This is the 6th 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’.

Other Country Current Circumstances, The World Equity Markets

Other Country Current Economic Circumstances

In the last 2 Posts in this Series I dealt with how I perceive the current and prospective U.S. Economic Circumstance. With respect to the general economic circumstance of other countries at this point in time, I see the U.S. Consumer in some respects as the Atlas holding the economies of the developing countries aloft. If the U.S. Consumer reduces its spending significantly – which in mid-November, 2008 seems to be occurring – I believe that will have a near-term continuing deleterious effect on both the U.S. economy and that of many of its principal trading partners, including Canada, China, Europe, Japan, Korea, India, the OPEC countries, Russia, Taiwan, and the United Kingdom, among others.

I do not know the extent of a negative effect of reduced U.S. Consumer spending in quantifiable terms, but I have little doubt that continued economic growth in the developing countries at recent levels is interdependent with continued growth of the U.S. economy. That likely will change over time as the developing countries, particular China, develop their own market economies and their dependence on the U.S. consumer diminishes. In the meantime, until the U.S. consumer (whose spending in recent years has accounted for approximately 70% of U.S. GDP) begins to spend at 2004 – 2007 and greater levels it strikes me as unlikely the U.S. economy can do other than spiral in the wrong direction, much like a household where both the husband and wife work to pay the bills, is debt-ridden, the husband has just lost his job and can’t readily find another one, and the wife’s income by itself is not sufficient to carry the household debt load and concurrently feed, house, provide clothing for, and educate all family members.

I am not aware of any study that reliably has predicted the timing of the economic self-sufficiency of China and other developing countries. Further, any such predictions made even three months ago likely would now be irrelevant given the world economic circumstances that have unfolded in that short period. Having said that, the current broad uncertainties with respect to economic stability and growth in the U.S., in the other developed countries, and in the developing countries certainly will not advance the ‘self-sufficiency timeframe’ of the developing countries.

It is beyond the scope of this Series of Posts to review the economies of individual countries that collectively are important to economic globalization and the continuation of that process. Suffice to say that in mid-November, 2008 the credit crisis that came to the fore in the U.S. beginning in mid-March, 2008 with the collapse of Bear Stearns and escalated in mid-September, all of which led to the so-called ‘U.S. Financial Bail-Out Bill’, now has become rampant in many of the world’s other developed countries and major economies. Until the air clears, and major asset and liability write-offs and reallocations take place, we are likely to live in an economically volatile and uncertain world.

History would dictate that this should be a time for ‘gold to shine’, yet in the past few weeks the U.S. $ has strengthened against other currencies. Gold, denominated in U.S.$, has dropped in price. To the extent this means that fiat currencies other than the U.S.$ are seeking a safe haven, and believe that the U.S.$ qualifies, it seems to me that one can only conclude that holders of those other fiat currencies believe the economies of countries other than the U.S. are at even more risk in the current environment than is the U.S. economy. A conclusion I for one would find highly startling and disturbing.

The World Equity Markets

1. Current Equity Markets are dominated by Money Management Firms, Investment Banks and Hedge Funds who employ analysts and ‘stock market experts’, many of whom have:

• limited or no hands-on business (i.e. manufacturing, retail, etc.) operating experience;

• (particularly those under the age of 40) worked in equity (i.e. ‘stock’) markets that on balance have been very ‘investor friendly’; and,

• made amounts of money managing the capital of others in excess of what they likely ought to have made.

2. Currently World Equity Markets are evidencing great volatility, as are commodity markets, in circumstances where virtually each day brings further dismal economic news. The price of Gold is not being left out. Volatility is a measure of the state of instability or uncertainty at a given point in time. Importantly, volatility does not imply direction.

3. Anecdotally, mutual funds and hedge funds through October – mid-November, 2008 received and are receiving redemption calls resulting in them liquidating equity positions the volume of which is one factor in broad-based falls in stock prices across most industry sectors. Mining and Oil & Gas are not being left out.

4. One wonders, given the turmoil in the World Equity Markets, what the originators and proponents of the Efficient Market Theory currently are thinking in the context of that theory’s validity. For detailed commentary on the Efficient Market Theory and the pros and cons relating to it see the business valuation text The Valuation and Pricing of Business Interests, The Canadian Institute of Chartered Accountants, 2001.

5. It is difficult to determine when to enter the Equity Markets in circumstances where a number of company’s shares seem to be trading at ‘below value’ prices. The old adages ‘rising tides raise all boats’, and ‘falling tides sink many ships’ make ‘entry point’ decisions difficult.

6. I believe it important to consider that in the past, and in mid-November, 2008 stock market commentators often rely on historic trends, cycles and ‘stock price benchmarks’ as indicators of where the current World Equity Markets are and where they are going. I have serious concerns with that type of analysis, unless the changes in the macro-economic climate, country shifts in manufacturing jobs, current individual country National and Consumer debt levels versus those of prior periods, and so on, all are appropriately factored into said analysis – which adjustments I think is virtually impossible to do in any meaningful way.

7. Over time, the World Equity Markets should act in a logical and ‘more normal’ manner than is the case in mid-November, 2008.

8. Going forward, I suspect that many investors will be more conscious of taking more time to understand share equity valuation principles and concepts, focus more on corporate governance, and rely less on their investment advisors than they have in the past.

9. The turmoil and continuing turmoil in the World Equity Markets ought to auger well for the price of physical gold in the near term. Whether it does remains to be seen.

Concluding Comments

1. This Post should be read in conjunction with Post #4 and #5 in this Post Series that appeared on this Blog on Wednesday, November 12 and Monday, November 17 respectively. These two Posts deal with what I refer to as the Current U.S. Circumstance.

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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