Gold is unique among commodities as it is perceived as a principal store of wealth. It is an element that does not chemically combine with other elements, does not tarnish, is highly malleable, easy to melt, can be subdivided indefinitely, and can’t be counterfeited.

I believe gold’s economics to be comparatively straightforward:

• annual gold supply is quite inelastic and constrained given the long time frames between the time a commercially exploitable gold resource is found and the time that gold is extracted and refined. The top producing countries historically have been Australia, Canada, China, Peru, Russia, South Africa and the United States, the largest producers having been South Africa, Australia and the United States in that order;

• gold historically has been thought of primarily as a monetary or investment metal and hence a store of wealth – whether held in the form of bullion, jewellery or other ornamentation;

• gold use in industrial (largely electronics) applications while increasing, currently is not substantive when compared with gold investment consumption;

• broadly, demand for gold historically has come from the jewellery industry (60%), investment (coins, medals and bar hoarding – 30%), and industrial uses (10% or less); and,

• central banks influence gold prices pursuant to exercise of their government’s prevailing policies by buying and selling gold in the open market, as do the hedging practices of major producers.

A book I strongly recommend to anyone concerned about current economic conditions, prospects, and wealth growth and preservation, and who is a disbeliever in the efficacy of fiat currencies is Gold, The Once and Future Money, Nathan Lewis, John Wiley & Sons, Inc., 2007. This book is available at most bookstores and at Amazon.com.

Among other things, this book traces the chronology of the historic reliance on a ‘gold standard’ to promote economic stability, and advocates a return to a ‘gold standard’ (abandoned by the U.S. in 1971) as the underpinning of all world currencies. The book, whose premises I would summarize as:

• gold is the ultimate competitor to the U.S. dollar;

• in the current environment of increasing global competition and military conflict anyone with an interest in building or maintaining wealth who ignores the gold market – and by inference both gold bullion and gold stocks - does so at their peril; and,

• a ‘gold standard’ forces governments to be fiscally responsible and provides a stable economic environment and that the adoption of a ‘non-gold standard environment’ operated with fiat currencies (i.e. currencies not backed by gold) will never do,

states that (at pgs 117 – 118):

• gold is hardly ever consumed, used up, or thrown away;

• there is no competition between monetary and industrial uses of gold in circumstances where about 6% of annual gold production is used in dental and industrial uses;

• there is no utilitarian reason to use gold in dental work and new technologies allow ever smaller amounts of gold to be used in electronics;

• of the 125 million kilograms of gold estimated to have been mined from prehistory to 2001, humans still possessed 106 million kilograms, or roughly 85% of it;

• of that total of 106 million kilograms, roughly 34 million kilograms were held by central banks, and 72 million kilograms were held by private citizens;

• the gold market is not subject to the vicissitudes of either supply or demand in the same manner as other markets. For most commodities production and supply are nearly synonymous, whereas annual gold production from mining is a tiny fraction of the total supply; and,

• gold production is spread throughout the world, making a dramatic rise or drop in production due to political factors unlikely.

The book quotes Alan Greenspan in 1999 as saying:

“Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted.”

This statement was made before the serious loss in manufacturing jobs (simplistically over 21% from 2000 to 2007) and enormous escalation in the cumulative U.S. net trade deficits that has subsequently occurred (approximately U.S.$2 trillion from 1999 to U.S.$6.5 trillion by December, 2007 and growing) – see the Economic Research tab of StockResearchPortal.com for detailed charts reflecting these statistics.

Until the past few years the price of gold denominated in U.S.$ has increased more than three-fold while at the same time the U.S. economy has weakened against those of its principal trading partners. Simplistically as I assess it, the price of gold, principally denominated in US$ at a given point in time is influenced by:

• perceived future inflation rates;

• changes in US$ purchasing power and exchange rates; and,

• demand as a safe haven investment.

As I have noted in prior Posts, I became interested in gold in mid-2005 as an investment and what I perceive to be the leverage to the gold price that I think can be realized by investing in gold mining and successful gold exploration companies. At that time I concluded for a number of reasons that continued U.S. consumer spending was fundamental to near term continued world economic growth, that the U.S. was ever more rapidly becoming economically dependent on its trading partners, and that the U.S.$ would fall after mid-2005 against many of the other world currencies. That has happened and I see no reason to prospectively change my view today. It is that belief that led me to focus my own investments on precious metals, oil & gas, and cash – holding a cash position being my bet against my being wrong going forward.

Having said all that, my conclusion is that whether as a reader of this Post you elect to visit and sign-up to use StockResearchPortal.com or not, if you are interested in building and preserving wealth in the near and long term you should study gold carefully in circumstances where I believe there is a high probability it will escalate in price going forward, but even more importantly should act as hedge against wealth (defined as ‘purchasing power’) deterioration. In the past many investment experts have advocated holding a comparatively small percentage of one’s wealth in gold bullion and gold stocks. In my view that advice should be carefully considered in what I perceive as escalating economic risk in the current environment.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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