This is the 4th 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’.

The Current U.S. Circumstance – Part 1

Note: Graphs summarizing the majority of the statistics quoted in this Post can be found under the Economic Research Tab at StockResearchPortal.com.

With respect to the current U.S. Circumstance I have come to believe:

1. The U.S. is the #1 military power in the world.

2. The U.S. is the world’s largest economy. Its citizens are collectively by far the largest consumer group in the world, in circumstances where they account for approximately 70% of U.S. GDP. Developing countries such as China and India currently have a high degree of dependence on the U.S. consumer’s continued ability to spend at historic levels to fuel continued domestic growth in those countries. Currently if the U.S. consumer group catches a cold, which I believe it has and is only now being diagnosed, the rest of the world may develop pneumonia or worse.

3. The U.S. population, like that of many developed countries (Canada included) is aging. This population demographic will lead to significant increases in old age security, health and welfare payments to the extent the populace, through the government, will be able to financially support such programs. Social Security and Medicare Administrations have estimated those programs’ total financial imbalances of a staggering $90 trillion (Goldwatcher – page 95). While other estimates vary, all such estimates I am aware of are significant multiples of the current U.S. National Debt.

4. In the past many years, but particularly after 2000, the U.S. has become both increasingly dependent on its trading partners, and weakened in its trading relationships with them.

5. The U.S. is not energy self-sufficient and is unlikely to be in the foreseeable future, if ever.

6. U.S. consumer credit stood at $2.58 trillion at August 31, 2008, up from $2.5 trillion at September 30, 2007.

7. Where a ‘house foreclosure’ is defined as the total of all default notices, auction sale notices and bank repossessions, in the twelve months ended September 30, 2008 there were 2.9 million house foreclosures in the U.S. versus 1.9 million in the previous 12 month period. For the quarters ended December 31, 2007, March 31, 2008, June 30, 2008 and September 30, 2008 U.S. house foreclosures were 642,000, 690,000, 756,000 and 842,000 respectively.

8. To September 30, 2008 existing and new housing sales and housing starts all were down significantly on a year over year basis.

9. U.S. consumer confidence dropped very significantly on a year over year basis from October, 2007 (95.2) to October, 2008 (38.0).

10. By the end of 2007 the U.S. had lost over 20% of all its manufacturing jobs that existed at the end of 2000, and continues to lose manufacturing jobs as each month passes. These manufacturing job losses have been more than offset in absolute numbers by service job gains. Having said that, manufacturing jobs typically pay better than do service jobs, and manufacturing jobs create products of long life and redistribution potential which service jobs generally do not.

11. The U.S. cumulative net trade deficit, which stood at ‘nil’ at the end of 1973 – 2 years after the U.S. abandoned the Bretton Woods Agreement and the Gold Standard, had escalated to $2 trillion by the end of 1999, today stands at approximately $7 trillion, and currently increases each month by approximately $60 billion. To put that latter number in perspective, in the six-year period ended 1979 the U.S. accumulated a net trade deficit of approximately $80 billion, which it has come close to matching in each of the last 42 months.

Concluding Comments

1. This Post needs to be read in conjunction with Post #5 in this Post Series that will appear on this Blog on Monday, November 17. In summary, my conclusion at the end of the following Post is that the U.S. (among other things):

• while still without question the world’s dominant economy, is becoming ever more dependent on its trading partners while it continues to lose manufacturing jobs and continues monthly to import far more than it exports;

• continues to run significant annual fiscal deficits;

• debt obligations before consideration of social benefit contingencies have approximately doubled in the past 8 years;

• stock markets and credit system currently is in disarray; and,

• the recently legislated ‘bailout financial package’ represents approximately 10% of the total ‘pre-package’ U.S. National Debt. In all probability this ‘package’ will exacerbate U.S. debt obligations at a time when its principal income tax revenue sources (corporate and individual) – barring income tax rate hikes – are have a high probability of declining in the near-term.

2. I don’t know the exact route to the ‘end game’ nor am I able to predict the ups, downs, and disruptions along the way. Having said that, I intuitively think the standard of living enjoyed by upper and middle economic class Americans and Canadians is likely to decline over time – perhaps more abruptly than one would like to imagine. In such an environment, if one accepts that Gold’s ‘value’ as ‘real money’ it seems to me that 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’.

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.

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

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