This is the 5th 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 2

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

Continuing from previous Post #4 in this Series, with respect to the current U.S. Circumstance I have come to believe:

12. (this paragraph #12 follows from paragraph #11 of Post #4 of this Series) The significant percentage of the current U.S. cumulative net trade deficit of $7 trillion is held in U.S. Treasury Bills by its trading partners, notably (in order of size of U.S. Treasury Bills held) China, Japan. OPEC, Russia, India, Taiwan, and Korea. The first four collectively account for approximately 70% of the U.S. cumulative trade deficit, the seven collectively account for over 80%. All of this in circumstances where:

• the stability of the U.S. $ likely is dependent at least in part on said trading partners being willing to continue to both take and be willing to hold ever increasing U.S. $ denominated U.S. Treasury Bills. China, which holds approximately U.S.$2 trillion was reported in mid-September, 2008 to be considering a reduction in its U.S.$ exposure; and

• John Katz seems to believe that (paraphrased from The GoldWatcher):

• most countries that own a lot of the dollar balances don’t have any real incentive to trigger a crisis (Goldwatcher - page 16),

• America’s creditors are likely to wait until after the new administration takes office in January, 2009 before taking damaging actions (Goldwatcher - page 122),

• we can’t ignore the danger of protectionism challenging global economic cooperation (Goldwatcher - page 91), and

• if the U.S.’s trading partners at any time decide that their holdings of U.S. $ claims are excessive, a serious and sudden U.S. $ correction is possible (Goldwatcher - page 20).

13. Concurrently, the U.S. Government runs large operating deficits in circumstances where its National Debt approximated $9.6 trillion at July 31, 2008, up from $9 trillion at December 31, 2007 and $6.2 trillion at December 31, 2006.

14. U.S. total debt is over 3 times current annual GDP, a relationship greater than existed during the Great Depression of the early 1930’s in circumstances where net interest as a % of GDP has declined since the early 1980’s. Without the low interest rate environment of the past 25 years, the U.S. Consumer – who accounts for approximately 70% of annual U.S. GDP and a substantive % of world consumer spending presumably would have borrowed less than they did, spent less than they did, and the developing countries would not have developed nearly as quickly as they have. Simply stated, the U.S. Consumer seems dependent on an environment of low interest rates to keep spending – likely even at that at reduced levels from recent years given that the source of part of the U.S. Consumer spending in those years (say, 2004 – 2006) came from borrowing against their escalating house prices (see following).

15. The U.S. financial system is in disarray, with:

• The U.S. Government having to bail out Bear Stearns in March, 2008 as a result of (at least in large part) the sub-prime credit problems that came to a head in mid-2007.

• The fact of 11 U.S. bank failures in 2008 to mid-September, and the threat of more in the offing – with it being reported that in September, 2008 over 115 U.S. Banks and Thrifts considered to ‘be in trouble’ by the Federal Deposit Insurance Corp., although in report dated August 24 by Marcy Gordon (AP) the FDIC Chairman is quoted as saying the majority of U.S. Banks ‘will be able to weather the storm’.

• In mid-September, 2008 grave concerns began being expressed daily as to the possible full extent of the credit crisis that has resulted from the low interest rate environment that, among other things, broadly resulted in U.S. house prices rising significantly from 2002 to 2006 and U.S. home owners borrowing against those escalating house prices to spend on home improvements, consumer goods, vacation homes, and the like.

• Investment Banks are under increasing pressure and in the result are contributing to substantive general economic uncertainty. Witness the Lehman Brothers situation that came to a head in the second week of September, and ongoing concerns about other major U.S. financial institutions.

• Critically important decisions being taken in very short time-spans where I can’t believe all consequences of those decisions can be understood by those making them – witness the Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG situations among others, and in particular witness the recent ‘Financial Bailout Package’ passed by both the U.S. Senate and House of Representatives in the middle of a U.S. Presidential race.

• Unprecedented stock market volatility resulting from a combination of bank credit extension issues, cash calls on hedge funds and mutual funds, margin calls, and multiple other factors.

• Continued pressure on the U.S. Government to provide funding to the private sector as witnessed by the ongoing (at November 16) requests from the U.S. Automotive Industry for Government Financial assistance in the current consumer environment.

16. It is fair to say that while there is a great deal of discussion and concern around the potential writedowns the U.S. banks and banks in other countries may face related to what are broadly referred to as the sub-prime credit issues, there is no reliable quantification of what those writedowns might in aggregate amount to.

17. The U.S. can’t keep on going deeper and deeper into debt forever – the game can’t go on forever (Goldwatcher - page 19). In my view, taking all of the foregoing into account, the only logical conclusion that can be reached is that absent inflation at much higher levels than we in North America have been experiencing for the past many years (which would serve to deflate the purchasing power of the U.S. $ and existing U.S. outstanding paper in the hands of its trading partners) the:

• current U.S. Government annual fiscal deficit spending;

• current U.S. annual military spending, the escalating U.S. cumulative trade deficits; and,

• U.S. Government economic support packages already passed into law and those incremental ones currently under consideration (U.S. automotive industry assistance, for example)

simply are unsustainable – particularly in light of possible U.S. Federal revenue reductions related to near-term potential reductions in sales taxes, corporate taxes and individual taxes as consumers reduce spending. I see the ‘nail in the coffin’ as it were is the loss of ‘never to be recovered’ U.S. manufacturing jobs combined with the almost certain inability of the U.S. consumer to spend at the levels of the past few years.

18. Consider in the context of valuation ‘blockage’ the argument put forward that U.S. property and other assets are worth far more than the aggregate U.S. Debt. Simply put, ‘blockage’ in valuation parlance means that if a whole lot of the same type of asset is put on the market at the same time, the price of individual assets within that asset ‘block’ will be less than if only a single asset was put on the market – the law of supply and demand. The argument that U.S. property values more than support U.S. debt might stand up to scrutiny in circumstances of an ordinary and orderly market, but is less likely to stand up in circumstances of a U.S. economic crisis.

19. In my view common sense dictates that if U.S. assets broadly come available for sale, foreign buyers holding U.S. treasury bills will purchase the best of those assets, not the worst of them – much as was the case when the Berlin Wall came down and Germany attempted to find buyers for the approximate 11,000 businesses that existed in the former East Germany in circumstances where the best and most viable businesses were sold first.

20. Consider also the ‘U.S. is always resilient’ argument put forward by many economists and stock market observers and participants. It is fair to say that as a general rule in human terms resilience is greater when one is young and vibrant than when one is older ant weaker, and when one’s options are greater. Why is this any different for the U.S. whose current ability ‘to be resilient’ strikes me as being much less than has been the case in earlier times.

21. Economists and Stock Market Analysts and Commentators often base their views of what is going to happen in the near and longer term on what has happened in the past – hence cycle and wave theories, stock market ‘bottom’ indicators, and so on. It strikes me that things are significantly different today than they have been in the past, what with the:

• current extent of economic globalization;

• extent of the U.S. cumulative National Debt;

• U.S.’s much greater economic integration with and greater dependence on its trading partners, etc.

than has been the case in the past – and that these significant differences make historic comparisons and expectations based on those comparisons likely less valid than they perhaps have been in the past.

Concluding Comments

1. This Post needs to be read in conjunction with Post #4 in this Post Series that appeared on this Blog on Wednesday, November 12. In summary, my conclusion 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;

• current (based on evidence to mid-November, 2008) drops in U.S. consumer confidence and spending; and,

• the recently legislated ‘bailout financial package’ represents approximately 10% of the total ‘pre-package’ cumulative 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.

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