Updated: October 2008

Dear Shareholder,

This is my second annual letter to you and I am pleased to report that your Company has made strong progress in its first year. We founded ALTUS to incubate, grow and invest in opportunities in the natural resource sector, through a 'Company of Companies' strategy; providing our subsidiaries with finance, operational and technical expertise, strategic direction as well as corporate and administrative support all under one roof.

• Progress Update
• Commodity Cycle - still on track?
• Debit Opportunity
• The next big thing: Stagflation
• Gold BRIC Road
• Return of the GOLDBACK

Progress update

Our decision to establish ALTUS reflected the strong outlook in demand for metals, in particular gold as an asset, in tandem with a paucity of significant economic discoveries in recent years. Our team has grown, with the appointment of a number of talented professionals and senior advisers, with wide ranging experience which puts us in a strong position in what has become a very weak market.

Our model is to create value from making economic discoveries in emerging markets and to invest in junior resource companies that are undervalued by the market. We have evaluated numerous projects in the last twelve months and selected those opportunities which we consider have the optimum risk / reward ratio for shareholders funds.

Four subsidiary companies have been established in the last year; namely, Arabian Gold Corporation plc, Avance Gold plc, Asian Gold Corporation plc and ALTUS Resource Capital Ltd.

Arabian Gold plc(www.arabian-gold.com)

Arabian Gold is a 50:50 Joint Venture company with a 'first mover' strategy for the discovery of economic gold deposits in the under explored Achaean age Arabian Shield. The Company is focussed on the Kingdom of Saudi Arabia, due to its highly prospective geology, favourable mining code (2005) and limited competition for ground. Over 1,000 mapped ancient gold and copper-gold workings attest to the prospectivity and provide a useful guide to the key districts on a fragment of craton which is comparable in size to that of western Australia.

Our joint venture partner is a highly respected mining and exploration service provider, with over sixteen years of operating experience in the Kingdom. With their support and under the stewardship of Drew Craig (ALTUS's Principal Geologist and COO of Arabian Gold) we have commenced reconnaissance exploration with encouraging initial results.

A shield-wide geographic information system (GIS) has been compiled in order to define additional target areas. Within the next six months, Arabian Gold intends to have completed first-pass exploration across its licences and to have submitted further licence applications on the basis of the GIS driven target generation.

Avance Gold plc (www.avancegold.com)

Avance has been established to explore for gold and base metals in sub Saharan West Africa. Local companies have been incorporated and licence applications have been submitted in Ivory Coast, Cameroon and Nigeria. We consider that these countries offer significant discovery potential.

Asian Gold Corporation plc (www.asiangoldcorp.com)

We have established Asian Gold to develop opportunities in Central Asia, initially focussed on Kazakhstan. We are in discussions with a number of companies in respect of developing opportunities there.

ALTUS Resource Capital Ltd (www.altrescap.com)

ALTUS Resource Capital has been established to capitalize on the disconnect between the long term demand for commodities, driven largely by growth of the BRIC economies, and the redemption driven resource equity sell-off. The closed ended investment company will make selected active value investments in up to 10% of the issued capital of resource companies which, based on our in-house technical analysis, we consider have robust assets, a proven management team and a distressed share price entry point. We expect such companies to be significantly re-rated as their value is realised by the wider market and they continue to achieve operational success. Where appropriate ARC will seek board representation and will initiate and facilitate value adding corporate transactions. ALTUS is the Investment Manager to ARC, tracking the global resource market on a daily basis.

The next twelve months

We intend to remain private, unless or until the merits in a public listing become convincing. However, we recognise that the shares of our subsidiaries may need to be listed in due course, in order to provide them with the rigour of market accountability and a platform from which their management teams can independently finance and grow the businesses. As discussed in my letter last year, we feel that London's PLUS market has the most appropriate balance of costs and benefits for an initial public listing for mineral exploration companies capitalised at less than £20m.

We look forward to updating you on the progress of our subsidiaries through our quarterly shareholder newsletter.

Commodity Cycle - still on track?

Despite strong growth in the last five years, commodity prices remain relatively low in real terms as they emerge from a 20 year bear market that ended in 2002. We see the fundamentals for most commodities remaining strong as they return to fair value driven by a number of factors. The most significant factor is the demand for raw materials and energy from the emerging economies, which represent over 50% of the world's population and which are, while exposed, somewhat more insulated to the current financial crisis than the developed world. Growth of the emerging markets has helped drive crude oil and copper consumption to record levels, while the paucity of new world-class mines coming on stream has created a supply side vacuum. In the meantime there is growing demand for gold, as a reserve asset against inflation of western currencies and destruction of equity.

Last year we predicted that greed would overtake fear as the cycle matures, resulting in higher valuations for well managed juniors. We are clearly not there yet. Against the backdrop of strong fundamentals, junior resource equities (defined as being capitalised at less than £50m) are suffering a vicious and protracted bear market with redemption and fear driven selling by institutional and private investors respectively, with little regard to underlying asset value. This could be seen as a natural pull back by investment managers who bought over priced mining stocks as a proxy to the commodity 'boom', but with little regard to, or understanding of, their underlying asset value.

The S&P GSCI commodity index gained more than 40 percent in the first half of 2008. However, the July and August sell off left the top 20 mining equities globally US$700 billion smaller in value. The Reuters-Jeffries CRB index of 19 raw materials posted its best first half since 1973, but has retraced and is down 22% since June, approaching its biggest quarterly loss since 1956. The GSCI recently enjoyed its biggest ever 3 day gain, up 8.4%, as short selling speculators perhaps exit the sector.

The number of junior companies trading at substantial discounts to their fundamental value and facing cash-flow difficulties is, we expect, set to increase through 2009 and into 2010. These companies will have little option but to undertake highly discounted equity or unattractive convertible issues in order to stay afloat. There are already 60 companies suspended on the TSX-V, the highest number since 2002 and average TSX-V financing has reportedly shrunk year on year from CA$1.8m to $0.48m; cash is most certainly now king.

On the bright side, the bull market for resource equities only started in early 2000 and the shortest bull market for commodities reportedly lasted 15 years. The current indiscriminate market conditions therefore represent an opportune window to buy the future 'winners' at knock down prices. However, not all stocks which are down 80% over the last year are 'buys'. The first stage of the resource "super-cycle" saturated markets with a number of speculative Cinderella companies; typically headed up by teams who gave a whole new meaning to the term 'cash burn'. We believe that successful companies will be recognised and re-rated, and perhaps aggressively consolidated. It is from buying these companies during the next twelve months where potential for the largest gains exists.

Debit Opportunity

In last year's letter we agreed with predictions of a reversal in economic fortunes for 2008 and 2009, catalysing a hyper inflationary environment, where oil would trade well above $100 (high of US$147.27 reached on July 11th) with rising food and other living costs, co-incident with a bursting of the real estate bubble. Well, prices in the UK are reportedly falling at the fastest pace since the 'great' depression. Consumers in the US and Europe are struggling to keep their heads above water. They are fighting negative equity in their homes on the one hand, the rampant inflation of living costs and the eroding of savings on the other. If not already, with less and less government debt available for economically stimulating infrastructure projects, these economies are teetering on a now seemingly inevitable recession.

Banker's bluff

The plight of the consumer is a function of a decade of low cost manufacturing and outsourcing from China and India creating a strong deflationary effect on the cost of goods and services consumed in the 'West'. The perfect storm was completed by Japan exporting intoxicatingly high proof, interest free loans, to fund its own protracted economic recovery. Property owners in the US and Europe enjoyed a double dip of rampant asset inflation and low living costs; the fact their real estate 'gains' were a product of banks leveraging on an unsustainable Yen carry trade did not occur to many as they upgraded their houses, cars, lifestyles and real estate portfolios. Governments enjoyed booming income, stamp duty and capital gains tax receipts and turned a blind eye to the growing debts of its citizens and excesses of the 'investment' as well as high street banks. The catchy title of Bear Stearns' 'High-Grade Structured Credit Strategies Enhanced Leverage Master Fund' was if nothing else a red flag. As Warren Buffet reportedly remarked, 'bankers on Wall Street found increasingly sophisticated ways of losing money, when the old ways worked just fine'.

Nightmare on Maul street

The wheels came off the virtuous monetising cycle when it became clear the assets backing the sub prime and Alt-A loans (the next one up, but still those without any supporting documentation) were actually worth much less than the initial loan. Wall Street investment banks as well as high street commercial lenders found themselves incredibly exposed; inter bank lending dried up and the race to the exit was on, chased out the door by short sellers betting who would make it out alive. Bundles of their toxic IOUs and complexly intertwined derivatives which were quietly being stockpiled deep in the accounting vaults of the major banks, hidden from shareholder view, with no buyers willing to reprocess them are only just being declared. $506,000,000,000 has officially been written off by the banks to date. Quite what the final total cost will be and what the erstwhile glamorous world of banking will look like from hereon is not clear. The tin is being passed around to shareholders, as even the biggest names fight to 'keep the lights on'. Discounted rights issues for the banks already total some $352,000,000,000. Those with cash, able and willing to lend or invest are firmly in the driving seat with numerous opportunities to grow through acquisition of heavily discounted financial assets. What can the auditors who signed off on the accounts and managed to misjudge balance sheet risk by billions of dollars possibly say to excuse themselves? Perhaps some of them will be included in the inevitable litigious back lash.

We are now in the eye of a financial storm. News coverage has moved on from subprime borrowers to the NINJA banks. Defunct firms such as Northern Rock, Bearn Stearns, Lehman Brothers, HBOS, Wachovia and Bradford and Bingley, with No Income, No Jobs and no Assets. Three of the big five on Wall Street have folded or been acquired so far while the remaining two, Morgan Stanley and Goldman Sachs have elected to retire from classical high leverage, 'light touch regulated' investment banks to being commercial banks. Lehman was 158 years old and the fourth biggest bank on Wall Street. It survived the 1929 crash yet became the world's biggest bankruptcy at $613bn. JP Morgan and Wells Fargo are trading like volatile penny stocks, threatening to test all time highs as their competitors disappear. HBOS and Merrill Lynch made somewhat more elegant exits, the latter taken over for just $50bn by the perhaps appropriately named Bank of America.

What the remaining banks, insurers and investment firms will have left when they show each other their mortgage backed security hands is not yet known. The surviving banks will be those who also hold deposits, have limited counter party exposure and probably the fewest litigious shareholders. The 'Universal Banks', such as JPMorgan, Bank of America and Barclays, will have significant sway in the markets, having eaten or outlived their competitors. However, there will be less business to be fought over as economies shrink and clients look inward.

There is now a systemic distrust between the banks and many more look set to fail; about 117 are on the US watch list of the Federal Deposit Insurance Corporation. Seventy five years after being split from deposit-taking lenders, the investment banking model has been brought crumbling down by excessive short term leverage, not share selling. They will now be allowed to put their depositor's cash at risk again, but tightly regulated by the Fed with more stringent capital reserve requirements. The short term leverage enabled hugely inflated profits to be made and led to the bonus culture. However, the exuberant days of the $50m pay pack are long over.

Japanese banks such as Nomura and Mitsubishi (buying up to 20% of Morgan Stanley) as well as the Chinese banks, holders of vast accumulations of cash and other home grown assets are on the ascendency and will continue to claim their prizes from Wall Street.

Federal reserve (non JORC)

Stock markets around the world are presently in fear driven turmoil and credit markets have seized up as participants second guess their potential exposure to write downs and stocks are liquidated to find 'safer' investments or simply cover off losses elsewhere. The S&P 500 recently experienced its biggest one day drop (8.8%) since the 1987 crash and the Dow recorded its biggest ever one day loss of 778 points (7%). A total of $1,000,000,000,000 was wiped off the value of US equities. Buyers are optimistically assuming the bottom is in sight or simply can't resist the temptation to take potential advantage of the mayhem. The Russian market has been suspended for three trading days and $44bn injected into its three biggest banks as a backstop. It looks like the end to financial markets as we knew them; but much heavier falls must still be a clear possibility over the next eighteen months, with a few dead dog bounces on the way.

The US market is no longer 'free' or even cheap, costing the US tax payer as much as $1.6tr. The US Treasury lost its first attempt to release $700b from the Senate for the Troubled Asset Relief Programme or so called 'bad bank', which would fit in perfectly on Wall Street. In the meantime the Federal Reserve has been on an unprecedented nationalization binge in order to create a strategic break to a potential financial wild fire.At least $900 billion has been underwritten by the American tax payer so far; picking up a 79.9% of AIG (for $85b and bearing a less than AAA 8.5% coupon above LIBOR), $29b for Bear Stearns, the interbank lending facility for 'mortgage-backed securities' has consumed a further $150 billion, $300 billion has gone to the Federal Housing Administration to insure loans for troubled borrowers and last but not least $200b to backstop Fannie and Freddie; the latter established in response to the Great Depression.The US Treasury has perhaps only $500b in treasury bills left in its armoury but has more financial obligations than assets and is paying 5% on its loan notes and lending out dollars at just 2%. It is said that it takes a small hole to sink a big ship, but in this instance a big hole will do just fine too.

IOU and U and...

The US now has its highest public debt burden since 1954, standing at $37k for every man, woman and child and it is the highest in the UK since 1970. Notwithstanding this, some in Washington will see its $1.5tr intervention as an investment, assuming the loans are repaid or are later bought back. This amount however, is colossal equivalent to seven times Africa's entire debt burden (US$200bn). How much of this 'investment' will actually prove bankable is questionable. One thing is clear, the upstream bailout is not going to have a significant impact on the US$10.5tr downstream housing market, of which $0.8tr is sub prime and $1tr is ALT-A. The crisis is hitting middle America hard. In July alone 272,000 homes received a foreclosure notice (55% up on July 2007), accounting for 6.41% of all sales and accelerating at its fastest rate in three decades. Of these, prime defaults accounted for a shocking 23%, against 36% for subprime.

The next big thing: Stagflation

The aftershocks from the credit 'quake' will be felt for several years to come. To keep their economies alive, governments are desperate to quietly devalue the debts of their citizens and inflate away the worst of the housing bubble; those with net savings, well they can count themselves lucky they don't have any debts. If they enter recession then, as with Japan, in the absence of sufficient hard currency tax receipts and the ballooning public debts, wave after wave of corporate bankruptcies and a contraction of credit may prove to be an anchor to their economies for years to come as the defaults on loans will take a few years to work through especially as the criteria for credit continue to rise.

Japanese style stagflation seems imminent, a paradoxically co-existing inflationary recessionary environment, where vast amounts of banknotes are injected into the economy to ensure firms continue to borrow and invest rather than contract.In essence stimulating inflation during a time of slow or no growth, rising unemployment, reduced market competition, reduced cash creation, and likely unsustainable wage demands. Assets are and will continue to deflate in nominal value, as the number of buyers dries up while consumer goods become more expensive in real and nominal terms. Inflation in the UK has hit a 16 year high, and a 25 year high for the cost of imports. The rate of deflation in assets, notably houses, equities and commodities must also be near an all time high. Japan was where we are now 15 years ago; last year house prices there rose for the first time since 1992. They have only just started falling in the US and Europe.

The yen'd of the world as we knew it

Unemployment looks certain to rise, initially from fall out of the banking sector. All companies and their equities are potentially at risk, be it gremlins on the internal balance sheets or a recession in their sales. Early casualties caught in the immediate cross fire of fuel inflation, lack of credit and a consumer spending crisis are the airlines. Twenty six have gone bust in the US this year alone and a further 36,000 jobs in the industry are planned to be shed there in the next three months. The UK has lost Zoom, SilverJet and XL. Auto manufactures are likely to be the next to come under pressure as consumers find credit more costly and expectations are adjusted in line with reduced confidence in their household income. Year on year sales for Ford are already down 35% based on September 2008 figures. It will be interesting to see the year on year numbers for house builders when they come through. General Motors is now trading at the same price it was fifty years ago and risks being down graded, making future finance even more expensive to secure.

National banks and governments are betwixt and between in how to prevent their real GDP falling; under pressure to raise interest rates and cut government spending in order to curb inflation while under equal pressure to lower rates and provoke business activity or at least prevent its collapse, cut unemployment and increase revenue at the exchequer. The take over of HBOS by Lloyds TSB has put perhaps 70,000 jobs at risk in the UK, of which maybe at least half will be lost. The effect on the real economy of widespread forced redundancies is hard to imagine. One implication is that the dollar as a reserve currency may simply be trashed. Sterling has already dropped the most in one day since 1993.

Soft and energy commodity prices have been driven largely by speculation, be it wheat, oil or uranium. There are evidently not four times as many consumers to justify a doubling in some cases quadrupling of prices. The impact of the inflationary shockwaves on economic activity is however a side show to the macro economic crisis created by the complacency of governments to the credit bubble of the last decade, which they chose not to cool with rate rises, but rather kept rates low and ignited a casino style credit derivative boom with excessive liquidity injected into the system effectively devaluing banknotes. Highly leveraged M&A activity also served to deplete competition and allow firms to increase prices while cutting costs, taking competition out of the market place.

super spiral

Until recently it seemed that a debasing fiat currency grand prix was underway, with G8 countries having loose inflationary monetary policies to reduce the real value of their debts, keep exporters afloat and thereby keep their economies ticking along. This has been brought to a crashing halt as investors have moved on from looking for papier-mâché growth to protecting the true value of their physical assets. It took the short sellers to expose to the world that investment and commercial banks like the proverbial emperor were totally naked exposed to each other's pyramid style lending activities, hidden behind revered reputations which took decades to build. The regulators in the US and UK won't let such a financial scandal be revealed again; they have banned the speculative short sellers from hounding the truth out of the complex balance sheets of the 'blue chip' institutions. No ban however on the speculative long buyers, who forced prices ever higher bought on leverage, using cash they did not own. HBOS had only 3% of its stock on loan before the company was taken out by Lloyds.

It remains to be seen how relatively resilient the markets will prove in the medium term, due to governments picking up the cheques. However, the real economic consequences of the bail outs and takeovers will be with the already highly taxed consumers, the ultimate counterparty, for many years. For now the media and public seem transfixed by the brilliant white light from the financial implosion, onlookers to a 50% increase in vacant office space in the City over the last year. Tsunami scale shock waves have, however, yet to rush out across the real economy in the form of job losses and asset devaluation, nor has the backlash begun on their governments' use of taxes set aside for retirement, education and healthcare to bail out what is popularly seen as an irresponsible financial service sector. They are lapping against the Irish shores, where unemployment is up a staggering 49.5% on last years figure to 5.8% (240,000 unemployed).

The hope is that a few trips to the cash machine and calmly buying up the excessive private sector will stimulate sufficient confidence and economic productivity that national debts can be repaid from future tax receipts. However, headline inflation is far higher than official statistics represent and governments should be steering a path to low cost energy supplies, ensure sufficiently low interest rates for generating appetite to borrow, use fiscal policies to cut the tax burden and increase purchasing power and restrict devaluation of their banknotes through overuse of the printing press. However, interest rates look set to be hiked in response to an impending wage inflationary spiral on order to underpin some value in their currencies. Brazil has started its fight with inflation; a number of rises this year have taken taking their interest rates to 13.75%. Double digit interest rates may become more common place.

China has recently cut its rates to 7.2% for the first time in six years in order to provoke their economy which looks at risk from stalling with inflation cooling and export demand falling, so far the Shanghai Composite Index is off 60%. We can expect the Yuan to appreciate in value against other economies, devaluing the real value of their holding in long term US treasury notes and making a long term increase in gold reserves as an attractive hedge against further real term dollar devaluation, short term covering short positions. In the meantime the Yuan had its first monthly loss against the dollar since May 2006, on speculation that weaker global demand may prompt the government to limit currency gains and protect exporters. Ironically a low dollar / high yuan carry trade may work to support leverage driven growth in China.

Gold BRIC road

In last year's letter we discussed how the US consumer, alone representing 21.3% of global GDP, was a potential slow wagon to the locomotive BRIC economies of Brazil, Russia India and China which represent 21.16% of global GDP (2.83%, 3.22%, 4.34% and 10.77% respectively). Projections for growth in GDP to 2050, describe a new economic world order. Notwithstanding the current issues, the US economy is projected to grow considerably ($14tr to $35tr), while the other G8 countries are expected to achieve less spectacular growth (around 150%). China will leapfrog the G8 to become the world's largest economy (from $3.2tr to $45tr), knocking the US into second place. India will have a meteoric rise from being smaller than Italy, to become the world's third largest economy (from US$1.2tr to US$27.5tr) and to twice the US economy today. Brazil and Russia are also set to grow aggressively (up 457% and 426% to $6tr and $5.5tr respectively).

We are currently seeing that despite current account surpluses and substantial reserves the BRIC economies may be dramatically slowed by the US brakes going on hard, but it does not look like they will be totally derailed. In the next couple of years we should find out if, fuelled by domestic consumption, they can decouple completely.

The economies of the G8 are at a complex juncture. As described above the US is facing its biggest financial crisis since 1929. Asset values are falling in real prices, government are burdened by increasing corporate debts, dwindling tax receipts and their corporations are suffering squeezed margins. Wage and price inflation must be controlled, yet governments are almost powerless to spark growth without aggravating the spiral further. The bail outs of the banks and other financial firms, most acutely in the US are causing public debt levels to soar in relation to their GDP, if not yet quite approaching Japanese (200%) proportions.

Impressive Stats

In the meantime the BRIC economies are by all metrics experiencing strong domestic driven and energy export value creation. Russia is now the world's largest energy exporter and second largest oil exporter after Saudi Arabia.

Goldman Sachs has estimated that by 2045 there will be an estimated three billion new middle class consumers in China and India; to put this in perspective this is almost ten times the size of the US population today. China's urban population, which has more English speakers than the US, is increasing at the rate of 30m / year (four cities the size of London). By 2010 it is estimated that the country will have over 50 cities with over 2m people (compared to four cities in the USA) with estimates of over 50,000 skyscrapers to be built in the next 20 years. To service these cities, 48 new commercial airports are being built and the equivalent of the UK's annual power grid (70GW) is being added to supply each year.

Personal wealth is being amassed at the rate of $25b per month (equivalent to the GDP of Ireland), there are already over 345,000 dollar millionaires in the communist republic. The country has over 200 million broadband internet and 600 mobile phone users, the latter growing at 9 million per month. At present less than 4% of the population own a car (27 million cars), which is an equivalent percentage to the US in 1915. Car sales are projected to balloon with 110 million new cars to be bought and sold by 2020 (presently 135m and 30m in the US and UK respectively).

Return of the Goldback

In order to perfectly hedge themselves against a likely gradual but potentially sudden devaluation of the dollar, elevated energy dependence and the appreciation of real assets from exposure we would expect significant central bank gold purchases from hereon as part of move away from dollar to a 'multi polar' currency reserve strategy. The US reserves are presently around $250 billion, of which 78.2% is held by value as gold which gives an indication to their underlying economic principals. By way of comparison, despite its vast $1.5 trillion reserves and significant counter party dollar exposure, China reportedly has only 1% of its reserves held in gold. The average gold-to-total reserves ratio of all G8 members is 36%. If the BRIC countries were to increase their holdings to this average level, perhaps in partial flight from the uncertain future relative value of currency reserves, it would require central bank purchases of around 33,000t (or just over a billion ounces). China would require 21,000t (675m ounces) alone, equivalent to approximately 9 years of total global production. To place these figures into perspective, total global central bank gold reserves currently total 29,800t (950m ounces).

Investment demand in H1 soared, up nearly nine fold year on year according to GFMS who predict a 38% increase for the year to 778t, with demand in East Asia doubling. Aside from governments reverting to buying gold as a hedge against a US economic and US dollar calamity, investment banks, their clients and sovereign wealth funds will also be buying gold to seek the same protection from inflation and other market risks to their assets. In the second quarter of 2008 gold demand reached new highs of $21.2 billion up 9% on the same period in 2007. This is despite demand for jewellery falling dramatically 24% to 504t, down 47% to 118t in India and down 30% to 33t in the US in the same period, due to higher prices and lower consumer spending power. In the meantime demand for gold jewellery in China rose 2%. Hedge books also continue to be unwound, with buying in the market to deliver against contracts, (GFMS estimated 250t) and fresh hedging is limited as gold miners firmly believe that higher prices can be achieved for their shareholders.

Country	Gold (tonnes)	% reserves
China	600.0	1.00
India	357.7	3.30
Japan	765.2	2.10
Russia	457.9	2.40
United States	8,133.5	78.20
Germany	3417.4	66.30
France	2562.3	59.40
Italy	2451.8	68.10
United Kingdom	310.3	14.80
Canada	3.4	0.20
	Average (G8)	36.44

Mine production is coming under pressure, down 2.2Moz (70t) or equivalent to 6% in the first half of 2008. Margins are squeezed from cost inflation (20% higher cash costs in H1 2008) royalty payments and low grading, in the established mining districts. The emerging producers are in Russia and China (the latter being the worlds largest gold producer with 12% of supply). 2008 global production is estimated to be 2,422 tons, the lowest since 1996. Central bank sales are also down, so far by around 26% this year and estimates suggest a possible 46% for the year, as the signatories to the Washington Accord hold fire. Notably the Swiss who hold 1,064t (38% of national reserves) have closed their sale programme. Gold on loan has also seen a marked decrease, due to lower yields and deemed higher counter party risk.

Gold - the storm before the storm

Rather than a few unfortunately timed 'strategic', perhaps more like trophy acquisitions, of shareholdings in Wall Street names last year, the vast accumulations of petro and trade dollars held by the sovereign wealth funds, have yet to flex their financial muscles. The top ten funds have over $2.5tr of assets under management. When and how they will is difficult to predict.

After recent market machinations they may elect to keep away from traditional equities and financial firms and look to gold as a safe haven investment.

Gold is a very small market and given the unprecedented magnitudes of likely investment demand, the inability for supply to meet that demand and potential debt burdened weakening of the dollar, with money market funds already showing the strain, we feel gold has the potential to increase significantly. We anticipate $1,500/oz is achievable within the next twelve months, and possibly spikes as high as $2,000/oz. Gold equities will lag the price increases but are highly leveraged to the price rises. Significant potential exists for spectacular performance of presently unloved mining and development stage equities, which are currently tarred with the same brush as the mainstream market.

	2007	2008*Est
Supply
Mine production	2,475	2,274
Net Producer hedging	-447	-536
Sub total mine supply	2,028	1,736
Official sector sales	501	338
Old gold scrap	967	1148
Total Supply	3,496	3,224
Demand
Jewllery	2,400	1,948
Industrial & Dental	461	446
Sub-total above	2,861	2,392
Bar & coin investment	445	380
Other retail investment	-42	-26
ETFs & similar	253	154
Total Demand	3,518	2,902
Balance	-22	322
* 2008 figures based on projections of Q1 & Q2 (World Gold Council)

We anticipate gold price inflation, firstly in physical metal as supplies fail to meet demand, only aided and not caused by a weakening dollar, as the dollar has dropped the baton as a traditional safe haven.

Last year we wagered that Goldmania would outshine Googlemania. Both have had a volatile year. However, one year on Google is trading at $381 per share, down 42% from $650 and gold is at $915/oz up 22% from $750/oz. In light of our observations in this letter, let's roll this bet over for another year, while we wait to see the real economic implications as the financial shock waves hit US and European consumers.


Yours faithfully,


Steven Poulton
Chief Executive