Tune out. Buy gold. Be happy.
MoneyWeek
Where we part company with Warren Buffett...
The Sage of Omaha explained in Fortune magazine why bonds are dangerous.
He went on to explain why he doesn’t like gold either. He points out that since 1965, the total return on gold (not adjusted for inflation) was 4,455%. But the total return on stocks was higher, at 6,072%.
The difference between the two is that gold is a ‘sterile’ investment, says Buffett. Stocks are not.
He’s right. Gold is only useful at protecting purchasing power when the monetary system is in danger. At almost all other times, you’re better off with stocks, businesses, farmland or another productive asset.
That’s why Buffett now prefers stocks. And it is why we now prefer gold.
Buffett willingly gives up the protection of gold in order to the get the upside from stocks. We willingly give up the upside from stocks in order to get the protection from gold.
Who’s right?
Only time will tell. Our guess is that time will tell us that Buffett is right in the near term. But we’re still not going to switch to stocks. Because the risk is too high that time will be on our side.
In other words, the most likely outcome, as far as we can tell, is that the financial world will stumble along more or less in the same direction it is going now. Perhaps for many years. Gold, already expensive in terms of purchasing power, may go nowhere or even down. After all, we’re still in a Great Correction. As long as we follow in Japan’s footsteps there’s no particular reason for gold to rise.
But we do not bet on the most likely outcome. We bet on the outcome that is underpriced. The outcome that is most likely to pay off or blow us up. In our view, investors do not yet fully appreciate the risks of a financial catastrophe, a war or a revolution.
In yesterday’s news, we learned that hundreds of thousands of Greeks had taken to the streets.
Meanwhile, hardly a day passes that we don’t hear of an impending attack on Iran.
The developed economies are borrowing money at two to five times the rate of GDP growth.
And the world’s major central banks eagerly print money.
Maybe Buffett will be right. Maybe the next 47 years will be like the last. But it seems like a bad bet to us. All the key circumstances are completely different – even opposite.
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