For those unfamiliar with the term, simply put structural unemployment means there is a meaningful mismatch between the skill-sets of unemployed workers and where they live, and the skill-sets required to fill available jobs and where those jobs are located.

Structural unemployment is a big deal if it exists in the economy of any country.  In the case of the U.S., which is still a major driver of the world economy, I believe structural unemployment to be a 'very big deal'.  If the U.S. has a serious level of structural unemployment (and I think it does) as it works to convert from a ‘manufacturing and service based economy’ to a predominantly ‘service based economy’, it has a long-term problem that is only now being talked about by economists and commentators.  Structural unemployment is a very serious problem for the U.S. in that if it exists in a material way in circumstances where the manufacturing sectors and residential and commercial construction sectors do not come back ‘big time’ in the near term, the following things seem to me to be inevitable:

1.          the U.S. will face high levels of unemployment for many years to come;

2.          U.S. worker re-training costs for younger people employed in manufacturing and residential and commercial construction (25 – 45 age group) will be time consuming and expensive;

3.          U.S. GDP will suffer in both the near term and long term from reduced consumer spending;

4.          U.S. Government (at all government levels) income and sales tax receipts will be lower than anticipated, and government budget deficits accordingly will be higher than expected; and,

5.          U.S. monthly net trade deficits will continue to run a comparative high monthly and annual amounts,

I do, and on the basis readers may find it helpful, here it is.  Note that I apply this same process irrespective of what industry sector (including non-resource sectors) a company I decide to ‘get serious’ about falls into.

First, I attempt to identify and do initial research on a company I think might be an interesting investment by using one or more ‘Research Websites’ and a combination ‘numeric, factual, subjective, and in the end intuitive’ screening process I have developed.  The criteria I use when ferreting out prospective Junior Gold Exploration Companies, for example, are summarized in a Post I will be making later today to this Investment Education Forum (see my answer to the Question ‘What are the main drivers I should be looking to when researching a junior gold exploration company?).

Second, if I find such a company I buy a ‘starter position’ shareholding in the company – usually about $1,000 - $3,000 worth of stock depending on the price per share.

Third, I develop a series of questions I have about the company that have resulted from my preliminary due diligence work.  These questions often relate to its Board, the company’s option strategy, its management, its overall strategy, its monthly cash ‘burn rate’ if it is an explorer, and so on.

Fourth, I call the Company’s President or Investor Relations Executive.  I prefer to speak directly with the President, but recognize that with larger companies that is not always possible.  I always introduce myself as a shareholder, which by then I am.  I have never found a single Company Executive who was unwilling to talk with me, or who was disinterested in the conversation.

Fifth, during the course of that conversation I reach a conclusion as to how interested I am in investing in the company.  If I am not interested based on the conversation, I simply thank the Executive for their time at the end of the conversation and sell the ‘starter position’ shareholding I had previously purchased.  If I continue to be interested in the company as an investment I buy more shares – the number being dictated by how attracted I am at that stage to the company as an investment in the context of the balance of my portfolio holdings at the time.  If I am extremely attracted to the company as an investment, during the course of my telephone conversation I arrange to meet with the Executive I am speaking with – which of course may entail air travel.  I have never had an Executive refuse to meet with me.

Sixth, if I meet with the Company’s Executive I completely reassess my then investment in the company and either sell it, hold the shares I then own, or add to the position.

Seventh, I continuously monitor my Investment in the company by following its Press Releases carefully, its day to day share price and trading volumes, etc.  Since I have established a ‘relationship’ with one of the Company Executives through a telephone conversation, or a combination telephone conversation/visit, I infrequently call that Executive with any further questions I have.  I am very careful in this regard to limit the number of such calls, so as not to add to the ‘nuisance’ calls these Executives receive.

Eighth, through my continuous monitoring process I am continuously assessing a ‘sell price’ for part of, or all, of my investment.  I do not become ‘married’ to any one investment, and don’t hesitate to take losses if I become disenchanted with an investment for any reason.

Ninth, I think continuously about two ‘Cardinal Rules’ I believe in:  (1) any day I don’t sell an investment is the day I ‘buy it’ all over again, and (2) I work to eliminate the ‘greed factor’ – and when it comes to my investments that are doing well I can assure you I am every bit as guilty of getting caught up in the ‘greed factor’ as anyone else.

A final comment.  When I have described my investment process to people who have asked me if I have one, many say they couldn’t follow such a process because they don’t have the ability to do that, and in any event wouldn’t want to appear to be ‘stupid’ when asking questions of an Executive.  While I can’t change people’s psyches, I suggest readers not ‘sell themselves short’.  The people on the other end of the phone typically are decent, hard working people with a real interest in what they are doing, and in their companies – and love to talk about both.

·        what is the current U.S. cumulative National Debt, and what was the U.S. cumulative National Debt at the end of 2000? (answers, about U.S.$13 trillion and U.S.$6 trillion respectively;

·        what is the current targeted U.S. Federal Reserve inflation rate? (answer, 2%);

·        what is the current U.S. monthly net trade deficit? (answer, it varies from month to month but currently runs about U.S.$40 billion/month);

·        what is the current cumulative U.S. net trade deficit? (answer, just under U.S.$8 trillion);

·        what % of the cumulative U.S. net trade deficit has been accumulated after 1999? (answer, about 75% of it);

·        what % of U.S. manufacturing jobs have been lost after 1999? (answer, about 40% depending upon how this is measured);

·        what is the current U.S. unemployment rate? (answer, the posted rate is 9.7%, but the estimated actual rate is much higher at as much as 17%;

·        specifically in what economic sectors is the U.S. going to be able to develop meaningful, long-term jobs that will reduce its current unemployment rate back to what is thought of to be full employment (being 4% - 5%);

·        how important is U.S. housing market recovery to U.S. re-employment? (answer, very);

·        what does ‘structural unemployment’ mean? (answer, ‘an economic environment where the skill sets of the unemployed, and the skill sets required for the available jobs, are significantly mismatched’);

·        does the U.S. currently suffer from ‘structural unemployment’? (answer, debatable, but I think the (complicated) answer is ‘yes’);

·        how do economists determine whether an economy is ‘in recovery’ (answer, if a country’s GDP has increased in percentage terms in the most recent quarter from the previous quarter – sometimes in the context of 3 or 4 consecutive quarters);

·        is the current stock market more an ‘investor’s market’, or more a ‘trader’s market (answer, debatable but likely more a ‘trader’s market’);

·        on a scale of 1 – 10 as measured against a partner in a public accounting firm, how well are you (the adviser) able to read a company’s financial statements and accompanying notes? (answer, who knows, but probably for most not at a level of 10);

·        should physical gold be viewed as an ‘investment’? (answer, ‘no’);

·        if physical gold should not be viewed as an ‘investment’, how should it be viewed? (answer, as a ‘safe haven’ purchasing power protectorate); and,

·        (if you don’t know the answer to this one already) do you (the adviser) primarily do your own research on the stocks, mutual funds or other investments you recommend, or do you primarily rely on the analysis of others in your firm or otherwise?

The video is four minutes long.  Two cartoon characters debate the 'follow the herd' or 'lemming' mentality to investing, and the 'think for yourself' mentality.  I find the video somewhat humorous, but a clear summary of how I suspect many people think about gold and their investments.  To watch the video click on this link - http://timiacono.com/index.php/2010/11/18/why-people-dont-buy-gold/

If you think of physical gold and gold mining shares as being ‘one and the same’, I believe you ought to reconsider that position.  In fact, I do not believe you should think about ‘gold mining shares’ as a single investment/trading category.  First, physical gold and gold mining shares are for me two entirely different things.   Second, I believe it necessary to think of gold exploration companies not as ‘gold mining companies’ – they don’t mine anything, they work to ‘find gold reserves and resources, and while a few of the exploration companies might ultimately become gold producers they are ‘explorers’ and not ‘mining companies’ until they do.  Gold Mining Companies are companies that actually mine and produce physical gold.

That said, first, I believe physical gold to be a 'safe haven' 'purchasing power protectorate' to be held to protect against economic uncertainty and investment markets volatility.  Second, I see gold exploration company shares as highly speculative investments where, if an investor ‘gets it right’ and ‘gets lucky’ can result in large  investment returns – where risk and reward is absolutely company fact specific, and where the physical gold price is only one of multiple inputs in that risk/reward equation.  Third, I see gold mining company shares as having a third and quite distinct risk profile, where they can be valued (priced) on conventional discounted cash flow metrics but where they can be clearly distinguished from conventional (say, consumer products) businesses in two ways (1) they have no control over the price their product (gold and other metals) fetches as these prices are dictated by world markets, and (2) their existing mineable resources have a finite life that diminishes as those resources are depleted by extraction and processing.

Both gold exploration companies and gold mining (producing) companies are investments where business risks go far beyond the price of physical gold.  Each individually needs to be carefully researched and analyzed from a value (price) perspective - with each exploration and mining company's shares (and underlying business) being assessed and valued on the 'fact specific factors' related to each individual company at any given point in time.

For me to lump physical gold, gold exploration companies and gold mining (producing) companies together makes absolutely no sense.  As I see it, to lump them together and pick one over the other two as the ‘better investment’ is akin to saying you should buy a bathing suit but not a sweater or underwear when all three are categorized as 'clothes' but where each garment serves an entirely different purpose one from the other.

I believe all three (physical gold, gold exploration companies, and gold mining companies) may have a place in an individual investor's investment mix – depending of course on the investor’s age, risk tolerance, quantum of funds invested, etc.

I find most articles I read on the current U.S. unemployment situation (9.6% reported unemployment, but likely really more in excess of 17% depending upon you believe, deal with U.S. unemployment at a ‘macro level’ that I believe broadly to be based on an underlying assumption that no real a structural difference has occurred after (in particular) 1999 in the U.S. economy, its place in the macro-economic world vis a vis its trading partners, and hence in the U.S. labour market – or alternately that the U.S. will simply ‘motor along’ to new technological development or ‘something else’ that will restore the U.S. labour force to a ‘full employment situation’ over time.

From my perspective, there are 'jobs' and there are 'jobs'.  The statistics cited in the second of the two articles that are of great interest to me are the breakdown of the jobs added and lost in the 'goods producing sector' (+5,000), the 'manufacturing sector' (-7,000), and the 'service sector' (+154,000). I am not sure what the difference is between the 'goods producing sector' and the 'manufacturing sector', but believe that there is a critically important difference to long-term meaningful 'unemployment recovery' and resultant U.S. economic recovery between the creation of (1) manufacturing jobs and (2) service jobs. There seems to be no meaningful creation of U.S. manufacturing jobs on the horizon, and from my perspective I believe manufacturing equipment technology will continue to evolve to eliminate manufacturing jobs. For me, this does not auger well for a meaningful reduction in the U.S. unemployment rate - and I think the suggestion in the articles with respect to 'getting back to pre-Great Recession unemployment by 2013 or 2017 are at best 'pie in the sky' arithmetic calculations.

I am also concerned for America in the context of both its economy and its social structure with three other things discussed in these two articles: (1) the youth unemployment numbers - in my view McDonalds, Walmart, etc ought to employing America's youth, and not those that otherwise ought to be retired, (2) the differences in population segment unemployment figures cited in the second of the two articles, and (3) the view expressed in the second of the two articles that an increase in temporary workers is a pre-cursor to an increase in permanent workers. That view may not reflect seasonality as we come into the Thanksgiving and Christmas Holiday periods, and simply may not be correct in the circumstances of the very different U.S. economic environment (at least as I see things) that exists today versus the pre-2000 period when American employment was so much more a 'manufacturing economy' than it is today.

That said, while these two articles do not leave me with 'warmer and fuzzier feelings' about the U.S. unemployment situation going forward, I do believe them to be very well thought out and useful in the context of background information on the underpinnings of the determination of U.S. unemployment rates.