The Investment Case for Gold

It is a “must read” for anyone interested in the gold market, it is a very well thought out and well written essay typical of Hathaway’s work.

As far as gold itself is concerned, I will let that stand for the moment.

One of the things that Hathaway mentions in favour of a gold investment is that US consumers are so deeply into debt that they are unlikely to get the economy into high gear through consumer spending. The other main pillar of economic growth, corporate fixed investment has already been in the doldrums for some time now. Over perhaps as much as the past year, it has been largely the consumer household that could free up fresh funds through a refinanced mortgage, taking advantage of lower rates as well as the fact that the property boom can support a substantially higher mortgage to replace the old one, which has kept the spending going and the economy just afloat.

And, of course, they were assisted by US manufacturers of motor vehicles who were kind enough to offer zero percent financing on new purchases – which helped to get stock out of inventory in advance of the new 2002 models, and helped to set a new record last year for the number of vehicles sold.

Very prominent, too, in getting consumers to spend were official spokesmen of various kinds and the people of the media who have tried so hard to get everyone sold on the idea of a V-shaped recession that will soon rebound into a new bull market, if this is not already under way.

In the light of this optimism, consider the following:

For the first three quarters of 2001, the one hundred companies that make up the Nasdaq 100 index – including, of course, Microsoft, Intel, Cisco, Oracle and Dell Computers – the 5 biggest – have informed their shareholders that they have made a total of ,1 billion of profit. At an average of 0 million each that does not sound too bad at all, even if the distribution can be expected to be heavily skewed towards the heavyweights.

These are also the results the financial media swooned over when they remark that the performance of these great companies met or exceeded analyst expectations.

As it happens, the above results were drawn from the very popular “pro forma” income statements prepared for public consumption – in which all kinds of major expenses and losses have been excluded from the bottom line on the premise that these are “non-recurring”. Except that observers have noticed much the same items have been appearing regularly, quarter after quarter.

Now a different set of income statements are submitted to the SEC, the regulating body of Wall Street. For the first 9 months of 2001 these statements reveal that the top 100 Nasdaq companies, between them, have suffered real accounting losses to the tune of ,3 billion. This means that the actual financial position of these companies are just over 0 billion worse off than painted in the reports going to shareholders.

Or an average of billion per company of what is at best ‘sleight of the pencil’ and at worst, as we may find later, cause for successful litigation by disgruntled shareholders. Note that Oracle is one of few who do not prepare “pro forma” statements, but distribute the SEC version to shareholders as well.

Given this state of affairs, it will not surprise if US investors soon follow the example currently being set by their Japanese colleagues, queuing up to purchase physical gold – in some instances brokers report a 15-fold increase year on year. And the gold is being taken home – not left in the bank vaults.

In the meantime, the above news on Nasdaq corporate profits implies one is taking a major risk by remaining invested in most industrial shares.