Warren Buffett isn't going to buy gold as an investment, and neither should you, writes Kevin McElroy ofResource Prospector Pro.
I'm not going to bash Warren Buffett—and I'm not going to go through all of his tedious points about why he doesn't like gold. I'm also not going to disagree with him!
I'd like to use the press and notoriety that Buffett brings to this discussion to highlight a huge misconception about the role of gold in anyone's portfolio. Before I do, I'd like to point out something that should make you think twice about taking Buffett's remarks about gold at face value.
Buffett bought 130 million ounces of silver back in 1998. He sold all of it by the end of 2006. Why did he own it in the first place? Well, his reason back then: "equilibrium between supply and demand was only likely to be established by a somewhat higher price."
In other words, Buffett bought silver back then for much the same reason that many investors buy it today: he was convinced that higher prices were on the way. This kind of price speculation certainly has a part in anyone's portfolio.
But I still think it's asking the wrong question about why anyone should own gold or silver.
It seems like Buffett is being asked, "Would you own gold as an investment?" Which opens the door for him to talk about the nature of his best investments, and how they crush gold in a number of ways.
It's the wrong question to ask, and I think Buffett realizes it. Because gold is not an investment.
I've written that statement many times, and I know some of my colleagues are tired of arguing with me about it—but if you can't make a distinction between the idea of "money" and the idea of an "investment," you will likely make the wrong decision about gold ownership—or stock ownership for that matter.
For instance, you wouldn't ever confuse a stock certificate with a paper dollar bill, and try to pay your bar tab with shares of Exxon Mobil.
But for some reason, Buffett wants to confuse the issue—and compare shares of Exxon with physical gold. Money serves an entirely different purpose than shares of a publicly traded company.
They each have their own drawbacks. For instance, shares of publicly traded companies regularly go to zero. It happens every day. But gold has never gone to zero.
I could go on...but the point is that gold is money. It should be compared to other forms of money if you want to make a reasonable comparison. There are times to hold some large portion of your net worth in stocks, and times to own different forms of money.
Warren Buffett knows that—and the fact that he chooses to own most of his liquid money in Treasuries and dollars tells me more about his preference for stock ownership. He's a stock expert—not a metals expert.
I own gold and silver because they're a reliable form of money. I believe that the United States government and Federal Reserve are either incapable of or unwilling to prevent the devaluation of the dollar. Their actions tell me that the dollar is in big trouble. So I prefer to hold some portion of my cash in gold and silver.
Buffett likes the dollar—but even he says the dollar is in trouble, as he said last year "No question that the purchasing power of US dollar will decline over time. Only question is at what rate it will happen."
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Warren Buffett is a great investor, says Christopher Goolgasian, a portfolio manager at State Street Global Advisors Inc. who helps oversee a $74 billion gold fund. The Oracle of Omaha just has it wrong when it comes to the metal.
“While he won’t own gold, he also never owned Apple (up around 1,500% since January of 2000) or Google (up 530% since August of 2004),” Goolgasian said of Buffett in a March 2 regulatory filing for SPDR Gold Trust, an exchange-traded fund managed by Boston-based State Street Corp.
In the filing, Goolgasian wrote that while Buffett’s Berkshire Hathaway Inc (BRK\A). has risen 105 percent since January of 2000, gold has climbed nearly fivefold during the same period.
Buffett, in his annual letter to shareholders last month, said investors should avoid gold because its uses are limited and it doesn’t have the potential of farmland or companies to produce new wealth. Achieving a long-term gain on the metal requires an “expanding pool of buyers” who believe the group will increase further, he said.
“What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” Buffett wrote in the letter, posted Feb. 25 on the company’s website. “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As bandwagon investors join any party, they create their own truth -- for a while.”
In his letter, Buffett estimated the world’s stock of gold if melded together would form a cube of about 68 feet per side and, when valued at $1,750 an ounce, amount to about $9.6 trillion.
‘Fondle the Cube’
For the same amount of money, an investor could acquire all the cropland in the U.S. and buy Exxon Mobil Corp. 16 times, while still having $1 trillion left over, Buffett wrote.
“You can fondle the cube, but it will not respond,” he said.
Gold futures for April delivery settled at $1,709.80 an ounce March 2 on the Comex in New York.
Buffett, 81, built Omaha, Nebraska-based Berkshire from a failing textile maker into a firm selling insurance, energy, and jewelry through acquisitions and stock picks. The company has a market value of $194 billion, according to data compiled by Bloomberg.
In his note, Goolgasian, called Buffett “the greatest investor of our time.” Still, that didn’t stop him from questioning Buffett’s take on gold.
“It strikes us that Buffett believes that only asset classes and investments that fit his specific investment beliefs can be sensible investments,” Goolgasian wrote. “We, however, are agnostic about how to beat the market. We just want to do it.”
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In this article we look at some critical fundamental features of precious metals that are rarely considered or accepted in the developed world markets. Expert investors like Warren Buffet look at inactive, buried gold with amazement, because he is focused on companies that produce things and earn money. And most of us wish we had his skill and money behind us.
George Soros and the like invested in gold as an anti-deflationary measure. Most analysts appreciate the anti-inflationary value of gold and silver. The protection of gold and silver in stagflationary environments are a combination of both abilities.
But why are gold and silver capable of giving such protection in bad times as well as good times?
They have certain qualities that shine forward at times when other investments fail.
THE LIMITATIONS OF CASH
In times of monetary stability and soundness, safely-stored cash never fails. Most consider cash in the bank to be the safest conservative investment, and in the distant past, the days of our grandfathers, this was largely true.
But that horrible word, inflation, came into being where prices kept on rising and cash saved would buy less-and-less. Interest rates compensated for this inflation, but then interest rates stopped rising. When interest rates did rise, it was at a slower pace than inflation. Cash lost its buying power as time went by. Bank charges would eat away any gains that might be made. At first inflation would occur one country at a time, and the exchange rate on those currencies fell, hurting international buying power even more. Today inflation is a global phenomenon.
Investors would have to move out of cash and into businesses or other investments that offset the cost of inflation. This was not easy unless inflation happened while growth was vibrant. And this benefitted those middle classes that enjoyed such growth. The poor, whose income rises slower than inflation, feel the pinch.
Suddenly, booms turn into busts and businesses don't do well. The value of businesses and its shares fall, losing investors money. Even self-managed businesses fall in value, putting rich people into bankruptcy. This is deflation, a monetary mood that causes values to shrink. In deflation the value of cash grows as prices fall.
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I have worked on Wall Street my entire life, and one thing I've learned is that large institutional investors, like pension funds and endowments, rarely veer from the herd. They manage too much of other people's money to stick their necks out alone - if their investments go bad, at least they can point to everyone else who fared just as poorly.
For this reason, these funds are often lagging in their perception of crucial market changes - changes such as a doomed currency. While many of us are buying precious metals to hedge against the collapse of the dollar, gold and silver have been taboo investments on Wall Street for years. Fund managers are taught that gold is a "barbarous relic" - much better to stick with government bonds and blue-chip stocks. That's what everyone else is doing.
But there are early signs that the herd is changing direction.
THE CURRENCY THAT CAN'T BE PRINTED
In a remarkably under-reported story, the University of Texas' endowment fund - the second largest in the country, after Harvard's - added about half of a billion dollars worth of gold to its portfolio just this month, on top of the half-billion it purchased several months prior.
The university's endowment now owns a staggering 6,643 bars of bullion (664,300 ounces), which have already appreciated by over $40 million since mid-April when the bars were delivered to a dedicated HSBC-owned vault in New York City. Not a bad start.
Kyle Bass, the well-known Hayman Capital hedge fund manager and UT endowment board member, advised the university on the purchase. He stated his reasoning plainly: "Central banks are printing more money than they ever have, so what's the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can't print any more of."
Apparently, the university agrees that sitting on a pile of fiat paper is an act of faith not befitting a prudent and enlightened institution.
AN INSTITUTIONAL AWAKENING
The purchase is certainly causing a few heads to turn.
Now that a major endowment has taken this step, other fund managers are going to be emboldened to follow through on their gut instincts. These are smart guys, after all; they are aware that although their funds may be posting nominal gains, they are losing much more in purchasing power. I'm sure many have privately bought precious metals, but now they have cover to do so professionally.
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