An Interesting Year for Gold

The past year was a most interesting one for gold. On the one hand, the gold price rose 18% during 2005 and touched a 25 year high early in 2006. Gold rose against all major currencies and against most other asset classes including U.S. equities and bonds. The gold market also exhibited increased momentum as it attracted new investment flows. It took the gold price three years to rise 25% from its bear market low of U.S.$252 set in 1999. It took only 90 days for the gold price to rise 25% from U.S.$440 to U.S.$550 as we entered 2006.

On the other hand, industrial metals such as copper and nickel significantly outperformed gold over the past year, suggesting that the increase in the gold price represented more an investor interest in commodities as a bet on inflation -- the so-called inflation trade -- than a preference for gold as a currency. At Seabridge, we think that the driving force of currency preference lies ahead, as the money supply for paper currencies continues to inflate at rates considerably in excess of real economic growth. In our view, gold is now "remonetizing": it is gradually becoming a preferred currency and store of value as confidence in paper currencies declines.

Support for this argument concerning the remonetizing of gold came from some surprising sources during the past year. Perhaps the most impressive was a 56 page report issued in January 2006 by Cheuvreux, a subsidiary of Credit Agricole, one of Europe's largest and oldest banks. Cheuvreux raised its mid-cycle gold price estimate to U.S.$900 and noted the possibility of a spike to U.S.$2,000 or higher. Even more astonishingly, the report claimed that covert selling by central banks had artificially depressed the gold price for a decade. This is an argument long made by GATA (the Gold Anti Trust Action Committee) which also was one of the main premises on which Seabridge was founded. Among other things, the Cheuvreux report concludes that:

• Central banks have 10,000 to 15,000 tonnes of gold less than their officially reported reserves of 31,000 tonnes. This gold has been lent to bullion banks and sold for jewelry and other uses.
• There is a supply deficit in the gold market of about 1,300 tonnes per year before central bank selling, more than twice the usual estimates. This deficit compares with world production of only 2,500 tonnes per year.
• History suggests that gold always wins against an inflating paper currency (one subject to excessive supply growth).
• Gold and gold mining stocks are poised for an unprecedented rise in prices and profile among investors.

For the complete Cheuvreux report see http://www.gata.org/CheuvreuxGoldReport.pdf.

Meanwhile, there is increasing evidence that a U.S.$550 gold price is not high enough to bring on new production to fill the supply/demand gap. Seabridge's largest shareholder, Albert D. Friedberg, notes in his firm's newsletter dated February 6, 2006 that "exploring and bringing new mines into production has become an enormously expensive, lengthy, and politically risky affair. Gold will have to attain much higher levels on a sustainable basis to reverse the present decline in production. From an investment point of view, the precious metal has come into its own as an asset class -- I remain very bullish on gold." In a similar vein, JPMorgan Chase and Co. stated on January 31, 2006 that the price of gold could surge to U.S.$800 an ounce in the next two years as central banks curb their selling in the face of rising demand.

For companies with significant gold resources and growth potential such as Seabridge, the current environment offers exciting opportunities for enhancing shareholder value. We expect the coming year to provide further validation of Seabridge's stated objective of providing exceptional leverage to a rising gold price.