New commentary by Tocqueville Gold Fund''s John Hathaway

12:26a ET Friday, February 21, 2003

Dear Friend of GATA and Gold:

Our friends at Au Capital in Maryland, Hans
Kahn and Dan Tessler, have generously
consented to our sharing with you their
February 11 report, which includes some
compelling observations on the gold market
and our favorite quot;barbarous relic,quot; as well
as favorable references to GATA and its
consultants, Frank Veneroso and Reg Howe.

Here's a lovely excerpt:

quot;We think that prudent, mainstream investors
gradually will relearn history's lesson that
gold is what money ought to be. Gold is no
one's liability, an asset that is produced by
work, not by credit; it is liquid, scarce,
divisible, anonymous, portable, dense, and
nearly indestructible. Call it a barbarous
relic for a barbarous world.quot;

The report is appended here with thanks.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

AU CAPITAL LP REPORT FOR FEBRUARY 11, 2003

To Our Limited Partners:

We completed ten full years of operation with
gains of 12.7 percent in the fourth quarter
and 111.5 percent in all of 2002. Our
quarterly and longer-term returns for steady-
state investors are shown below. Individual
results vary depending upon the timing of
investments. Your individual account
statement and partnership financial
statements are enclosed, subject to audit and
adjustment.

We formed Au Capital 10 years ago to provide
an inexpensive, long-term call on the price
of gold bullion as quot;insurancequot; against
systemic risk to the values of financial
assets. We earned nearly 10 percent
compounded annually although no systemic
failure occurred during the decade and the
values of gold bullion and large-
capitalization gold stocks changed little on
balance. This ranks among the very best long-
term returns in Lipper's universe of publicly
traded funds, without regard to specialty. We
tripled the average return among the gold-
oriented funds, and beat the total return of
the leading gold fund by 40 percent. We also
exceeded the average returns of all Samp;P 500
Index funds by nearly a full percentage point
per annum, despite the enormous inflation in
equity prices that occurred during the middle
years. A $10,000 investment in Au Capital in
December 1992 grew to $25,614 over the
decade, as compared with $15,140 in the
average gold-oriented fund and $23,520 in the
average Samp;P 500 Index fund.

Our performance was volatile from one quarter
to the next but it trended clearly over
longer periods. Our first four years were
generally up, the next four generally down,
and the last two up. We gained more than 100
percent in both 1993 and 2002. Our worst
yearly loss was 34 percent in 1997. Overall,
we gained in six of 10 years but only 17 of
40 quarters. The Samp;P index also rose in six
years of 10, but with less volatility, a
difference that reflects the pronounced
emotional content that can move gold-related
markets in the short term.

Gold bullion and related assets were widely
disparaged by investors when we began. Gold
was generally thought to have become a
consumer commodity with steady demand that
was overmatched by new production and
prospectively endless sales by central banks.
Gold had lost its monetary appeal to western
investors and bankers. It was widely
ridiculed as the quot;barbarous relicquot; of J.M.
Keynes.

In contrast, we believed for two reasons that
gold and related assets were historically
cheap. First, supply/demand fundamentals were
improving in ways that had not been
recognized. Second, 5,000 years of history
assured us that investors eventually would
rediscover the monetary character of gold in
a dangerous, paper-intensive world.

Most of our return over the past decade
resulted from the further improvement and
spreading recognition of the commodity
fundamentals that we saw at the outset.
Investors by now generally understand that
gold demand chronically exceeds production;
that consumer demand, the largest component,
is growing with Asian incomes; and that gold
production has peaked and likely will decline
for some years as a result of diminished
exploration and development during years of
low prices.

How was excess demand satisfied for so many
years without substantially increasing gold
prices? The answer to that question is a
principal reason for our view that the
commodity fundamentals of gold are still far
more favorable than generally recognized.

Briefly, central banks met the excess demand
from official bullion reserves, by selling
significant volumes outright and by lending
even more through financial intermediaries to
producers and speculators. Producers and
speculators in turn sold the borrowed metal,
and physically delivered it, in order to
hedge future production, finance investment
or earn the spread between market interest
and low gold-lease rates. As a result,
producers, banks, and speculators in the
aggregate are obligated to return much
borrowed gold that now dangles from Indian
and Chinese earlobes. Estimates of that short
position range up to six years' mine
production and nearly half of nominal
worldwide central bank reserves.

Research by Reginald Howe and Frank Veneroso
increasingly supports the circumstantial case
that the Gold Anti-Trust Action Committee has
made for the high-end estimates.

In any case, it seems clear that there is a
short position that amounts to a large,
possibly unmanageable multiple of normal
demand. The resulting market imbalance, in
our view, eventually must be cleared at
substantially higher prices.

The second aspect of our initial rationale
was our belief that the traditional regard of
investors for the monetary character of gold
eventually would be renewed. That renewal
seems to have begun last year with the
spreading perception of rising, intertwined,
long-term geopolitical and financial system
risks. It has not yet contributed materially
to our returns, but we expect it to
strengthen over time and to substantially
boost investment demand for gold and related
asset values.

We think that prudent, mainstream investors
gradually will relearn history's lesson that
gold is what money ought to be. Gold is no-
one's liability, an asset that is produced by
work, not by credit; it is liquid, scarce,
divisible, anonymous, portable, dense, and
nearly indestructible. Call it a barbarous
relic for a barbarous world.

The U.S. dollar has been the symbol of world
order, and the U.S. economy has been its
foundation, for five generations. Both the
dollar and the economy are fundamentally sick
today. We have had essentially one
irresponsible monetary policy since 1987 -- a
policy of quot;morequot; -- that has increased the
broad money supply 8 percent compounded
annually for the past 10 years and 10 percent
per annum for the last five. With brief
exceptions, short-term interest rates have
been maintained below market; they now
provide a minus 2 percent return after taxes
and inflation.

Like a force-fed goose whose diseased liver
is prized as foies gras, our economy
processed this unstinting expansion of
liquidity and attendant credit into diseased
growth. Consumption generates 90 percent of
income growth and represents 70 percent of
economic activity. About $5 in new debt
lately has been needed to generate $1 in
income growth. The expansion of business
investment that has now collapsed was largely
illusory, based on the statistical mischief
known as hedonic pricing; the rest was
financed in excessively liquid capital
markets that lacked productive outlets.

Although much of the air has left the equity
bubble, our much larger bond, mortgage and
securitized debt markets have only continued
to expand at increasing, and increasingly
dangerous, rates. Domestic savings rates have
increased slightly in the past year but
continue near record lows, while our record
and growing trade deficits consume 80 percent
of the gross savings of the rest of the
world.

There is chapter and verse to detail and
expand upon these concerns, but you get the
point: conditions economic and financial are
extremely unbalanced and possibly
unsustainable. quot;Morequot; is still the only
policy response: lower interest rates to
foster more consumption and less saving, plus
a guns-and-butter swing from last year's $6
trillion projected 10-year budget surplus to
this year's $2 trillion projected deficit.

Meanwhile, investors increasingly overcome
their inertia to consider alternatives to
dollar dependency. There aren't many. All
major economies are weak, at best. All major
currencies are in reflation mode. The
Norwegian kroner is interesting but small,
like other commodity-based currencies. The
Chinese remnimbi is undervalued but
unconvertible and dollar-pegged.

This kind of thinking leads directly to
commodities, particularly gold, as we have
seen in the past two years.

Bullion supporters often are accused of
lunacy -- goldbuggery, some call it -- when
discussing risks of this order. Trust us: we
know lunatics; lunatics are friends of ours;
lunatics are not us. We believe that the U.S.
is still the biggest kid on the block and
that we will prevail over whatever comes.

But the risks are real. Osama bin Laden,
Saddam Hussein, Kim Jong Il, George W. Bush
and Tony Blair are all gunning for the Clint
Eastwood Lifetime Achievement Award. At the
same time, accumulated financial excesses
have created the most vulnerable financial
structure and the weakest economic
environment that the world has seen since
1930. Instability and disunity have escalated
dramatically just as risks to economic and
physical security increasingly require the
opposite.

For what it's worth, for example, we'd guess
that during the protracted efforts toward
consensus -- notice that quot;Chiracquot; rhymes with
quot;Iraqquot; -- the bulk of Iraq's biological and
chemical weapons have been relocated to Syria
and Lebanon, where they are even more likely
to end up with terrorists.

A barbarous world can have its humorous
moments, as when the duct tape futures market
tumbles suddenly into backwardation. Or CNN
spotlights quot;chapel in a box,quot; a new emergency
tool-kit that may or may not include a
collection plate. Or the United Nations picks
Libya to chair its Commission on Human Rights
and Iraq to grace its Commission on
Disarmament.

But it is dark humor today because it is
increasingly clear that the world order is in
fundamental jeopardy.

The discomfort that that fact induces is the
primary spur to the gradually increasing
investment demand for non-financial assets,
including gold, and the second reason that we
believe a secular bull market in such assets
has begun.

For the next decade, as for the last, we
anticipate continuing and occasionally severe
volatility, with a generally upward bias, in
our markets. The principal short-term risk,
we think, is a substantial and involuntary
rise in U.S. inflation and interest rates
brought about by a dramatic additional fall
in the dollar's exchange value. A credit
squeeze and a rapid fall across the spectrum
of asset values could accompany this
surprise, despite the authorities' best
efforts to avoid it.

We would expect gold to decline at first,
recover soon after and then move to new highs
relative to other assets. Time will tell.

With every good wish,

Hans H. Kahn and Daniel Tessler
Au Capital LP
Suite 337
4938 Hampden Lane
Bethesda, Maryland 20814
301-469-8080
digitaldaniel@earthlink.net