in now, or wait to see if it can be bought at lower prices soon.

Increased Premium on Krugerrands
Today we increased our selling premium on krugerrands in larger quantities, adding 1% from 3.5 to 4.5% on lots of 100+, with smaller increases on smaller quantities. This reflects the shift in supply and demand levels, and the fact that surplus stocks of krugerrands have shrunk rapidly.

Lower Premium on Sovereigns
On larger quantities of sovereigns, we have trimmed our selling premiums slightly, especially on specified types, although "Our Choice" of type and date continues to be the best buy in our opinion.
Our premium on 500+ sovereigns is now at 4.5%, exactly the same as for 100+ krugerrands, while our 1,000+ rate on sovereigns is even lower at 4%. Combined with their smaller size, we believe that, for the present, sovereigns remain an even better buy than krugerrands.

Historic Premiums
Long before krugerrands were invented, we used to sell sovereigns at £4 each, £37.10s. per 10, £365 per hundred, and £3,500 per thousand. From memory, these price represented premiums of around 30 to 40%. In the last quarter of 1999, we were buyers of krugerrands at up to 4% premium, and of sovereigns at up to 10%. There were special circumstances, but we believe that those premiums represent a fair measure of the true respective value of sovereigns against krugerrands.

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