The gold price has fallen 10% from its $670/oz peak in the quarter to $600/oz at quarter end. This, together with some stock-specific influences, saw the gold index decline by 14% for the quarter, compared to the gains of the Basic Materials (2%) and All Share (6%) Indices. However, the concurrent weakening of the rand has actually resulted in the price received by gold mining companies staying close to the record of R150 000/kg.
One of the key events this quarter was Gold Fields' proposal to buy Barricks' 50% stake in South Deep and its intention to acquire Western Areas, which holds the other 50%. The longer term benefits for Gold Fields include synergies and access to large, long life, low-cost reserves.
Another key milestone to observe is the Washington Accord - the agreement by a large number of the world's central banks to limit gold sales. According to this agreement, they will only sell up to a maximum amount of 500 tons in a year to September. We are waiting for the official data of how much has been sold, but current estimates suggest that they are well behind this target. This could be interpreted as a shift in attitude by central banks towards the yellow metal. This would be very bullish news as their sales have been a major negative force in recent years.
Finally, the rand/gold price, at close to the R150 000/kg mark, will provide more than enough breathing space for the SA mines, which have been plagued by falling grades and rising costs. While their Q2 results were showing improvements, we could expect substantially better results for Q3.

The quarter saw gold break multi-year record highs when it touched $725/oz in May. The precious metal's climb to the top was driven by tensions brought about by Iran's nuclear programme and a weaker US dollar. The relationship between the dollar and the gold price, which broke down in late 2005, was restored in 2006, becoming even more pronounced during the second quarter of this year.

During the period, the World Gold Council published data that showed demand for gold jewellery had fallen 22% in tonnage terms, with India experiencing as much as a 38% decline on the previous year's levels. Such news, coupled with a resurgent US dollar, led to the fall in the gold price. However, investment demand provided some support and we saw gold recover from a low of $568/oz during the quarter to the end of June at above $600/oz.

The rand gold price followed a similar pattern, starting the quarter at R115 734/kg, peaked at R143 364/kg in May and then retreated to R124 808/kg in June. However, as the currency weakened during an emerging market sell-off, the rand gold price climbed back above R135 000/kg. At these levels, we expect South African gold producers to show satisfactory profits and to be cash positive at the operational level. Unfortunately, the shares have lagged the rand gold price, but of late they have started to catch up.

The gold price continues to rise. After a pause during February and early March, the yellow metal powered ahead again later in the month and recorded a new 25-year-high of $584/oz by the end of the quarter. This is driven by very positive fundamentals, with strong economic growth in the key markets of India and the Middle East, falling global mine supply, a lack of projects following a decade of under investment in exploration and development, and speculation of a change in central bank attitude towards gold. While we feel that gold shares are expensive and discounting much of the upside already, we have little doubt that share prices will rise further if the price of the yellow metal continues to rise.

The year ended on a strong note, with the fund gaining nearly 8% during the final month alone. This brings the total return for the calendar year 2005 to well over 55%.

December saw further excitement in the gold market as the yellow metal reached a new 24-year high of just below $540/oz before easing back somewhat towards the end of the month. Gold rose some 20% during 2005 and has more than doubled from its low of $250/oz reached back in 2001.

Most metal analysts that we monitor are bullish on gold going into 2006. However, one should take note of their poor track record in predicting the metal's fortunes. In spite of intensive analysis of the supply and demand fundamentals, none of them predicted prices anywhere near current levels. Year-end gold prices were forecast to range between $415 and $465/oz according to forecasts made at the beginning of 2005. Those analysts at the upper end of the range typically anticipated a weaker dollar, which also did not pan out. Instead, gold has broken away from its long term relationship with the trade-weighted US dollar. This phenomenon is drawing a lot of attention at the moment, especially from the hedge funds. Together with rumours about a change in central bank attitude towards gold, it has led to substantial speculative activity taking place at this point in time, which makes forecasting very tricky in the short term indeed.