JANUARY 2007

Precious Metals Forecast 2007
Contents Gold Silver Platinum Palladium Rhodium Page 1 Page 7 Page 10 Page 12 Page 14

Executive Summary • After the excessive gains in H1 2006, prices have been broadly consolidating. • Concern is now focussed on how the financial markets will cope with a slowdown in US economy and a likely weakening of the dollar. • How will foreign creditors react to this, will they reduce their dollar holdings? • Industrial demand for precious metals is sound and new high- tech applications should provide good ongoing demand and support for prices. • But above all investment interest is likely to remain the bullish factor.

Gold
Introduction The bull market in Gold started to accelerate when prices rose above $460/oz in September 2005. The rally was seen across the commodities and was mainly driven by aggressive fund buying. Between September 2005 and the end of January 2006, prices rose 25%, but after a short pause in Q1 06, the rally accelerated again. Indeed the March to May 2006 rally saw prices rise from $533/oz to $730/oz, a 37% increase. The move was spectacular, but there was little doubt that the rally had also run ahead of itself and the

gains would not be sustainable. As it turned out, the speed and extent of the increase seemed to unnerve even those involved in it, which led to a sharp sell-off as funds reduced exposure across the markets. This led to a 25% correction back to $543/oz and signalled the end of a phase of the rally that had up until then been almost a one-way-bet. If the first part of the year was a one-way bet, the second half was characterised by volatile gyrations as the market tried to consolidate. This led to an extended period of sideways trading in a wide range between $540/oz and $680/oz. The price oscillations have, however, created opportunities for all sectors of the market, with good trade and investment buying seen into the dips below $600/oz, while the rallies have provided range trading opportunities for the more speculative element of the market. As we approach year-end, it looks as though a base is now in place below $600/oz and the market has set its sights on the upside again. Although prices will first have to climb up through considerable supply as seen by the horizontal lines on the Chart on page 1. The Big Picture In recent years the global economy as been pumped full of money to the extent that the financial markets are awash with liquidity. The process really started in the late 1990’s when Japan spent vast sums of money on public works projects. Their aim was to keep the economy afloat, to counteract the effects of deflation and for most of this time interest rates were also kept around zero percent. However the impact of this was not restricted to Japan as financial institutions put on carry trades whereby investors borrowed yen and converted these into dollars to then invest in dollar based assets. This enabled Japan’s abundant liquidity to be utilised in other markets and it soon became a major factor in the rapid expansion of the hedge fund industry. The second source of liquidity came from the US itself, where each sign of trouble or crisis was met by the authorities throwing money at the problem while at the same time easing monetary and fiscal policies. This happened after the Asian crisis, the LTCM financial emergency, the dot.com bubble and 9/11. In addition to years of ultra loose monetary policy, government spending has risen dramatically as the treasury has had to finance the Iraq war, the war on terrorism and ho meland security. While at the same time consumers have been given tax cuts as well as incentives to boost disposable income by remortgaging their ho mes. All this has kept global growth running at a fast pace, but the excess liquidity has created various bubbles along the way, the latest being the housing market. How will the market cope in a downturn? These government policies and the resulting trade and financial flows have created a host of financial imbalances and debt that at some stage will have to be unwound and paid back. When times are good, debt and the pressures caused by trade imbalances can be lived with, but the concern is how will the markets cope once economic growth starts to struggle. Can US households service their debt in an economic slowdown or will high debt repayments drag down consumer spending, corporate profits and the dollar? Another potential complication is that as much of the debt is owned by foreign central banks and investors, will a weaker dollar get even weaker as foreign investors liquidate their US assets? Related, but a separate issue is the growing concern over just how big the derivatives market has become, the number of hedge funds operating in it and how the system will cope in another financial crisis. Given these risks, it is understandable that Gold has become more sought after as a form of insurance within portfolios.
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Indeed you could argue that the imbalances have got to such a level that the macroeconomic status quo may have to change. This is especially so if you consider that the US may no longer have quite as much control over the dollar now that there are so many foreign holders of their debt. US creditors Although China leads the list of central bank creditors owning some $988bn of reserves out of the $2.7tln owned by the top ten Asian central banks, there is another major group of US debt holders, notably the world’s oil exporters. Indeed whereas China’s current account surplus is running at around $215bn this year, the oil exporting economies are likely to see a current account surplus of around $500bn. Out of this, $280bn is from Middle East countries where most of petrodollars end up in large state investment funds that can invest as they please. Indeed with much of the petrodollars being traded through Western intermediaries, they can buy and sell assets very secretively. This is a potential problem area for the dollar as this is one group of investors who could diversify away from the dollar with few political strings attached. In summary the big pic ture outlook suggests there is considerable risk of financial change, which could have meaningful implications for growth and the dollar. Above all it could lead to some tense situations that are likely to create volatility within the markets. In such an environment we feel Gold will remain highly sought after.

Factors driving Gold prices The dollar - As already mentioned, the run up in Gold prices into the May peak were largely driven by investment buying, which in turn was fuelled by amongst other things dollar weakness. As the Chart shows, between April and mid-May the dollar index fell from 90 to 83.6. Indeed the inverse relationship between Gold and the dollar has been strong throughout 2006. With the dollar index now below the May lows, the price of Gold is still some $100/oz below the May peak. This suggests Gold may have some catching up to do. Indeed in a recent ScotiaMocatta survey the impact of the dollar ranked the highest factor likely to determine Gold prices over the next twelve months. De-hedging – After a slowdown in de-hedging in 2005 when only 131 tonnes were removed from the delta-adjusted hedge book, the first three quarters of 2006 have seen some 390 tonnes taken-off. This is expected to reach 460 tonnes by year-end. Considering this represents some 11% of annual demand, this remains an important feature of the market. At the end of Q3 06 the outstanding hedge book

Producer de-hedging 500 tonnes 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 estimate 400

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stood at 1,350 tonnes so there is considerable room for further declines. Indeed it is thought that ongoing efforts to reduce the hedge book are likely to provide support to prices into any weakness.

Central Bank Official Sales - Offsetting the impact of de-hedging was the ongoing official sales made under the Central Bank Gold Agreement (CBGA). However the level of sales in the CBGA year ending September 26 was 393 tonnes, this was 107 tonnes short of the expected 500 tonnes that the CBGA allows for each year. The reason why the full amount was not sold was because Germany did not sell its full quota. However, Official sales are expected to return to the 500 tonne level in 2007 as Germany has again said it would allow other CBGA signatories to take up its allocation and more may do so this time. Central Bank diversification - Whereas numerous European banks have been selling Gold, other central banks are looking to diversify their dollar reserves into other currencies and assets. Italy has reduced its dollar holdings in favour of sterling, Japan has cut the amount of US treasuries it holds and the UAE is looking to reduce its dollar reserves by 10% in favour of the euro and sterling. Other central banks are considering similar moves, but most worrying is China’s more vocal warnings that Asia’s central banks are at risk from a falling dollar. However, as they are heavily tied into the dollar any move to sell dollars would be counter productive. More likely they will keep current dollar reserves, but going forward will add assets denominated in other currencies. Whether this includes Gold and other metals remains to be seen. Although, it is difficult to imagine central banks buying Gold in the open market as the market would not be big enough to furnish such one for one swaps. That said, this would not prevent central banks doing offmarket swaps with other central banks or institutions such as the IMF. Even though central banks’ diversification is unlikely to include Gold, it is still bullish as a shift away from supporting the dollar would on its own be bullish for Gold. Oil – Oil and Gold prices have been following each other quite closely for most of 2006. Although rises and falls in oil prices tend to see similar moves in Gold, it can be seen that Gold prices can also rise if oil prices are flat. This was most noticeable in October and November, when oil was flat, but Gold was able to rally. Again the recent ScotiaMocatta survey put energy prices as the second most important factor likely to affect Gold prices. The outlook for oil in 2007 is one of more stable prices, as with better levels of spare capacity; the threat of higher prices should be less. That is of course as long as there are no geopolitical events that threaten oil supply. However a steady oil price around $60’s/barrel could still provide a bullish environment for Gold. Jewellery demand – The high prices at the end of 2005 and then the run up in price from mid-March 2006, hit demand from jewellery manufacturers hard. In the first seven months of 2006 Indian imports stood around 300t, down nearly 50% from the same period in 2005. Then the volatility in May and June kept buying at a low level as even though the sell-off was expected to see pent- up demand, the volatility ended up confusing the market. As a result, many operators simple missed the buying opportunity. Indeed the sell-off left many fabricators cash-struck and paralysed with out-of-the- money positions. In the end it
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took the start of the wedding and festival season in India in September to see demand pick-up. As this coincided with the second main sell-off of 2006, that saw prices fall back below $600/oz, it triggered exceptionally strong physical demand. As always, however, price volatility more than high prices hit jewellery demand and this is likely to remain the case. Indeed a certain amount of price appreciation is good for jewellery demand as in many regions jewellery is bought as a form of investment anyway. Investment demand gains market share in India - In the second half of 2006, there was a noticeable pick- up in demand in India for investment Gold in the form of kilobars and medallions. This took some of the shine off demand for basic jewellery, although demand for branded jewellery is growing. This trend is likely to continue, but in some ways may become more of a double edge sword as investment bars will be easier to sell back into the market when holders want to take profit. Political uncertainty - In 2006, there were numerous occasions when geopolitical tension ended up supporting Gold prices. These included the Hezbollah/Israel war, heightened tensions over Iran’s and North Korea’s nuclear ambitions and any event that threatened oil supply. However, although these have ongoing potential to impact prices, the market seems to be getting more complacent about these issues. On the surface this seems a dangerous attitude, but it may be due to the fact that many investors have already started to diversify their portfolios and therefore the knee-jerk reaction to buy Gold has diminished. Long term investment buying - The Gold ETF most exciting change over the past few 700 years has been the growth in the 600 Exchange Traded Funds (ETF). Indeed 500 400 the existence of ETFs has opened the 300 bullion market to a much larger potential 200 100 pool of investors. The Gold ETF’s 0 started in November 2004 and were relatively well established by the start of 2005 with 156 tonnes under management. By the end of 2005, this had grown to 365 tonnes, a rise of 134%, but by late December 2006, the total had risen another 65% to 602 tonnes. Even more interesting is the fact that the investments seem to be long term and that the various pull-backs in price have not led to a mass of redemptions. Indeed the opposite tends to be true, with weaker prices attracting a pick-up in ETF buying. Corresponding with the latest down turn in the dollar, it was interesting to note that the US demand for the ETF was particularly strong. This is not so surprising considering Gold is a convenient way for US investors to diversify against weakness in their own currency. The outlook for investment buying remains healthy at both the institutional and retail levels. Numerous financial institutions continue to announce they are launching commodities funds and while the trend is now well underway in the US and Europe, it is unlikely to be too long before the massive Japanese financial institutions and pension funds start getting interested too. As if often noted, given the relative small size of the commodity markets and the huge size of the assets under management in the world’s financial institutions, even a small shift into commodities can have a huge impact on prices.
tonnes Feb-05 May-05 Feb-06 May-06 Nov-04 Nov-05 Aug-05

The Futures market - In contrast to 2005 that saw the overall trend in the net fund position on COMEX trend higher, albeit in a volatile manner, 2006 has seen less volatility but has also seen the market becoming less bullish. This might indicate that some of the long interest has shifted to the more stable ETF environment, but also the fact that prices
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Aug-06

Nov-06

have spent the second half of the year moving sideways is also a less than perfect environment for systematic funds. In tonnage terms, the early days of the bull run in 2001 and 2002, the net long fund position moved from around 109 tonnes in 2002, to 375 tonnes at the start of 2005 and to a record 530 tonnes at the peak in October 2005. It has now fallen back to around 255 tonnes, which suggests there is more room for fund buying if the right environment unfolds again.

CFTC Net Long Fund Position
200
Contracts (000)

160 120 80 40

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 05 05 05 05 05 05 06 06 06 06 06 06

Supply Since the late 1990’s, Gold mine output has been fairly level around 2,500 tonnes, with production tending to fall in North America, Australia and South Africa, but rise in a host of countries including Indonesia, Peru and Russia, while at the same time considerable consolidation has been going on amongst the large producers. As has been the case across all metals, falling ore grades and shortages of men and machinery ha ve frustrated mine output. In addition, the Gold price producers have received when converted into their local currencies has been affected by the weak dollar, which in turn has cut into their margins and has in many cases reduced their incentive to step up production and exploration.

In 2006, output is expected to reach 2,525 tonnes, slightly higher than the 2,519 tonnes achieved in 2005. However, when this production is taken into account with the level of de-hedging, total supply from mining will be considerably lower than in 2005. After net new production of 2,388t in 2005, only some 2,065 tonnes is likely to reach the market in 2006. However, despite this, the physical market has experienced no shortage of metal, with the London market remaining well supplied. Scrap Supply from scrap has picked up in 2006 and is likely to reach levels last seen in the late 1990’s when scrap surged out of Asia during the Asian financial crisis. Some 1,100 tonnes of scrap is expected in 2006, but as is often the case after a surge in scrap supply, the market is left fairly dry until prices run up to yet another high level. As such, 2007 may well see the level of scrap fall back toward the 850 tonne level that it has tended to average in recent years. Technical Outlook After the spike higher in the summer, Gold prices have been consolidating in a broad and choppy range between $560/oz and more lately $650/oz. At the time of writing in mid-December, price are consolidating having been turned away from $650/oz, and are testing the 100 and 200 day moving averages around $615/oz. Good support is expected around this area, but should prices fall back to below the
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moving averages then good scale down buying would be expected below $600/oz and especially around the long term up trend line around $585/oz. Conversely a rebound that starts to gather pace above $638/oz would be expected to rechallenge $650/oz and then $676/oz. A breach of the latter would then retarget the 2006 highs above $730/oz, which would then bring into range the record highs above $800/oz. Forecast & Conclusion Overall the trends in the Gold market that have been influencing prices over the past few years are expected to continue. These include concerns over dollar weakness and the state of the US economy, the level of geopolitical unrest and how this could impact oil prices and the potential for investment interest to carry on growing. Out of these, the greatest concern is now focussed on how a slowdown in the US economy will affect the dollar and the mass of investments that are dollar based. With the rapid expansion in hedge funds, combined with the asset price acceleration over the past few years, the financial markets could be in for a volatile time. As such we feel the Gold will play and increasingly important part in the financial markets in the year ahead. This is especially so now that the ETF has opened the Gold market up to a much larger pool of potential investors. Overall therefore now that the excessive gains from the March to May rally have been consolidated, it looks as though Gold prices are trending higher again. As such dips are expected to attract good buying interest from investors and trade buyers and we feel the up trend will resume. Although there is likely to be considerable resistance on the way up, we feel that prices will trade back above $700/oz again next year and may even spike over $800/oz. However for this to happen would require the dollar to weaken significantly, but an economic slowdown may be the trigger that brings that on. Over the past six years the average percentage gain from one year’s high to the next has been 19%. If this trend continues then it would mean prices reaching $868/oz. Overall we expect trading to spend most of 2007 in the $590/oz to $750/oz range, although spikes above $750/oz would not be out of the question. Silver Outlook Silver has had a rollercoaster ride in 2006 with the increased volatility spurred by investor trading. Having ended 2005 at $8.80/oz, prices had already risen to a 23 year high of $14.68/oz by April, they then fell 21% to $11.70/oz only to rally 31% to set fresh highs at $15.25/oz by mid-May. They then fell again, this time by 37%, to $9.50/oz in early June. Since the June sell-off prices have trended higher again, although there have been numerous rapid sell-offs along the way. Whereas fund buying has been responsible for pushing the rallies, trade and investor buying have provided support into the dips. Indeed despite the higher prices and the increased volatility, fabrication demand is expected to only fall by some 3% during 2006. Considering the ongoing decline of the photographic industry, the overall fabrication demand for Silver has remained very robust. The ETF is launched The early acceleration in Silver prices was on the back of the planned launch of the Silver ETF. Knowing the ETF would have to buy Silver, hedge funds and alike, bought ahead of its launch. The gyrations in April and May were then the result of good two-way trading that saw funds take profits while the ETF bought their start-up allocation. Not surprisingly the
Silver ETF tonnes 4000 3500 3000 2500 2000 12-May 12-Sep 12-Oct 12-Jun 12-Jul 12-Nov 12-Aug 12-Dec

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general sell-off across the commodities at the end of May hit Silver hard, mainly because there had been so much new speculative activity in the early part of the year. However, once the market had consolidated, the ETF saw steady buying with close to 3,500 tonnes now under management and the level of redemptions has been light. Indeed it is thought Silver’s outperformance compared with Gold in recent months, has a lot to do with the view that Gold had already seen a lot of long term investors get on board over the past few years and therefore the market is already heavily long. This is highlighted by the overall down trend in the Gold / Silver ratio over the year. However, the recent filling with the SEC to register new shares for the ETF could in effect double the amount of Silver that could be bought. This is likely to provide ongoing investment support for Silver. Changing trends in physical demand Despite the higher prices in 2006, which are running some 55% above 2005 levels, fabrication demand for Silver is only forecast to fall some 3%, which goes to show how price inelastic fabrication demand is. Indeed, industrial demand, which accounts for around half of total demand, is even expected to pick-up by around 1% in 2006. The fact that industrial demand is picking up despite an 11% secular decline in photography, highlights the fact that other sectors of industrial demand are strong. New applications Silver has in recent years found a host of new applications. Plasma TV / display screens can use up to 1oz of Silver per screen, smart tags are being used instead of bar codes, glass can be treated with a double layer of Silver to reflect the sun’s heat and there are numerous high-tech applications across the pharmaceutical, electrical and water purification industries. One of the biggest new uses, however, is solder. In 2005, 1,316 tonnes of Silver was used in solder and brazing, which was up 8% yoy, after annual increases of 3.2% and 1.7% in the preceding years. This suggests the rate of growth is almost doubling each year. Many of these new applications are only just becoming commercially available and although only tiny amounts are used per item, the market for these applications is truly global and is expected to spread fast. Although industrial demand for Silver is likely to suffer in an economic slowdown, the fact that Silver is finding so many new high-tech applications means it will be somewhat cushioned by a slowdown. Jewellery demand suffers World wide jewellery demand has not surprisingly been hit by the high and volatile prices, which at times have pushed consumers to the sidelines. But the volatile price has also provided numerous cheap buying opportunities. However, with other precious metals also trading at high prices the profit margin on Silver remains relatively high. India is the main exception and a powerful exception at that, where price volatility always hits demand, but there also has been a shift from demand for jewellery to investment demand where bars are becoming more popular. Overall therefore jewellery demand is expected to fall 10% in 2006, but we do not think this is the start of a trend. Indeed jewellery demand for Silver globally is likely to hold up well as a growing middle class demand more luxury items, which should suit Silver jewellery well in months ahead.
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Supply Mine output was relatively unchanged in 2006 with production increasing about 125 tonnes, which is less than 1%. Production difficulties, with prolonged strikes in the copper industry, low ore grades in Australia’s lead and zinc mines and delays at commissioning new base metal mines, have impacted the amount of Silver output. However, over the next few years mine output is expected to rise faster as new mines come on stream. In 2007, Silver production is expected to rise by some 500 tonnes as new lead, zinc and copper mines are commissioned and as a number of primary silver mines in Latin America startup. In addition, scrap supply has suffered in 2006 and is expected to suffer further in 2007. The 3% increase in 2005 was mainly on the back of an increase in scrap from India as government sales picked- up and on the back of distress selling by farmers affected by flooding. At first sight the fall in scrap supply going forward seems surprising considering the high prices, but diminishing use of Silver in photography is having a follow through impact on scrap generation from this industry. Balance After years of seeing Silver in a supply / demand deficit, the past three years have seen a growing surplus, but despite this the market has been in an exceptionally bullish mood. In a nutshell this is down to the healthy pick-up in investor interest and we see this continuing in 2007 as the global financial markets are likely to go through some turbulent times. Indeed while the surplus remains relatively small investor buying is likely to soak up the surplus. In addition, the level of Official sales is expected to decline as governments have in most cases depleted their stocks. Also with central banks looking to diversify out of their dollar holdings it would not be out of the question to see some Official buying of Silver, especially as the Gold market on its own is too small in this respect. Technical The Silver Chart has been looking bullish with prices climbing above the September high. The break down from the strong up channel looks worrying, but in the grand scale of things it has not done any real long term damage. If prices can now consolidate and work higher then a return to the May highs would not be hard to envisage. Indeed purely on a technical basis the break up above the September highs would provide a rough target of around $16.25/oz. Conclusion and Forecast Silver has put in a volatile but overall bullish 2006 and we expect more of the same in 2007. Fabrication demand has held up well considering the price movements and although more supply is expected next year, this will likely be offset by a lower level of Official sales and scrap, and ongoing high levels of investment demand. In turn this may well send prices considerably higher. However in order to see such an environment unfold
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investment buying is going to have to expand. This is only likely if the dollar looks set to weaken further, but we feel this is inevitable at some stage. Although this implies slower economic growth, we expect Silver to get off quite lightly as it is seeing its industrial demand rise from a host of new applications that may well cushion it against an economic slowdown. In addition, as the financial markets could get quite volatile if the dollar does extend its losses, we feel that demand for Gold and Silver will increase significantly and that the ETFs will help in this respect. In the near term, prices are expected to consolidate the sell-off that started in midDecember. Lower prices are expected to spur further investor demand and that in turn should see prices run higher to rechallenge the $14/oz level and move on to test the summer highs at $15.25/oz. In a bullish environment it would not be hard to see prices spike higher above $16/oz.

Platinum Outlook Like the other precious metals, Platinum started 2006 by trading sideways until March, when a strong rally got underway. This rally was not unique to Platinum; it was being seen across all the commodities and was primarily driven by fund buying. Although Platinum prices were already at a high level, the new buying seemed confident that higher prices could be sustained as Platinum was once again set to see a supply deficit in 2006. Prices hit a peak in May at $1,335/oz and sold off along with all the commodities into June, but then rallied to trade in a broad sideways range over the summer between $1,200/oz and $1,290/oz. However in early September the outlook started to shift to a less bullish stance as concerns rose that a slowdown in the US economy would hit demand for the metal, especially from the vehicle industry. Indeed Platinum was hit hard, which on the surface was surprising as it still had some of the best fundamentals, but because of that, it also had a large speculative following which turned out to be flighty. This seemed to be the reason why prices fell from $1270/oz to $1,120/oz during September before heading down to $1,055/oz in October. After consolidating between $1,100/oz and $1,050/oz over October, the metal took off again as rumours circulated that a Platinum ETF was to be launched. This sent the market into a buying frenzy that saw prices peak at fresh record highs at $1,400/oz , which led to extremely volatile trading and a pull-back to $1,100/oz by late December. During the spike, one month lease rates went up over 100% which suggests aggressive short-covering, although it could have been the result of producers forward selling to take advantage of the spike. Platinum’s fundamentals look strong as the demand outlook remains robust as its industrial uses continue to expand at a healthy rate of between 6% and 15% depending on application. It also has the reassurance that if prices fall below $1,000/oz jewellery demand should rise to the rescue. However, Platinum supply is expected to rise 4.5% in 2007 and if that coincides with slower global economic growth then the less buying pressure from investors may take the shine off prices. Indeed supply and demand on paper are likely to be more balanced in 2007, for the first time in eight years, so in theory lower prices than of late could be expected. However this is only true insomuch as it depends on at what prices jewellery demand kicks in again to absorb any surplus. Strong industrial demand to continue There is no doubt that Platinum’s industrial base is thriving with autocatalysts remaining in healthy demand with a rise of 15% likely in 2006. Considering this accounts for some 49% of Platinum consumption, this on its own is a sign of strength. Demand is expected to remain robust in 2007 even though a slowdown in economic activity is likely to hit unit
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sales in some regions, but as the use of catalytic converters is spreading geographically, overall demand is expected to grow by some 9% in 2007. In addition, some 26% of Platinum consumption is also tied up in other industrial applications, notably the glass, electronics, petroleum and chemical industries, and these are collectively growing at a steady 6% pa. Although these industries may suffer from an economic slowdown, as much of the technology the Platinum is being used in is new and advanced it is expected to be fairly well cushioned from a slowdown and is expected to see growth of around 3% in 2007. Jewellery demand may swing back into action Platinum jewellery once again acted as the swing factor in supply and demand and the high prices in 2006 are likely to see demand fall some 11% to 1.74 Moz. This is down from the 2002 level of 2.82 Moz. Indeed these figures not only show just how much Platinum jewellery has acted as the swing factor over recent years, but also show how much pent-up demand there may be if prices fall back to a level deemed attractive to the jewellery trade. This is especially so if you consider that consumers probably expect to pay higher prices now for Platinum and the size and affluence of the middle classes in China and Asia have no doubt expanded significantly since 2002. This means the jewellery buying may come in at a higher level tha n previously seen. Supply remains key Since 2000, supply has risen Platinum Supply & Demand on average by around 4.8% with the increase weighted 7500 more heavily in recent years 7000 as high prices has provided 6500 Supply incentive to maximise 6000 Consumption output. However, with South 5500 Africa providing the lion’s 5000 share of production, some 78%, its output has been affected by the exchange rate. When the South African Rand was appreciating in value against the dollar, which saw it fall from over R12 to R6 between 2002 and late 2004, it put tremendous pressure on producers who were receiving less rand for each ounce produced. In turn this put the brakes on production expansions. However over 2005 and 2006 the rand has moved back towards R8 and that has helped relieve some of the cost pressures. But during the recent bout of dollar weakness, the rand has strengthened to around R7 again, so production in South Africa could come under pressure again.
'000 oz 2000 2001 2002 2003 2004 2005 2006

Production in other regions is also expected to remain strong, with growth in North America expected to recover on the back of improved ore grades and another year of stable production is expected in Russia. Supply is also likely to be boosted from ongoing growth in autocatalyst recycling. Investment demand In the early part of the year the move by funds into precious and base metals seems unrelenting and this has had a large impact on the bullish state of the market up until May. For a long time Platinum’s fundamentals have looked constructive with a bias towards a deficit and this has made it an attractive investment. However the high prices in 2006 has seen investment metal return to the market, especially in Japan where the high price in yen attracted profit-taking. However on NYMEX the net fund long position has fallen from an average of just under 8,000 contracts in Q4 05, to an average of 4,200 contracts in H1 06
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2007

and to below 2,000 contracts in October 2006. This suggests a considerable reluctance by the funds to chase Platinum prices higher, especially now that the market is likely to be in balance. If a Platinum ETF were to be launched, which seems unlikely, then it would certainly improve access to this market and it would no doubt prove a sought after investment. Technical The Platinum chart shows how wild trading became in 2006, with prices racing away from the up trend line only to swing down to it on two occasions when trading became increasingly volatile. Indeed the spike to $1,400/oz looks like a bad tick, but it isn’t. Prices now look set to trade either side of the up trend line which should mean prices hold a range between around $1,000/oz and $1,200/oz. Any move above $1,260 is likely to run into good supply.

Platinum

Conclusion and Forecast Although the fundamentals for Platinum remain tight and any surplus metal produced is likely to be soaked up by the jewellery industry, the threat of a more balanced supply and demand situation is likely to deter investment buying. As this has been one of the key drivers underpinning strong prices in recent years, it may well be that prices now trade below the levels seen during 2006. However demand is expected to remain strong as geographical growth is likely to help counter any slowdown in demand as a result of slower economic growth. On the supply side, production is expected to rise at a level that more than offsets the rise in demand and that should see a market move back into balance or even a small surplus. However, the one aspect that is most likely to change this is a strong rand that could once again lead to production difficulties in South Africa. Given the outlook for the dollar this factor should not be underestimated. As such we expect Platinum to remain well supported and think that pent-up demand from the jewellery industry may well support prices at a higher level than has been seen in the past. In 2007 we expect a less volatile trading pattern with prices holding within the $950/oz to $1,400/oz range. Palladium Outlook Palladium has followed a similar pattern to Platinum although it has not been as volatile and it missed out on the November spike that hit Platinum. However considering the metal has been in supply surplus since 2001, it has performed very well. Indeed it is only in a supply surplus because of the additional sales Russia makes from stocks. Without this stock, new mine output, plus secondary supply would result in a supply deficit. This is worth bearing in mind and may well be the reason why long term funds have been so prepared to buy the surplus metal, hence prices have managed to perform as well as other metals that are in supply deficit. Indeed the outlook for Palladium is robust as the metal has in recent years seen strong demand from autocatalysts industry, which is likely to continue to see strong growth. In addition, its newly found use in jewellery is likely to remain a growth market as are its other industrial applications. On the supply side output is expected to grow at around 5%
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in 2007, but this is expected to be less than the increase in demand which is forecast to grow by closer to 8%. As such the outlook for Palladium looks positive, although it should be remembered that a large surplus has built up over the past five years that could be mobilised and is therefore likely to prevent prices from running away on the up side. Industrial outlook remains strong With autocatalysts accounting for roughly 50% of Palladium demand and with it having a huge price advantage over its sister metal, Platinum, we continue to expect demand to remain strong for Palladium. Although vehicle sales may suffer in the US, the geographical spread of environmental legislation, combined with the growing vehicle market in Asia is expected to see demand remain buoyant. Likewise in other industrial sectors demand is expected to remain strong, especially in electronics where performance are of paramount importance and the best materials are therefore needed. Having lost market share in the late 1990’s, Palladium’s relative stable price over the past five years, compared to Platinum, is gradually seeing it win back market share. Indeed the large stock levels are likely to be another source of comfort for consumers as it reduces the likelihood of a repeat of the spike to $1,000/oz that was seen in the late 1990’s. Jewellery demand - a growth industry High PGM prices continue to hit jewellery demand. Platinum jewellery demand is expected to fall 11% in 2006 yoy (down 38% from 2002 levels). High Palladium prices have also started to erode demand for Palladium jewellery, which is expected to fall 21% in 2006. However, with stronger Gold, Platinum and Silver prices, it would not be surprising to see Palladium jewellery demand make a rebound. It might be that 2006’s apparent fall in demand is a reflection of a slowdown in the build-up of working stock at jewellery manufacturers in China. Indeed demand for Palladium jewellery is still set to increase in Europe, North America and Japan, with all the fall being seen in Asia. Over the long run we expect Palladium to become increasingly important in the global jewellery industry, especially as it is a relatively new concept. Therefore 2007 is likely to see steady growth return. Supply Russia is the largest producer of Palladium with mine output running around 3.17 Moz, compared to South Africa’s output of 2.85 Moz, while North America is the third largest producer with production of around 0.96 Moz. However, on top of Russia production, the country is also exporting around 1.6 Moz of metal from stock. In 2007, Russian production is expected to remain level, whereas output in South Africa is expected to continue expanding at a similar rate to the 6% seen in 2006. However as noted with Platinum, a significant increase in the level of the rand could curb South African production, so this needs to be watched out for. However the level of Russian stock sales will remain the swing factor. Although Norilsk’s stocks are now thought to have been depleted, the government is estimated to have between 5 Moz and 10 Moz of stocks, which are likely to be sold in a responsible manner. Overall therefore, even though production is expected to increase in 2007, the level of total supply will be left in the hands of Russia and is therefore likely to be managed to avoid too big a surplus developing. Technical Palladium has been trading in a sideways range since after the May rally and the June sell-off. Prices are just holding above a long term up trend line but are likely

Palladium

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to breach it before too long. This suggests that the sideways trading zone between $300/oz and $355/oz is the important range at the moment. Outside that range good support is evident on the chart at the $270/oz level while supply above $355-$360/oz is likely to cap the upside. Conclusion and Forecast Palladium’s outlook is relatively robust, it has a number of strong industrial applications many of which are growth markets which should provide some cushioning against an economic slowdown. In addition, there is healthy demand from long term investors who seem to be quietly soaking up the market’s surplus by buying any weakness. Given the market is likely to shift into supply deficit once Russian stocks have been run down (not expected for a few years yet), this ongoing support is likely to remain in force. In turn this should provide good support going forward. Overall we expect 2007 to be a less bullish year, with prices generally trading between $270/oz and $360/oz. Rhodium Outlook Rhodium prices doubled again in 2006 having doubled in 2005 as well. Indeed as the chart shows prices have gone from a steady $500/oz in 2003 to a peak of $6,275/oz in May 2006. The sell-off in June that was seen across all the metals saw prices fall to $4,175/oz, but as the chart shows, it was soon snapped up as a buying opportunity. The fundamentals for Rhodium remain second to none and even though demand only grew 2% in 2006, the limited supply is keeping the market extremely tight. Indeed demand from the autocatalyst industry is greater than production, with the balance made up from scrap supplies and stocks. Rhodium As well as autocatalysts, the chemical, electrical and glass making industries are important users of the metal, collectively accounting for some 15% of total demand. In 2006, the main change in these other uses was in the glass industry where Rhodium demand fell as fewer flat screen glass manufacturing plants were set up, following a build up of capacity in 2004 and 2005, especially in China. Rhodium supply is tied in with Platinum output, so as South African mine output increased in 2006 so too did Rhodium supply, with an estimated extra 46,000 oz reaching the market. As PGM output continues to increase in 2007 in South Africa, so Rhodium output will, but it is likely to remain an extremely tight market. Recycled autocatalysts are another form of supply and this is growing as more vehicles with autocatalysts are now coming to the end of their working life. In 2006, some 160,000 oz were recycled compared to 80,000oz in 2000. The other important source is Russian production, which is estimates at 60,000oz in 2006, which was down from 90,000oz in 2005. In addition, there were no signs of sales from Russian stockpiles, which given the high prices, suggest that any stockpiles that remain are not for sale.
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Overall with demand from autocatalysts likely to remain strong, while the rest of the industry remains stable, there may be little room for a meaningful price correction. However, as there is some investment activity in the metal, fear of a broader economic slowdown may lead to some investment liquidation which may see prices plateau even if they do not fall back too far.

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