This is the 8th 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. Subsequently I found a 3rd recently published book, Buy Gold Now, Shayne McGuire, 2008, John Wiley & Sons, Ltd. Like the other two, Buy Gold Now is available at Amazon.com. Again, I recommend this book to you. Page references to Buy Gold Now are denoted by (Buy Gold Now – page xx).

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’.

Conclusions Drawn in this Post Series

This Post and the final 3 Posts in this Post Series set out my conclusions with respect to ‘Gold as an Investment’.

Conclusion #1 – What is Gold

Before addressing the question of Gold as an Inflation Hedge or a Deflation Hedge, and Physical Gold and Gold Mining Shares respectively as investments, it strikes me as important to state what I have come to believe what ‘gold’ is. In this regard I have concluded:

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. Gold has always been, and broadly is today, considered a monetary metal.

3. Gold is the only widely accepted monetary asset that cannot be printed (Buy Gold Now – page 197).

4. As a financial asset or ‘stateless money’ it is in the domain of economics and macroeconomics where cause and effect relationships are opaque (Goldwatcher – page 11).

5. Gold’s most notable investment attribute is that it remains, in the words of financial historian Peter Bernstein, “the ultimate certainty and escape from risk”. When all else fails, gold does not (Buy Gold Now – page 112).

6. There is no reliable way to forecast whether the precious metal (gold) will rise or fall 10% next year (Buy Gold Now – page 110).

7. ‘Gold is indestructible by nature. It is non-tarnishable, cannot be corroded by any natural acid, and after lying for centuries in ocean-sunken vessels it will always be able to shine once again’ (Buy Gold Now – page 109).

8. ‘Gold is a sterile asset that pays no interest, yields no dividends and cost money to keep. Accordingly, there is a valuation circle to square before it can qualify as an investment – unless it is bought at a price low enough for a realistic prospect of profit from a sale at a higher price’ (Goldwatcher – page 10).

9. Gold is a ‘commodity’ where a ‘commodity is defined as: ‘anything for which there is demand, which is supplied without qualitative differentiation across a market where its price is determined as a function of its market as a whole’. However, there is a fundamental difference between gold and other commodities as defined. No other commodity is produced virtually entirely for accumulation and not for consumption.

10. Physical gold (bullion, coins, and arguably 22 carat jewelry) is a fundamentally different asset class than equity stocks. It is an alternative investment with a different risk reward profile to financial assets (Goldwatcher – page 4). Gold is a perceived as a ‘store of value’, whereas the capital value of a given company’s equity (i.e typically in stock market parlance translated into a ‘price per share’) at a given point in time is the present value of all prospective after-tax free cash flows (before principal repayment on interest bearing debt) of the business(es) underlying them, less the principal amount of interest bearing debt – i.e. the value of a given company’s equity is based on ‘prospective return’. As a result:

• gold ought to perform best in a climate of uncertainty, material change, and political and cross-border upheaval. It comes into its own whenever there is uncertainty (Goldwatcher – page 4); and,

• equity stocks ought to perform best in a stable political climate with strong property rights, little turmoil, and a growing, well-educated and economically stable population.

11. Gold knows no borders, and is of interest worldwide as a store of wealth. It has intrinsic ‘purchasing power’ at any given point in time referable to how individual goods and services are ‘priced’ against it.

12. Physical gold is problematic as barter. This is because while physical gold can be readily melted and divided, the question of prove of purity must be addressed.

Concluding Comment

1. So where does all this leave me. 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 #7 of 11

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