Confidence based money (all the official currency in use today) comes into existence with the creation of debt. When a bank makes a loan (to either a private entity or the government), it deposits the amount of the loan into the account of the borrower. The total supply of money in the economy is hence increased by the amount of the loan. As newly created currency makes its way into the economy it has the effect of reducing the value of all existing currency units, thus causing prices to increase. An increase in the quantity of money is called INFLATION, and a rise in the general price level is usually (but not always) an effect of this inflation. A decrease in the total supply of money is called DEFLATION, a phenomenon that almost never occurs in our current system due to the ability of the nation's monetary authorities to create an unlimited quantity of currency notes.

A monetary system supported by nothing more tangible than confidence, in which the expansion of debt results directly in money supply growth, is inherently unstable. Firstly, confidence can 'turn on a dime' leading to the rapid destruction of savings. Secondly, with no physical limits on money creation the purchasing power of the currency will inevitably decline. Thirdly, an increase in debt/money necessarily leads to a higher total interest repayment burden. Since each new Dollar creates a liability in excess of one Dollar (due to an obligation to pay interest that accompanies the creation of each new Dollar), the total amount of liabilities within the system always exceeds the total amount of money available for debt repayment. As such, our monetary system can be likened to a giant Ponzi scheme in which the supply of money (and debt) must continue to be expanded simply to avoid a financial collapse.

The Role of Gold

The inherent instability of our current monetary system means that debt related crises will continue to occur. Each new crisis, in turn, will prompt central banks to create money in ever-increasing amounts in order to postpone a financial collapse. It is inevitable that, without any link to gold or silver (an anchor to the physical world), the relative valuations of the various fiat currencies will continue to oscillate wildly as large amounts of money dart from one location to the next in search of safety or to profit from interest and exchange rate differentials. As exchange rates become more and more volatile and each currency becomes worth less and less in terms of physical assets, the confidence on which the entire monetary system is based will erode.

Gold, throughout the ages, has proven itself time and time again to be the ultimate refuge in times when confidence in the official form of money was declining. Our belief is that the monetary system that has been in effect since 1971 (when the official link between gold and the US Dollar was severed) is in a serious state of disrepair. As the recognition of the inherent defects in this system becomes more widespread, confidence will firstly waver and then collapse leading to panic buying of gold. A goal of the Speculative Investor is to identify ways of profiting from the coming period of currency depreciation and declining confidence through investment in the stocks of gold mining companies.

The Internet

The other major investment goal of the Speculative Investor is to profit from the continuing phenomenal growth of the Internet.

The Internet will change the way almost every business on Earth is conducted and will have a profound influence on the lives of a large proportion of the world's population. It is, without doubt, one of the greatest inventions of all time and is set apart from other great innovations, such as the automobile, the telephone and the computer, by the speed and geographical spread of its impact. Whereas automobiles and computers are still unaffordable to a large part of the world's population, the Internet, in its infancy, is already reaching people in some of the poorest countries.

Despite the obvious power of the Internet, the majority of Internet-based companies will never make a profit and will therefore not survive as viable standalone businesses. The challenge is to find a method of valuing Internet stocks that takes into account the blue sky growth potential of this industry whilst paying close attention to the need for a business to be profitable and cashflow positive within a defined period of time. In particular, we are not interested in companies that offer a free product based on the vague concept that more eyeballs will eventually translate into profits some time in the undefined future.

Internet stocks are extremely volatile as sentiment regarding this sector of the market oscillates wildly between exuberance and gloom. These emotional swings provide an intelligent and objective speculator with excellent opportunities to both buy and sell.

There will still be fortunes to be made in the Internet stocks for decades to come, although individual stock selection will be critical (the indiscriminate buying of anything with a 'dot com' in its name will not be an effective strategy).

Conclusion

The unquestioned financial wisdom of the moment is that gold, as an investment, is dead. We are told ad nauseam that there is no inflation and that stocks, if bought with a long term perspective, still represent the best investment choice. However, the unquestioned wisdom of one investment cycle is always seriously questioned at the beginning of the next cycle, before being totally discarded. In our opinion, the next cycle will be characterised by a resurgence of gold and gold stocks, and a continuation of the Internet stock boom (with a large emphasis on stock selection). As such, every portfolio should have a core holding of both gold and Internet stocks (including the non-Internet technology stocks that benefit from the huge growth of the Internet, such as telecommunications, software, computer, and communications equipment stocks). Outside of these core holdings the most successful investors of the future will be those who are able to take advantage of ever-increasing volatility by trading in and out of stocks.