Beginning the year at 99.35, XAU rose to 102 in March before dropping to 78.73 in May. From that point, investors moved into gold stocks and gold funds with gusto. XAU's rise to close the year was an increase of over 62% in less than eight months. The average gold fund was up over 30% for the year.

Worldwide, gold meandered through the markets until late May, when French and Dutch voters rejected a proposed European constitution. When it became apparent that the stability of the euro might be in question, central bank reserves began moving out of euros and into gold as it became a more viable reserve. I view this as a major pivot point.

Central banks unwilling to let the dollar sink against their own currency and gain a trading advantage flooded the market with liquidity. As a result, the dollar index remained high even as it was losing value. Gold therefore started rising in all currencies, along with the dollar.

The surge by gold in September was brought on by the recognition by many investors that the Federal Government's offer to spend $100 billion to aid Katrina victims might have been overkill for a budget already in deficit. Meanwhile, each trade deficit seemed to set another record, month after month, with no improvement in sight. Shortages in petroleum supplies became big news when Katrina cut off supplies from the Gulf of Mexico and disrupted refinery output. We can expect higher petroleum prices in the future.

In November, Russia confirmed that it has decided to increase its share of gold reserves from 5% to 10% of total foreign reserves. China mentioned that they were also interested in adding gold to their reserves. Central banks with a policy of selling suddenly began to reconsider. A rally begun in November extended into December and began to build on its own momentum.

In addition, India, already the number one consumer of precious metals, has shown that its recent growth has produced a new generation of young entrepreneurs with money to spend, and much of that is going into gold consumption.

The growth of China and India as consumer societies has increased the price of 'stuff', including all construction materials. Copper, lead, zinc, oil, palladium, platinum, steel, cement, and uranium all launched bull markets. As long as demand continues to climb and supplies are limited, prices will go up. This also applies to gold and silver as production from established mines decreases.

The U.S. housing market continued its enthusiasm, making and selling record numbers of new and used houses. However, by year's end, mortgage refinance applications were plummeting as mortgage rates edged up. October's record for new home sales was followed by a big drop in November. The inventory of unsold houses has now reached a record number and home prices are starting to dip slightly. The trend is turning and this will remove part of the consumer spending force which has supported the economy for the past three years.

The Dow ended the year essentially unchanged, closing at 10717. However, high levels of consumer spending for the Christmas holidays showed plenty of confidence in the economy as the year ended, and almost all stock markets around the world had substantial gains and remained in a bullish mode.

The yield curve for the two year treasury and the five year treasury have become inverted, which sometimes signals an upcoming recession. This would tend to put a cap on inflation and gold.

By December, Placer Dome(PDG) had agreed to be taken over by Barrick Gold(ABX). Expect large mines to buy up more smaller mines and exploration companies to maintain there reserves.

fn       Fund                     1 mo   3 mo  12 mo   2 yr   3 yr
14 PMPIX Profund Prec Mtls Ultr   14.8   17.2   38.3   14.8   82.1
11 MIDSX Midas Fund           .   14.6   19.1   39.7   35.9  106.3
20 USAGX USAA Precious Metals .   13.8   17.6   39.2   23.3  113.0
 3 BGEIX Amer Cent Global Gold.   13.3   15.6   29.2   18.6   73.9
18 USERX US Global Gold Shares.   12.9   14.7   32.8   24.3  107.7
 5 EKWBX Evergreen Prec Mtls B.   12.9   14.1   34.6   24.5  105.9
12 OCMGX OCM Gold             .   12.8   13.9   25.9    8.8   62.3
10 LEXMX ING Precious Metals A.   12.3   14.1   32.1   17.8   72.5
 8 FKRCX Franklin Gold & PrMt A   12.3   16.0   40.5   29.4   93.0
19 UNWPX US Global World Pr Mns   12.2   13.1   30.6   31.8  151.7
13 OPGSX Oppenheimer Gold A   .   11.7   14.3   31.4   19.7   90.5
 4 INPMX Riversource Prec MtlsA   11.0   12.2   25.6    7.3   70.6
 1 ASA   ASA Ltd              .   10.8   19.2   39.7   20.8   36.6
17 TGLDX Tocqueville Gold     .   10.5   12.5   29.7   21.6   87.0
 2 FGLDX AIM Gold & Pr Mtls Inv   10.3   12.6   32.6   26.1   85.7
15 RYPMX Rydex Prec Metals    .    9.7   12.0   21.5    3.7   47.5
 9 GOLDX Gabelli Gold         .    9.2   12.0   31.1   15.8   73.0
 6 FSAGX Fidelity Select Gold .    8.8   17.3   41.2   25.5   65.4
 7 SGGDX First Eagle Gold A   .    7.6   14.6   26.1   18.2   64.9
22 VGPMX Vanguard Prec Metals .    6.9    6.8   43.8   48.0  135.2
21 INIVX Van Eck Intl Inv GoldA    5.6    8.8   26.5   16.4   68.0
16 SGDAX Scudder Gold & Pr Mt A    2.9    6.5   12.3    0.7   96.1

December turned out to be another excellent month for gold and gold funds following November's advance. The surge in the price of gold peaked on December 12 over 535, and rallied at the end of the month after a short correction. All funds gained with some much more than others.

Over the last four months, Midas Fund (MIDSX), Fidelity Gold (FSAGX), Franklin Gold (FRKCX), and Profunds (PMPIX) all made major gains to try and overtake Vanguard (VGPMX), but Vanguard managed to finish on top. The lowest fund for the year was Scudder(SGDAX) at 12%, by itself a good showing. The average gold fund was up over 30%.

The Position indicator gives the relative position of a fund between its 52 week high and low. A high is represented by +100 and its low by -100. Positions and prices as of December 30, 2005.

  				                   nav
fn          Fund                  pos   11/30/05 12/30/05
19 UNWPX US Global World Pr Mns  100.0    19.03   20.32
 7 SGGDX First Eagle Gold A   .   97.2    19.36   20.34
 6 FSAGX Fidelity Select Gold .   97.2    32.79   33.24
17 TGLDX Tocqueville Gold     .   97.1    38.82   40.80
12 OCMGX OCM Gold             .   97.0    12.85   14.49
11 MIDSX Midas Fund           .   97.0     2.61    2.99
 8 FKRCX Franklin Gold & PrMt A   96.6    22.97   25.64
13 OPGSX Oppenheimer Gold A   .   96.5    21.91   23.29
18 USERX US Global Gold Shares.   96.5     9.58   10.70
20 USAGX USAA Precious Metals .   96.4    18.75   21.18
 4 INPMX Riversource Prec MtlsA   96.3    10.62   11.79
 9 GOLDX Gabelli Gold         .   95.6    19.21   20.80
 5 EKWBX Evergreen Prec Mtls B.   95.6    37.75   42.56
 3 BGEIX Amer Cent Global Gold.   95.6    13.68   15.50
10 LEXMX ING Precious Metals A.   95.1     7.94    8.90
 1 ASA   ASA Ltd              .   94.6    49.65   55.01
15 RYPMX Rydex Prec Metals    .   93.5    42.26   46.37
14 PMPIX Profund Prec Mtls Ultr   92.7    36.13   41.47
 2 FGLDX AIM Gold & Pr Mtls Inv   91.5     4.39    4.84
22 VGPMX Vanguard Prec Metals .   88.1    22.46   23.20
16 SGDAX Scudder Gold & Pr Mt A   76.6    18.88   19.42
21 INIVX Van Eck Intl Inv GoldA   64.2    11.71   12.36

Most of the funds set a new high in late December and dropped back slightly on the last day of the month. UNWPX was the only one still going up on December 30. All are not far from their highs for the year.

The following list shows the approximate size of funds as measured in total assets under management. (In $millions as of the end of December) This is only an approximation as the size changes daily with new purchases, redemptions, and nav changes. Relative positions of the funds usually don't change much. The largest remain the largest.

fn         Fund                  $assets
22 VGPMX Vanguard Prec Metals .   2295
 6 FSAGX Fidelity Select Gold .    951
 3 BGEIX Amer Cent Global Gold.    798
 7 SGGDX First Eagle Gold A   .    666
 8 FKRCX Franklin Gold & PrMt A    629
17 TGLDX Tocqueville Gold     .    624
 1 ASA   ASA Ltd              .    531
20 USAGX USAA Precious Metals .    398
19 UNWPX US Global World Pr Mns    348
13 OPGSX Oppenheimer Gold A   .    335
 9 GOLDX Gabelli Gold         .    328
21 INIVX Van Eck Intl Inv GoldA    299
15 RYPMX Rydex Prec Metals    .    165
16 SGDAX Scudder Gold & Pr Mt A    153
14 PMPIX Profund Prec Mtls Ultr    133
 2 FGLDX AIM Gold & Pr Mtls Inv    125
10 LEXMX ING Precious Metals A.    105
18 USERX US Global Gold Shares.    100
12 OCMGX OCM Gold             .     89
 4 INPMX Riversource Prec MtlsA     75
11 MIDSX Midas Fund           .     68
 5 EKWBX Evergreen Prec Mtls B.     54

Over the past four months, fund holdings increased significantly as more money entered the gold market. Millions are going into Vanguard Precious Metals(VGPMX), Fidelity Select Gold(FSAGX), and American Century Global Gold(BGEIX), all well know no-load funds, but First Eagle Gold(SGGDX) and Franklin Gold(FKRCX) are load funds and are getting their share. The leader by far is still Vanguard. As gold becomes more of an acceptable mainstream investment, these funds will get more.

The beta indicator measures the relative volatility of a fund's net asset value (nav) movement over the last 52 weeks as compared to the gold fund group average, 1.0. This number indicates volatility by measuring the difference between a fund's high and low navs, but does not specify the direction of movement, so it is only a measurement of relative activity of the price of the fund.

fn       fund                     beta
14 PMPIX Profund Prec Mtls Ultr   1.61
11 MIDSX Midas Fund           .   1.27
18 USERX US Global Gold Shares.   1.14
21 INIVX Van Eck Intl Inv GoldA   1.10
20 USAGX USAA Precious Metals .   1.10
10 LEXMX ING Precious Metals A.   1.08
 8 FKRCX Franklin Gold & PrMt A   1.08
 1 ASA   ASA Ltd              .   1.07
 5 EKWBX Evergreen Prec Mtls B.   1.06
22 VGPMX Vanguard Prec Metals .   1.05
 6 FSAGX Fidelity Select Gold .   1.01
15 RYPMX Rydex Prec Metals    .   0.99
 9 GOLDX Gabelli Gold         .   0.99
 2 FGLDX AIM Gold & Pr Mtls Inv   0.98
12 OCMGX OCM Gold             .   0.92
 4 INPMX Riversource Prec MtlsA   0.92
19 UNWPX US Global World Pr Mns   0.87
13 OPGSX Oppenheimer Gold A   .   0.83
16 SGDAX Scudder Gold & Pr Mt A   0.83
 3 BGEIX Amer Cent Global Gold.   0.82
 7 SGGDX First Eagle Gold A   .   0.75
17 TGLDX Tocqueville Gold     .   0.74

The beta for each fund may change as the fund advances and declines, but the general position on the ladder doesn't change much, except as a reference to other funds. As you can see, there is a big difference between management policies of different funds. Perhaps the greatest difference is the policy of Profund (PMPIX) to leverage purchases or go 100% cash when they want. This policy produces a higher volatility rating and more amplified returns in an up market.

Some funds make distributions to shareholders during the year, usually in December.

                                    $
 6 FSAGX Fidelity Select Gold .   3.86
17 TGLDX Tocqueville Gold     .   2.09
 1 ASA   ASA Ltd              .   1.20
13 OPGSX Oppenheimer Gold A   .   1.18
19 UNWPX US Global World Pr Mns   1.04
22 VGPMX Vanguard Prec Metals .   0.80
 7 SGGDX First Eagle Gold A   .   0.49
 9 GOLDX Gabelli Gold         .   0.18
 8 FKRCX Franklin Gold & PrMt A   0.16
20 USAGX USAA Precious Metals .   0.16
18 USERX US Global Gold Shares.   0.12
 5 EKWBX Evergreen Prec Mtls B.   0.07
12 OCMGX OCM Gold             .   0.05
10 LEXMX ING Precious Metals A.   0.02

Some don't.

 3 BGEIX Amer Cent Global Gold.   0.00
 2 FGLDX AIM Gold & Pr Mtls Inv   0.00
 4 INPMX Riversource Prec MtlsA   0.00
11 MIDSX Midas Fund           .   0.00
15 RYPMX Rydex Prec Metals    .   0.00
16 SGDAX Scudder Gold & Pr Mt A   0.00
21 INIVX Van Eck Intl Inv GoldA   0.00
14 PMPIX Profund Prec Mtls Ultr   0.00

Vanguard Precious Metals (VGPMX) maintained leadership most of the year by investing in metals and natural resources besides gold and silver, which had a weak first five months. As gold began its move after May, other funds began to catch up.

As the surge in gold maintained its strength, all gold equities and funds benefited. By the end of the year, with gold at 517, analysts differ on the short term direction, but all agree that the long term direction is definitely up. Some point out that this move from 417 in May is up 24% in seven months and must take a breather. Others feel that most of December was a breather following the December 12 peak, and we are now ready for another surge. The international conditions which emphasize worldwide demand for 'stuff' with limited supplies haven't changed. However, at a certain price, buyers take a rest, and some feel that India and China investors are close to not buying.

Normal economics would expect the price of gold to move in an inverse relationship with the U.S. dollar, but all of 2005 did not fit into that neat arrangement. First, the peak in gold at 454 in early December, 2004, matched a low in the dollar near 81, which remained near there entering the new year. A January rally to 85.4 coincided exactly with a drop in XAU from 99.3 to 88.6 and a low in gold of 412 on February 8. A rally in gold to 446 and XAU to 101 on March 11 matched within a day the fall in the dollar to 81.4. From that point, gold slowly slid to 415 by June 1. However, by late May, the dollar had advanced to 87 and subsequently kept right on rising to 90 in July. Meanwhile, the XAU index rallied from a low on May 16, two weeks ahead of gold. Most gold funds have that as their low date. Coinciding with this timing was the rejection of the European constitution in late May, but gold investors had already foreseen it by buying gold stocks. From that point until December, gold and the dollar no longer had the neat inverse relationship since both came to be courted as reserve currencies. Gold rallies in September and November coincided with dollar advances, not expected declines.

However, just when you thought you have a convenient relationship to bet on, things changed. The resurgent rally in gold from late November to December 12 coincided with a slide in the dollar from 92.4 to 89.7. The correction in gold occurred before the dollar rallied as if gold were now driving the dollar. The year ended with both rising in tandem. Gold closed at 517.1 and XAU set a new record at 129.56 as the dollar rose to 91.17.

Why has this old relationship become unreliable? Perhaps its because of the weakness in the euro, and perhaps its because other central banks are also flooding the currency markets. Since the dollar index is a relational number, a high dollar index measures its value against other currencies, not its true value. Since all currencies are being inflated, prices will soon demonstrate that. The dollar is only maintaining its position against other weakening currencies but not gold. In other words gold will become more valuable in all currencies, which is exactly what is happening. This is not a short term phenomena.

A personal note. When analyzing the changing environment for investments, political agendas or religious viewpoints should not overrule what is really happening and the consequences. For instance, while it was necessary to help Katrina victims, the overkill in support cannot be supported by the federal bankbook every time someone in our country or the world has a bad day. It is financially untenable. Since most politicians don't seem to have the backbone to stand up against compassionate spending, I expect that the fiscal deficit will grow, the trade deficit will continue to balloon, the Social Security funding problem to get worse, the Medicare deficit will increase, unfunded pension problems will fall on the shoulders of the federal budget, and the dollar will get weaker in terms of a higher gold price. It is just a matter of time as the bull market in gold continues.