Nov 10 2008
Gold as an Investment – How I Assess It and Why – Post #3 of 11
This is the 3rd in a series of 11 Posts that will be published on this Blog each Monday and Wednesday from November 3 to December 8. All 11 Posts will be filed under the Blog Category ‘Gold as an Investment’. For previously issued Posts in this Series click here. We hope you find this series of Posts useful.
While preparing this Post Series, I found two recently published books I think particularly helpful: The Goldwatcher: Demystifying Gold Investing, John Katz & Frank Holmes, 2008, John Wiley & Sons, Ltd. and Guide to Investing in Gold and Silver, Michael Maloney, 2008, Hachette Book Group USA. I highly recommend both. Where I have adopted ideas from those books, I have put them in italics. Page references to The Goldwatcher and Guide to Investing in Gold and Silver are denoted by (Goldwatcher – page xx) and (Guide – page xx) respectively. I also recommend www.theGoldwatcher.com Blog and www.GoldSilver.com, websites related to those respective books, to those of you interested in gold.
General Conclusions
My reasoning behind my conclusions with respect to Gold as an Investment are set out in this Post Series. Succinctly, they can be summarized as follows:
1. Gold is ‘real money’, fiat currencies are not. This is because at any point in time gold satisfies all components of the definition of ‘money’ where as a ‘store of value’ that definition in part means that ‘money’ must be able to be reliably retrieved and ‘predictably useful’ when retrieved. Fiat currencies do not meet this test as ‘money’.
2. At any point in time the U.S. $ is a measure of the price of gold, not a measure of its value.
3. At any point in time Gold’s value needs to be thought about in the context of its then current and prospective purchasing power, having regard to prevailing and prospective macro-economic conditions.
4. Whether the future economic circumstance is inflationary or deflationary some gold is a good thing to own as a ‘safe haven holding’.
Economic Globalization, World Conflict
If one accepts that Gold’s ‘value’ as ‘real money’ is in part a function of prevailing and prospective macro-economic conditions it follows (or at least I think it does) that economic globalization and world conflict need to be carefully considered in any reasoned assessment of the merits of ‘gold as an investment’.
With respect to Economic Globalization:
1. Economic globalization has occurred for many years, but both economic globalization and the effects of economic globalization escalated after 2000 and continue to escalate.
2. Economic globalization makes things increasingly interdependent, complex, and more difficult to understand on both a macro and micro basis, be it at a country, state, county, specific business or individual (i.e. personal) level.
3. The world has a finite quantity of individual commodities, resources and a finite ability to grow agricultural products.
4. The world population is ever increasing, standing at approximately 3 billion in 1960, currently standing at over 6 billion, and estimated to grow by a further 3 billion 2050.
5. Some parts of the world’s population are more susceptible to societal problems related to transmittable diseases (such as AIDS) than are others. However, arguably all are susceptible to new strains of viral or bacterial diseases.
6. Individual countries and continents have differing amounts of available fresh water, differing amounts and quality of arable soil in which to grow agricultural products and support livestock, and hence differing abilities to be ‘food self-sufficient’.
7. Short of government intervention (read ‘trade protectionism’ where, for example, existing trade agreements are abrogated or new import tariffs are introduced) labor utilization will always over time gravitate to the lowest cost environment.
8. In my view, trade protectionism today is a far more difficult thing for the government of a particular country to implement in an effective manner than it has been in the past. That is not to say that in difficult economic times the governments of one or more countries will not attempt various forms of it.
9. Technology and technology improvements do at least three important things. First they reduce required labor inputs where manufacturing and service jobs are automated. Second, they may increase manufacturing efficiencies through substitution of improved equipment. Third, they favor more intellectually able and motivated individuals over those less intellectually able and less motivated.
10. We live in an increasingly integrated world, where the ‘partner countries’ in that world have different social program agendas for their citizens, and in all probability in some cases entirely different long-term agendas in the context of their importance and dominance on the world stage.
11. We likely face escalating and increasingly expensive environmental issues, problems and related expenses as new environmental legislation is enacted (likely) first in the economically developed countries and at some point in the emerging market countries, and as ever-greater industrialization occurs in both – although particularly in the economically developed countries there may be technology related breakthroughs and enhancements that may offset some of what otherwise might be enhanced environmental issues related to increased industrialization.
12. Developing (read ‘emerging markets’ such as China and India) countries, are becoming ever-increasing consumers of commodity metals and commodities generally in circumstances of increasing commodity scarcities and escalating extraction and processing costs that typically consume comparatively large amounts of energy.
13. Oil and gas reserves are dwindling without ready alternate energy sources yet having been developed in circumstances where such alternate energy sources are either prolific or economic in the context of even today’s energy prices.
With respect to World Conflict:
1. Wars are inflationary, war debts are often repaid with an inflated currency, and currencies of countries at war tend to be weak (Goldwatcher – page 181).
2. For the U.S., and because of the importance of the U.S. economy the world at large, September 11, 2000 was a fulcrum point.
3. U.S. foreign policy seems to be turning the world against it (Guide – page 96).
4. Religious ideologies are in conflict, particularly at the level of ‘religious extremism’.
5. While in my view no thinking person should wish it so, political upheaval, economic upheaval, terrorism, war and other disruptive forces are always a possibility, and arguably are becoming ever more a probability with the passage of time. These are scenarios that (at least as I see it) the world stock markets tend to react to, rather than anticipate. At the end of October, 2008 there were
• at least 10 ongoing world conflicts, the most notable being those in Afghanistan and Iraq, with the question of Iran’s nuclear ability being a continuous source of tension – see worldconflictstoday.com; and,
• frequent references in the Press and elsewhere to terrorist concerns and activity – for example, see terrorism.com,
none of which suggests all the world’s inhabitants are going to co-exist peacefully any time soon.
Concluding Comments
1. If one accepts that Gold’s ‘value’ as ‘real money’ is in part a function of prevailing and prospective macro-economic conditions, it seems to me that from a 20,000 foot perspective one must think through the timing and likely consequences of economic globalization both in isolation (i.e. as a systematic change to the economic order) and in the context of the effects world conflict and terrorism and potential terrorist acts may have on both inter-country and country specific economic checks and balances.
2. All this said, I think the:
• ever increasing country/country macro-economic interdependence that will continue to result in ongoing trade imbalances and a continuous change to the world economic order;
• ongoing wars in Iraq, Afghanistan, and elsewhere, and the threat of terrorist acts and further terrorist acts
have resulted and are resulting in a circumstance where it is a wise thing to hold some physical gold as a ‘safe haven holding’. That is not to say that based on my thinking to date I am recommending a physical gold holding to the exclusion of owning one or more fiat currencies, equities and other investments. I have simply concluded that I think ‘some physical gold is a good thing to own as a safe haven holding’.
I urge any reader of this Post to comment if they agree with its content, and more particularly urge them to comment if they disagree. If you think any of my thinking is wrong your well-reasoned comments on this Blog Post will be greatly appreciated, and will be published here.
For previously issued Posts in this Series click here.
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.
© 2008, Stock Research DD Inc., all rights reserved.
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Possibly Related Posts:
- The General Public, The Eurozone, and Gold!
- Gold as an Investment – How I Assess It and Why – Post #11 of 11
- Gold as an Investment – How I Assess It and Why – Post #10 of 11
- Gold as an Investment – How I Assess It and Why – Post #9 of 11
- Gold as an Investment – How I Assess It and Why – Post #8 of 11
Ian,
Again I agree with most of your statements. I would like to give you my views on some points which you could implement in some form if you agree with;
[quote] 7. Short of government intervention (read ‘protectionism’) labor utilization will always over time gravitate to the lowest cost environment. [end-quote] and
[quote] 9. Technology and technology improvements do at least two important things. First they reduce required labor inputs where manufacturing and service jobs are automated. Second, they favor more intellectually able and motivated individuals over those less intellectually able and less motivated. [end-quote]
If I understand correctly, you said that the absence of protectionism will over time always deliver the lowest cost environment. In essence by the full use of free market principle. In my view this is not completely correct, so I would like you to consider the following for Economic globalization;
If a government, i.e. the US gov. would not incorporate protectionism measures, there will be the need for domestic and foreign competitors to innovate and increase productivity to gain market share, which we both support. But protectionism in general does not include the fiscal freewheel policy that the (private) FED uses since Alan Greenspan and continues doing with Ben Bernanke, which is; flooding the markets with low interest loans.
The result of these policies (which are not named protectionism) is spurring consumer expenditures, inflating the economy (70 percent of GDP was based on consumer demand) and therefore fueling emerging markets (China, India, South Korea etc) growth as the US has outsourced almost all of their manufacturing labour.
This non-protectionism measure of fueling an economy that should (after 2000 tech-bubble) meet a (firm) recession, was inflated even more. Now we all know how that developed into the credit crisis, with the overvaluations of housing prices, spurring car sales and credit card debt, basically overleveraging the entire financial system.
My point, finally
is that protectionism is not the right word to use here. They didn’t protect anything. Although greed played its part, it think it was mostly ignorance and stupidity that set the demise of the US dollar economy.
With regards to point 9: I’ll keep it short as I partly explained it above already.
I do not agree with your first statement of reducing labor inputs.
Technological improvements are spurred by the increase of productivity by means of reducing labor costs (than may include outsourcing, but also the willingness of lowering wages) and increasing efficiency rates. And I agree with point two; to keep the lead, companies require the most motivated and educated individuals.
I’m looking forward to your thoughts and possible corrections you might consider.
Rob de Graaf
Rob:
Thanks for taking the time to make your two comments.
After reading your first comment (the one you made with respect to Post #2 of the Series of Posts I am now making with respect to Gold as an Investment) I did visit the goldprices.biz site. You obviously have picked up on what I consider to be a critically important point – that gold is about value (or purchasing power) not about day to day price.
With respect to your second comment made with respect to this Post #3 of the Series I comment as follows:
1. When I referred to ‘protectionism’ I was not thinking of government intervention in the context of the activities of the Fed. Rather I was referring to ‘protectionism’ in the context of a government (be it the U.S. government or other government) changing cross-border trade agreements (such as NAFTA) or, for example, imposing tariffs on imported goods. In an attempt to clarify my Post #3 in this regard I have edited the Post to say … (read ‘trade protectionism’ where, for example, existing trade agreements are abrogated or new import tariffs are introduced). Please comment further if you would like to.
2. I agree with your comment on technology improvements increasing manufacturing efficiencies, and have edited Post #3 by adding the words: Second, they may increase manufacturing efficiencies through substitution of improved equipment. I will say, that in my business valuation consulting practice we continually face the problem of attempting to determine the split between the growth and sustaining capital components of capital spending forecasts. This continually leads to a debate as to how much labor and manufacturing equipment replacement efficiencies result from said anticipated capital spending. Recent studies by economists that we have recently reviewed in the context of a ‘fact specific’ business model placed the labor efficiency potential as fairly minor in ‘cost savings’ terms, except where new technology could eliminate labor jobs entirely. Where labor jobs could not be eliminated labor efficiencies were not expect to be significant in the first place, and were expected to decline over time as each member of the continuing labor force became more adept at their respective jobs. Again, please comment further if you would like to.
Ian Campbell
Thanks for your reply. Very clear.
And again, nicely done Ian. Corresponding viewpoints we have.
I just scanned your article once more and found the following advice relating to point 11 and 12;
[quote] 11. We face escalating and increasingly expensive environmental issues, problems and related expenses as “ever-greater” industrialization occurs. [end-quote]
[quote] 12. “Developing” countries, are becoming ever-increasing consumers of commodity metals and commodities generally in circumstances of increasing commodity scarcities and escalating extraction and processing costs that typically consume comparatively large amounts of energy. [end-quote]
11. Implies that (ever greater or developed) industrialisation, which embraces innovation over time, cannot go hand in hand with environmentally friendly and cost-effective industrialization. Which I think is incorrect for EVER-GREATER industrialized nations.
If you meant EMERGING industrialization, that is correct. We as ever-greater industrialized nations can not say to emerging countries; You must use environmental friendly and more costly industrialized technology solutions for developing.
That would imply that we can (in the past) use poluting industrialization and they can’t (now and in the future). Which creates unbalances and political tensions.
For 11. Basically changing ‘ever-greater’ into ‘emerging’ would be upmost correct.
For 12. Changing ‘developing’ into ‘emerging’.
I believe you will understand the essence of my arguments.
brgds and keep up the good work!
Am looking forward to the next column.
Hello Rob:
Again, thanks for your comments. You are discovering I have very little ‘pride of authorship’, which I have always considered a ‘good thing’.
First, given that you did not interpret ‘developing’ to mean ‘emerging market’, I have added this point of clarification to Post #3.
Second, I agree that greater and developing industrialization inherently ought to embrace improvements to what otherwise might be increased environmental problems, and in some cases might mitigate existing environmental problems. Over the years I have seen this occur from time to time in my business valuation consulting practice. Having said that, I don’t think the ‘match’ between enhanced industrialization and improved environmental treatments is ever likely to be perfect. I do believe that ‘environmentalist groups’ will continue to push governments – particularly in the developed economies – to legislate tougher and tougher environmental laws. The counter to this is that in difficult times governments may put such matters on the ‘back burner’ in consequence of having greater concerns they need to deal with. Having said that, I think your comments have merit and have made some further editing changes to Post #3we which I encourage you to review – and comment on if you wish.
Best regards,
Ian
I surely honor your type of ‘pride for authorship’.
Its one of the virtues people lack nowadays when so called outsiders comment on things they write for the general public. Indeed some people simply want to put their stamp on YOUR writings, but others (like me) only consider facts that contribute and at most cooperate to YOUR credited writings.
But, I have to say (with humility)
that your improvements for 11 and 12 are not my intentioned to change the way you did. Don’t you agree the shorter statements you had, said it all the first time? Its really only the two minor changes (I argumented for you) that finish the ‘straight to the point’ sentences you already had. Spot on right they were.
Now they are to detailed in my opinion.
I hope you reconsider 11 and 12 to its former form.
I read the rest of your topic parts. Nothing I saw that was ‘not true’ in my views/opinion.
brdgs