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Source link: http://archive.mises.org/9732/the-trouble-with-warren-buffett/

The Trouble with Warren Buffett

April 3, 2009 by

Warren Buffett

A junior high investment club wrote in to CNBC’s Squawk Box to ask legendary investor Warren Buffett what he thought the price of gold would be in five years and whether the yellow metal should be a part of value investing. Obviously the junior high kids have been educated that inflation is coming down the pike given the massive monetary stimulus that the Federal Reserve is engineering. So it’s perfectly reasonable that they would pose their question to the world’s greatest investor. But Buffett doesn’t understand that gold is the people’s money. FULL ARTICLE


newson April 3, 2009 at 10:44 am

qu’ils boivent de la coca cola!

greg April 3, 2009 at 11:09 am

Let me see, do I take the advice of someone that has elevated himself to the second richest man in the US or do I take the advice of someone that quotes from 18th century France?

Sorry, I need to follow the money! Now I am taking a shot in the dark because I really don’t know the price of KO in 1930. But my guess if you invested $35 in gold and $35 in KO in 1930, you would have a lot more money in KO today.

Furthermore, do you really understand what makes gold go up or down. The demand for jewlery and coins is fairly low and there does not exist a significant use as a “gold standard”. The greatest demand for buying and selling gold is the gold ETF’s that need to purchase and sell to meet the buyers of the ETFs.

Why do you think there seems to be a ceiling at $1000? Because of the limit number of players in these ETF’s and volume of trades drop off when prices elevate (reason why companies split) to resistance. Over the last year I have been playing the GLD between $80 and $100 and it has worked out like clockwork.

I agree that there has to limits to money growth, just don’t think gold is the answer today!

DNA April 3, 2009 at 11:36 am

Don’t let Buffett’s midwest, down-to-earth persona fool you. He is an insider, through and through. Not a very bright one, either: on that CNBC interview, I lost track of the number of times he characterized the crisis as an “economic Pearl Harbor.”

whittaker April 3, 2009 at 11:37 am

Mr. French,

I generally agree with you about the worthlessness of paper certificates and the desirability of tangible assets. But I think one needs to invest in a combination of precious and industrial metals and other commodities– not to mention one’s own job skills.

I would also disagree that gold is “divisible”, unless one has on hand an infrastructure of people and equipment needed to do re-melting, alloying, assaying, weighing, and so forth. Depending on the scenario for which one is preparing, these things may not be available.

Jake Taylor April 3, 2009 at 11:40 am

No offense to Mr. French, but I found his arguments unconvincing. As an admitted Buffett fanboy [but also an admirer of Austrian econ], I think a much better insight on equities and inflation comes from Buffett himself:


I’ve struggled with the investment decision on gold for the last couple years. I see inflation coming obviously, but buying gold right now is relatively expensive compared to equities. I’d rather buy $1 worth of zinc or corn for 50 cents by buying an undervalued equity that makes or owns that commodity. I distilled my thoughts with the following thesis: Gold right now is no different than google or amazon in 1999. They look like great businesses because they produce a lot of cash with limited invested capital, but everyone can see that fact so you pay an arm and leg for it. I’m not getting $1 for 50 cents– there’s no value. Also, pretty much every other asset in the world is on sale right now. You know buying gold is no longer a contrarian investment when you see ads for gold during the Superbowl!

Mike D April 3, 2009 at 11:44 am

“Also, pretty much every other asset in the world is on sale right now. You know buying gold is no longer a contrarian investment when you see ads for gold during the Superbowl!”

I assume you’re talking about the cash4gold ads, which are trying to convince people to SELL gold. Not exactly the same thing.

D. Frank Robinson April 3, 2009 at 11:47 am

The price of KO in 1962 was about $1.60. Adjusted for ‘official’ dollar inflation since 1962 the current price ($44.60) of KO is $7.33. A gain of about 4.6 times.

The price of gold in 1962 was officially $35. Adjusted for ‘official’ dollar inflation since 1962 the current price ($900) of gold is $144. A gain of about $4.1 times.

Of course, KO dividends have been omitted from the back of the envelope calculation, those cumulative dividends would also have to be discounted for inflation.

Overall, gold looks like a reasonable vehicle for the preservation of capital value over the last 47 years. This calculation ignores that the gold price has been the object of political price suppression by a factor of from to 2 to 6. OTOH, there is no evidence of political manipulation of the price of KO that I am aware of.

KO does not appear to be significantly better than gold for the preservation of purchasing power (wealth).

Brad April 3, 2009 at 12:00 pm

I’m 18 and I’ve already started hiding some gold.

Jake Taylor April 3, 2009 at 12:09 pm

I think dividends are pretty significant in this equation, as well as stock splits. [And I think that is Buffett's point: there are no dividends or splits with gold.]


Jake Taylor April 3, 2009 at 12:43 pm

Just crunching the numbers a little bit in support of my thesis:
1 share of KO purchased in 1919 would have split enough times to equate to 4,608 shares in 1996. Then since 1997, it’s paid $11.78 in dividends per share. That’s $54,282 in just dividends for one share purchased in 1919. You still also have a market value of $205,609 ($44.62/share *4,608 share) on top of that. Even adjusted for inflation, that appears to be significantly better than gold in creating wealth.

Mike D April 3, 2009 at 1:01 pm

“The price of KO in 1962 was about $1.60. Adjusted for ‘official’ dollar inflation since 1962 the current price ($44.60) of KO is $7.33. A gain of about 4.6 times.

The price of gold in 1962 was officially $35. Adjusted for ‘official’ dollar inflation since 1962 the current price ($900) of gold is $144. A gain of about $4.1 times.”

There’s no need to adjust for inflation when comparing the change over time of two prices in dollars. They will both have inflated at approximately the same rate.


D. Frank Robinson April 3, 2009 at 1:03 pm

Jake: Agreed. And the taxes on those KO gains were? There are other costs in holding gold, but no income equals no taxes.

low warranty April 3, 2009 at 1:17 pm

Jake, thanks for the old buffet link. My perception is that WB doesn’t talk(write) like that anymore. What bothers me about WB is what he doesn’t say about inflation and why he doesn’t take a stand against it. I’ve never heard him mention an investment strategy for widows and orphans with little or no savings or people on a fixed income that would struggle to have any money to invest to ‘protect’ themselves from inflation. I also think he may be the best ‘current’ investor in the world purely because he bought insurance companies, not because he is the best stock-picker. Many of us are forced to purchase insurance(if I want to drive) so I consider this a gift to him(and other insurance cos) from politicians. Finally, he never mentions counter-party risk, something that has got a lot of attention in the last 6 months, and also something that gold is very good at protecting. If I had the chance to talk to him, I would ask him which part of his dads famous speec on Gold and human freedom he didn’t agree with.

Jake Taylor April 3, 2009 at 1:19 pm

I’ll take income as opposed to no income from my investments 8 days a week (barring a marginal tax rate >100%).

fundamentalist April 3, 2009 at 1:58 pm

I think there is some confusion over cash and investments. Gold is cash. It is not an investment. Cash has a zero interest rate. You should hold cash near the end of the business cycle before the bust so that you don’t lose a big chunk of what you invested. For example, a lot of people have held cash for the past year and a half while the stock market and housing market tanked. Gold would be a good form of cash as it protects against inflation.

However, for investing you need something that at least pays an interest rate that is higher than expected inflation. So stocks are a better investment than gold for low levels of expected inflation. Unexpected inflation can kill the return on stocks and bonds. And you don’t want to hold stocks at the top of the business cycle. Generally, you want out of stocks at the peak of the boom and into bonds. Then when bonds peak (the interest rate is lowest) you switch to cash, such as gold. Gold is a cash substitute and a hedge against sudden unexpected inflation.

An investment should return a dividend or interest rate high enough to cover inflation plus a market rate of interest. Gold can’t do that. But none of that has anything to with why gold is a better form of cash than paper. That’s a completely different subject.

Jake Taylor April 3, 2009 at 2:00 pm

I’m pretty sure I’ve read nearly everything Buffet has written (which isn’t that much really) and I couldn’t agree more. He had a more biting tone to his early writings and unfortunately, he’s either mellowed with age or been blunted for some reason. I’m not sure if he’s trying to be more PC now due to all the exposure?
Your other points I can’t agree with as much: Buffett’s given specific investment strategy advice: buy either cheap assets or cheap earnings, so called “50-cent dollars”. He points to “The Intelligent Investor” as the book you need to read to execute this.
He’s got one of the best track records because he’s extremely smart, diligent (as in he lives to go to work everyday), amazing odds handicapper, and he’s been doing it forever.
I agree that we shouldn’t be forced to have insurance, but he’s in the insurance business because he’s good at handicapping and he’s after the float of an insurance company. Not because of government imposed demand. Insurance business actually have pretty low ROIC, it’s all in how well they manage risk and invest float.
As far as counter party risk, google “Buffett weapons of mass financial destruction”. He saw a lot of this coming, evidenced by his prudent unloading of most of General Re’s CDS portfolio well before the fireworks started.
Even though I have great respect for him, I’m much closer to his father’s politics than his. I’m not sure how he became so liberal. I know it has a lot to do with his “ovarian lottery” theory, but I just don’t see government as a good mechanism to make the world fair.

Joe April 3, 2009 at 2:15 pm

Buffet did not answer the question. He just tip toed around it and offered a sort of sales pitch for dividend paying stocks instead. True, gold or any commodity for that matter will just sit there and look at you but then again so will any non-dividend paying stock such as Yahoo until you sell it.

I still hold for example an ounce of gold that I bought for $458 an ounce in 2004. Right now, that same ounce of gold that I bought back then is at roughly $900. I could easily sell it, pay the higher taxes for my sale and still come out ahead. So why am I not selling it to collect that profit? I am not selling it because I expect the Federal Reserve to continue to debase the dollar at a rapid pace. I have little confidence that the Federal Reserve will be able to maintain the dollar’s purchasing power down the road given the amount of U.S. debt and unfunded liabilities so I continue to hold onto my gold. Now, I may be wrong here but I’d rather be wrong and maintain some of my purchasing power by holding my gold if the currency does fall than to sell it now and only to learn afterwards that I was right.

8 April 3, 2009 at 2:19 pm

Right on fundamentalist. Think of the argument if there was a gold standard. Buffett has two choices, buy stocks or hold cash (gold). I think Buffett is technically correct in what he says because he’s thinking of gold as money. Gold has only become an option because of paper money, but if gold was the standard currency, you might be in total agreement with Buffett, depending on your valuation of stocks.

8 April 3, 2009 at 2:22 pm

Also, I don’t know if many people are aware, but a foreign investor in German stocks during Weimar hyperinflation actually made a very nice profit. Stocks outpaced hyperinflation.

Kyle Napierkowski April 3, 2009 at 2:23 pm

to Mike re “I assume you’re talking about the cash4gold ads, which are trying to convince people to SELL gold. Not exactly the same thing.”

I think you’ve missed the point. You don’t think cash4gold buys gold and puts it in their warehouse to sit, do you? They buy it cheaply from consumers and sell it on the commodity market at a big profit. It wouldn’t be worth running primetime commercials if there wasn’t such a huge demand in the commodity market for physical gold right now.

On a similar note, I love the political and economic philosophies of Dr. Paul, Schiff, and the like, but I don’t have confidence in directly transferring their policy recommendations to investment strategies. This is because the non-quantitative, praxeological approach used in Austrian thinking is essential for good policy, but investing is inherently quantitative in nature. Simply giving reasons why gold or foreign equities are going to fare well does not make a case for investment. Instead of simply saying, “Gold is a good store of value, currencies are being inflated, equities haven’t come down enough, so buy gold!” the argument must include the downside and the quantitative questions:

- What are the main drivers of long-term demand for gold? How can these factors be quantified, and what is the medium and long-term outlook for these factors?

- Does the current price of gold already incorporate inflationary expectations? This argument would need to be supported with a long-term analysis of gold price versus the value of a basket of currencies in 2008 units.

- How has gold’s price movements correlated with other commodities in recent decades/years, including silver and precious metals as well as industrial commodities? Is it currently overvalued versus these assets?

- What impact do the options markets have on current gold pricing? For example, will gold futures obligations have a significant negative or positive impact on gold pricing in the next several years if those who are long gold futures start accepting delivery instead of rolling over contracts?

I’m sure there’s more, but these are the sort of questions I don’t see answered by gold advocates. Maybe it’s just me, but I want to see numbers, charts, and graphs before I take investment advice to heart.

AC April 3, 2009 at 2:23 pm

Companies’ securities are definitely not fiat currency. Don’t get them confused. In an inflationary environment, equities will also rise. The equities in companies that are producing tangible wealth won’t be worthless if the currency is debauched.

I’d normally take equities over gold for long-term growth. Gold is a hedge against inflation and generally a store of value. However, central banks manipulate this by selling into the market as prices rise. But gold is generally not a growth vehicle because the commodity itself produces no new wealth.

So Mr. Buffet’s comments concerning stock or gold obfiscate the issue. The question is fiat currency or gold. I’ll take gold over holding fiat currency. If someone is playing short-run in the market, gold may be a good place to retreat to while you wait out popping bubbles, then dollar cost average back into the equity market lows. But that strategy predicates itself on one being able to fairly accurately get out before the bubble pops and get back in before it starts coming back.

Whether or not the currency is being substantially debased at the same time as the bubble is popping causes a different set of issues, i.e. I wouldn’t want to be locked in to long-term interest rates where I was the lender.

If you want to preserve wealth and purchasing power over a long time, gold will probably get you there. But this presumes you’ve already got the wealth. If you want to create substantial wealth through investing, gold will probably not get you there, although it will be a decent store of value.

Justin April 3, 2009 at 2:34 pm

Fundamentalist is absolutely correct. You hold cash or cash equivalents during times of uncertainty. Warren Buffett makes money investing his money. It doesn’t make a lot of sense for him to hold onto cash for long periods of time.

What’s hard to understand about Buffett is how he doesn’t see that the dollar can be a terrible unit of account as the Fed constantly decreases its value through inflation. I’d like to know an honest accounting about how much inflation uncertainty costs his businesses. Purchasing assets in consumer goods is one thing, but he runs a life insurance company. They have to compute life cycle investments over 40, 50, maybe 70 years.

Or maybe a life insurance company makes most of its money based off that inflation uncertainty. When you think about it, it’s like a timed deposit that only has to be paid out on demand if that person dies.

Inquisitor April 3, 2009 at 3:02 pm

I think Fundamentalist has it right.

Greg: “Let me see, do I take the advice of someone that has elevated himself to the second richest man in the US or do I take the advice of someone that quotes from 18th century France?”

? He is offering an illustration of where this thinking led to in the past…

Vincent Cook April 3, 2009 at 3:38 pm

Buffet’s observation that over the long run stocks like KO generate real returns while Au generates real costs (for storage, etc.) is true over very long time scales, but Mr. French is absolutely correct in his rejoinder that gold potentially offers better returns under the kinds of inflationary circumstances we are facing today.

Indeed, if one is thinking in terms of five year time horizons (as was implied by the junior high school kid’s question), the last five years offer ample evidence that gold can dramatically outperform a stock like KO—gold has more than doubled its dollar price during that period, while KO has dropped more than ten percent. Even reinvesting dividends, KO’s real value has declined. Most stocks have done much worse.

Of course, a “value investor” (as Buffet conceives it) eschews any speculation on anything as short term as five years, which naturally tends to rule out shifting one’s asset allocations in response to economic cycles. Fundamentally, Buffet doesn’t care about five year time horizons for investing, so he gives an answer that is more apropos to a much longer time horizon, like the 90-year calculation Jake came up with.

A historical perspective on this (going back to 1901) is offered by this dow/gold chart. The century-plus trend line is indeed positive for stocks relative to gold, but there are also significant prolonged reversals that a savvy investor might be able to take advantage of. The crucial question is, what sort of foresight is required to identify and take advantage of periods when gold is relatively strong?

There is also the issue that, apart from being an inflation hedge, holding gold is also a way of preserving value that doesn’t depend on other people’s promises. In extreme situations of great social disorder or governmental confiscations of private wealth, what is a stock worth to you versus something you have direct possession of? Owning a business like Buffet suggests is fine as long as capitalism is allowed to function, but surely even a long term “value investor” might find it prudent to lay something aside just in case. Or to put it in Buffet’s language, in cases of social chaos I would rather have an asset in hand that just looks at me and keeps most of its value than a goose that is laying rotten eggs or is about to be seized and slaughtered by others.

Jake Taylor April 3, 2009 at 3:46 pm

I agree with Fundamentalist except for two points:
1. I don’t agree that stocks get killed in an inflationary environment.
2. After reading the study below, do you still think you can time the market? I’m reticent to think that I can.

greg April 3, 2009 at 3:52 pm

The price of gold is set by a bunch of traders sitting around trading the damn stuff, nothing more, nothing less. So if you are serious about investing in gold, you need to understand the psychology of those people trading and place your bets accordingly, not what you think gold should do.

I lost out on the oil move because I saw the upswing as being driven by overspeculation of the traders in the market. The funtamentals told me that oil should not be over $100 a barrel and I placed my bets accordingly. Needless to say, I loss! It was because I didn’t play the players.

The idea that the price of gold is tied to the money supply is totally out in left field. If you based it on the money supply, then gold should be $2000 an ounce with the projected increase in the money supply. But it isn’t and actually the price of gold is going down. Why is that? It is because the price of gold is set by those that trade it!

Now you need to look at size of the trading block. From where I sit, the block is small as it consist of some gold bugs and those that will invest at $900 per unit or ounce. Most investors tend to flock to stocks in the $30 a share range. Basically what I am saying is the number of players are low and so the chances of break outs beyond the trading range is small.

The key to investing is trading, not buying and holding. For all of those that bought gold at $450 an ounce, your in good shape today, but if you bought in the late 1970′s, you paid $800 an ounce, not so good of an investment.

But getting back to gold as a commodity, what uses does it really have other than a few pieces of jewlery? You may say it is a medium of exchange, but just try to by a Starbucks coffee with it and see if it works out for you. When you buy a 1/10 of an ounce coin for $114 plus $31 in shipping and handling, you have coin that is worth $89 and will cost you at least $15 to convert it to regular currency that Starbucks will accept.

In conclusion, the people that promote gold as a hedge against inflation are those that are invested in it. Listening to Peter Schiff is like reading the message boards on Yahoo finance, they all are just pumping their position. So then you need to get back to understanding the pyschology of the players and how they react to people like Schiff to play this market.

fundamentalist April 3, 2009 at 4:53 pm

Jake: “After reading the study below, do you still think you can time the market?”

I’m not a market timer. I can’t predict when the stock market will go up or down even on an annual basis. But the article takes the approach that stock returns are nearly random. That follows mainstream economics which does not have a theory of the business cycle at all, except to say that “shocks” happen. What I’m saying is that stocks follow the economic business cycle. They’re month to month movements may be close to random, but the long term movements aren’t. The ABCT can predict when sectors, such as capital goods producers, will earn their highest and lowest profits. Stock prices in those sectors will roughly correlate with the profit cycles. Consumer goods profits, and therefore stocks, should reach their peak close to the end of the business cycle.

I used the ABCT to time the market with my money and got out of stocks and into cash in June of 2007. I was a little bit early, but I don’t think anyone can predict the absolute top. Better safe than sorry. I missed out on about a 10% gain followed by a 50% plummet. I should have gotten into bonds at the time while interest rates were fairly high. I could have made money while bonds rallied, and then gotten into cash.

If mainstream economics is right, then I agree with the article’s author and any attempt to time the market is foolish. But if the ABCT is correct, then it predicts the cycles of profits and interest rates as well as the general economy and that info can be used to time the major bull and bear markets. If the ABCT is true, and I think it is, it’s foolish to sit still and take the punishment of a 50% stock market decline.

What I propose is that people study the ABCT, especially Hayek’s “Profits, Interest and Investment” to understand what sectors to be in at what point in the business cycle (using SPDRs or ETFs), when to get out of stocks and into bonds and when to get out completely.

Vincent Cook April 3, 2009 at 5:38 pm


The dollar price of gold bars, like every other price, is a function of the subjective preferences of everyone in the market. In that sense, it’s all “psychological.” However, it is quite mistaken to suggest that professional traders of gold bars are merely gaming one another to set its dollar price. This is not like gambling for quatloos on Star Trek.

For one thing, these traders are in fact bit players in a much more complicated market involving non-monetary, monetary, and quasi-monetary supply of and demand for gold bars by non-traders.

For another thing, gold’s role as a money or quasi-money is not simply a matter of “a bunch of traders sitting around trading the damn stuff.” The point is that this stuff is in highly marketable and exists in quantities that can’t be changed in rapid, unpredictable ways. This makes it highly desirable as a means for transmitting on-demand purchasing power through time–that is, it is highly desirable as a hedge against the inflation that afflicts less suitable forms of money.

It is highly unfair to smear Peter Schiff in the way you did. I knew Peter back when he was at U.C. Berkeley over twenty years ago, and I can personally vouch for the sincerity of the convictions that lie behind the investment advice he offers (which is more than just promoting gold, btw).

There is simply no reasonable basis for denying the reality of the economic theory and empirical experience of gold’s superiority over fiat paper as money, nor denying the fact that Peter has built a successful business informing and empowering people to act in response to these realities. Just because you get burned playing oil futures is not a valid reason to reject what Peter has to offer. Monetary gold has real uses just like oil does, even if its utility as a media of indirect exchange seems more “psychological” than oil’s utility in the production of various consumer goods. You have as much of an objective need for market exchanges as you do for the various consumption goods that oil makes possible.

Jake Taylor April 3, 2009 at 5:44 pm

I definitely don’t agree with the mainstream that the market is random or efficient. Value investors wouldn’t be able to make money if it was. I still found it shocking how large the percentage of the gains and losses come from only a handful of trading days.
I haven’t read that book from Hayek– I’ll add it to my list though. Thank you.

S Andrews April 3, 2009 at 5:50 pm

I think you’ve missed the point. You don’t think cash4gold buys gold and puts it in their warehouse to sit, do you? They buy it cheaply from consumers and sell it on the commodity market at a big profit. It wouldn’t be worth running primetime commercials if there wasn’t such a huge demand in the commodity market for physical gold right now.

It still means the mob is selling gold while a select few in the know is buying.

quicksilver April 3, 2009 at 6:55 pm

Warren Buffett answered the question that was asked. The student didn’t ask if gold is useful as a currency, he asked if it is a “value investment”.

A “value investment” is an asset one buys in hopes of it producing a stream of future earnings. Gold fails this definition because it does not produce any earnings. There are storage and insurance costs. Your pile of gold actually gets smaller over time if you pay these costs in gold (like at goldmoney.com).

None of the above should be interpreted as saying that people should not hold some savings in the form of gold. We should because it is a hedge against inflation and it is real money. But it is not an investment.

D. Saul Weiner April 3, 2009 at 7:10 pm

Odd that Buffett is badmouthing gold when he took a big position in silver a few years back when it was cheap (may have been $3). Unless he thought industrial usage would force the price up.

As Jim Rogers has written, there have been alternating cycles (since the establishment of the Fed) where stocks have done well and then commodities have done well, with the other doing poorly at the same time. So gold is not necessarily something you want to invest heavily in at all times, but it can perform well if you invest during the commodity boom cycles.

fundamentalist April 3, 2009 at 7:12 pm

Jake: “I still found it shocking how large the percentage of the gains and losses come from only a handful of trading days.”

I’ll think you’ll find that those days aren’t randomly distributed, either. The big one day gains come during the boom phase of the business cycle and the big one day loses come during the bust phase.

Hayek’s “Prices and Production” is good, too. “Profits, Interest and Investment” was written about 10 years later and covers the same ground, I just think it’s easier to understand and better written. You also need to read “Monetary Theory and the Trade Cycle.”

Peter April 3, 2009 at 7:24 pm

The price of gold is set by a bunch of traders sitting around trading the damn stuff, nothing more, nothing less.

Exactly like the price of every other good in existence.

The idea that the price of gold is tied to the money supply is totally out in left field. If you based it on the money supply, then gold should be $2000 an ounce with the projected increase in the money supply. But it isn’t and actually the price of gold is going down. Why is that? It is because the price of gold is set by those that trade it!

And the biggest of those that trade it are governments trading it to keep the price low, or maybe the price would be over $2000/oz. See GATA.org. Good for us when they eventually have to stop playing games, though.

pkwhitey April 3, 2009 at 7:47 pm

There is an animosity in rebuttal that puts me in mind of intolerance. We haven’t reached that critical moment in American history yet, but we’re fast approaching it.
I would like to ask:
what’s so wrong about peace, love and understanding?

Bernard Palmer April 3, 2009 at 8:11 pm

“what uses does it really have other than a few pieces of jewlery?”

Excerpt from ‘What is the Primary Fundamental RIght?’
“All monetary systems are probably based on sexual attraction. The use of gold and precious stones made into jewelry and given by men to the women in their lives is possibly why the ownership of gold and gem stones that were easily convertible became the basis for all wealth. This jewelry produced the marriage, which in turn produced the children, the most valued commodity on the planet. …. Unless all monetary systems return back to a gold standard that has its roots in sexual attraction then they are all probably bound to collapse. Supposedly the word jewelry comes from the Latin word ‘jocale’ meaning plaything but the spelling suggests the ethnic origin of its makers is also likely. What is also interesting is that the word ‘plaything’ has many sexual connotations for men, the givers of jewelry.”

Women like gold. Only gold negates debt. Paper money is a government promise to use force to make some one in the future give up their gold to pay government debt. And as the future is always in the future debt steadily increases but can never increase more than the value of the amount of gold available to negate the debt because the value of gold is probably always greater than the total value of debt. So what ever the world wide dollar amount of debt is in all monetary systems, divide that by the amount of known gold in the world and you have the approximate value of gold. If there is as some suggest 10 billion ounces of gold in the world and the world debt is around 100 trillion US dollars then gold today would be worth about $1000 an ounce.

All debt is equal to the amount of gold required to liquid an asset. If all the possessions of the bankruprt US government and US corporations where sold for gold then the true worth of gold would be known, but not in a dollar amount because there will be no dollars to equate with, only in property. So the true value of gold is in how much property it can it buy and not forgetting that a mans family is his most valued property. Then seeing as nobody would sell the people they love for all the gold in the world means that gold is probably actually worth nothing which fits because everything supposedly comes out of nothing. So the true value of gold is how many children it allows you to make.

Since gold has been relegated to the margins and governments with their irredeemable currency keep on increasing debt to such an extent that most wives have to work to pay the mortgage then baby production falls dramatically. In the west low birth rates will see the end of western civilization within probably 150 years. No more planes within a very short period. Probably less than 30 years, unless we go back to a gold currency. The collapse of all the world monetary systems will guarantee a return to gold.

D. Frank Robinson April 3, 2009 at 8:17 pm

Of course gold is cash money. No one can put all their wealth in gold unless intend to starve on their stash. We need to consume other commodities. It is a question relative balance. Investment is deploying cash (gold) for other assets to obtain a flow of gold revenue to exchange for consumables. Gold money stabilizes price levels among the array of consumables and makes rational investing possible. Fiat money distorts commodity price levels and makes investment extremely risky and irrational. This is the present situation; hence hold gold today for investment tomorrow – when prices have deflated.

See Mises and Rothbard.

D. Frank Robinson April 3, 2009 at 8:28 pm

Mike D: Re: x:y::x*z:y*z

But the array of consumables in 1962 is not identical with the array of consumables in 1962. Example, what was the price in 1962 of cell phone service? Answer: Undefined variable.

Corollary: As the array of consumables expands, given a static quantity of money, the general price level must fall. Increasing consumable wealth deflates the general price level for all forms of consumable wealth.

newson April 3, 2009 at 8:29 pm

i can’t see how the 2009 buffett fits with the 1970′s/80′s buffett. then, he understood what a corrosive effect inflation had on industrial companies (see here some of his wise comments from that era – http://illusionofprosperity.blogspot.com/2007/09/warren-buffett-on-1970s-inflation.html).

people who targeted commodities or resource companies in the seventies came out streets ahead of industrial company investors. when, eventually, the penny drops in the public’s mind, and retail/producer prices start roaring upwards, precious metals will start to enjoy panicky catch-up, and outperform all other sectors.

buffett junior will die as the world’s most cunning investor (and demolisher of the efficient market hypothesis), but it will be proved that senior was the only credible economist in the family.

D. Frank Robinson April 3, 2009 at 8:43 pm

CORRECTION: the second reference to 1962 should be struck and ‘today’ substituted.

Bruce Koerber April 3, 2009 at 10:08 pm

Money and Ethics
Friday, April 3, 2009

Warren Buffett Answers A Question About Gold.

Not everyone can translate ethical principles into action and wisdom. Those who have a highly developed entrepreneurial spirit but who do not have a connection to the philosophy of classical liberalism will follow the current even if it is leading them to a waterfall!

A risk taker may even feel confident that the boat will stay upright and the passengers safe because it always has in the past!

What if the waterfall is nothing like anything seen before? What if the boat can be anchored to the shore before its destructive plunge by attaching to something solid like gold?

Ponder this Warren Buffett!

Jim Davidson April 3, 2009 at 10:29 pm

Some other uses of gold. It is great in electronics. It has been used as a heat reflector on a number of satellites. It is a natural antibiotic.

Gold is a good money because it is convenient, consistent, durable, divisible, and valuable. Land is a poor money because it is neither convenient to carry around nor consistent in value from one piece to the next. Wheat is a poor money because it isn’t durable. Fine works of art and polished gemstones are not readily divisible. Bits of paper with squiggles of ink are not of themselves valuable.

Gold, silver, and other metals can be a good store of value. Paper money can be an adequate medium of exchange. Any of these can be a unit of account, though one always seems to be adjusting the paper unit of account for past inflation, which makes its predictive power more uncertain.

There’s really nothing else to money. It has certain features. People have used all kinds of things as money, especially as a medium of exchange. Cigarettes. Chocolate. Warehouse receipts for wheat in Argentina in 2002.

Hayek’s idea about money that I like best is in his essay on the denationalisation of money. I like the 1990 edition best. A market chosen money is inevitably better for the market than a fiat money.

Gil April 3, 2009 at 11:05 pm

Face facts. Gold is only money when it is that which passed over the counter in exchange for goods and services. Right now it’s just another commodity liked by some more than other commodities. Gold is only valuable because enough people thousands of years ago liked its shiny yellow form to circulate it far enough. If gold had a prospenity to corrode it would probably be near worthless.

Jeremy April 3, 2009 at 11:54 pm

It all comes down to value and price.

A year and a half ago, I was sure that gold & silver were the best safest investments going forward. With the only asset class to outperform it being the dollar, that seemed to be a good call.

But today, while I think that gold & silver are a better long term investment than the dollar, the prices of stocks around the world have plummeted.

It’s pretty easy to see that those foreign equities selling at bargain prices will outperform gold in the medium to long term. But gold is a far safer place to keep your money than dollars these days.

All of the other considerations (listed by Kyle above), beyond price and value, don’t matter in the long run. In the short run the price of gold and everything is controlled by traders. In the long run, it’s controlled by its intrinsic value.

Comparing the South Sea Company to Coca Cola based on the prices then and now is a comparison without any basis. One was priced in the stratosphere, one is priced rather high in comparison to some of the values out there today, but is not in any way a bubble.

And from everything Warren Buffett has said in the past, it seems like he knows inflation is coming, but he fears the ‘animal spirits’ of scared consumers far more. It’s too bad he didn’t take his father’s teachings to heart.

fundamentalist April 4, 2009 at 9:06 am

Jeremy, I would keep some gold because the likelihood of the Feds causing high inflation in the near future is pretty high. But as happened in the past decade, I think a lot of the new money will go into equities and commodities.

The South Sea and Mississippi companies were closer to a Madoff scheme than a real investment. The had no income, just promises. Actually that makes them very much like the tech stocks of the late 1990′s.

Two Men, Two Schools of Thought April 4, 2009 at 10:03 am

Clearly, Warren Buffet comes from a different school of thought than his father. The two schools are:

1. a gold backed currency imposes some discipline on politicians and is therefore a sounder economic choice because it protects the savings, the currency and the economy of a people, and

2. a paper currency allows for the political takeover of a country or countries.

People who love big war always endorse fiat currency, because big war, which causes high inflation, is entirely dependent on paper currency. People who love money and power endorse fiat currency because that system fuels the personal acquisition of massive amounts of money and power.

One day history will record something like this. In the mid 1990′s, when Bill Clinton, an enthusiastic supporter of the UN, was the President of the U.S., a virus was introduced into the financial sector. This virus was developed by two government economists, who developed models for high risk derivatives trading. The economists were awarded Nobel Prizes for their work. They became directors of Long Term Capital and successfully drove it into bankruptcy. The government bailed out Long Term, thus setting the precedent for bailouts and encouraging more high risk trading. In less than ten years, the five largest banks in the US were made insolvent. At first the US, under Bush, tried to save the banks, but under a new leader, Obama, quickly gave up on any possibility of maintaining its quasi independent status and promptly turned itself over to the IMF.

In a global economy, where very wealthy countries trade with very poor countries, either every nation has to be on a gold backed currency or the entire world has to be on a single fiat currency.

Since the politicians are addicted to big war, big promises to voters, and big personal enrichment, we are getting the single fiat currency model.

Jake Taylor April 4, 2009 at 10:03 am

It sounds like you and I are pretty close in our viewpoints but here is a question I struggled with: What’s the intrinsic value of gold? To the people holding gold right now, how high in dollars would it have to get before you’d sell? I’d think that if you can’t come up with numerical intrinsic value, Ben Graham would call that speculating, not investing.

Brian Macker April 4, 2009 at 10:14 am

“Let me see, do I take the advice of someone that has elevated himself to the second richest man in the US or do I take the advice of someone that quotes from 18th century France?”

Well go ahead and short gold then.

As the other guy pointed out gold hasn’t done bad against KO. Of course, that’s cherry picking. Thousands of companies have gone out of business since then and how do you know which one is going to be the next coke.

DS April 5, 2009 at 7:26 am

Of course like any investment, when you bracket your time horizon makes a big difference. You can select a date, like 1962, to make your case. You can also pick other dates. If you bought gold in 1962 and sold it in 1982 you made a ton of money – I’m sure way more than an investment in Coca-Cola.

If you bought gold in 1982 you just got back to even sometime last year, ignoring inflation. However, if you bought gold in 2000 your investment outperformed every other investment category in that time period and you would have enjoyed double-digit returns 9 years in a row.

But this misses the whole point. The reason gold is a good investment at times is that it IS money. Or at least it has been for most of the last 5000 years. Fiat, debt-based paper money has also been used as money over the centuries and has a zero percent success rate.

The real shame about Warren Buffet is that you and I have very little to learn from him other than repeating things that you could learn in a Benjamin Graham book. You can’t mirror his investment philosophy because he is the ultimate insider. If you bought GE or Goldman Sachs at the same time he did you weren’t buying the same company. He bought GE plus a 10% return guarantee, something you and I can’t get. Despite most of his public pronouncements he is invested in derivatives and took a bath betting against the dollar during the one period in the last decade when the dollar was stable or increasing (2004-2005) and he bought into the US stock market at the top of a historic bubble. I don’t care what your time horizon is, buying at the top is a poor decision always and every where, even if your returns eventually exceed your investment.

Buffet made a lot of money a long time ago and has been coasting on his reputation ever since.

Freeman April 5, 2009 at 5:05 pm

I was amused by the article, as I was just thinking the other day that Buffet is a Keynesian and doesn’t know how to anticipate macro-economic trouble.

While his midas touch during normal economic times is clear, its also clear that he is just one of the lemmings when it comes to bubbles and their nasty habit of bursting.

I invested in his company perhaps 5 years ago, and made a respectable gain for most of that time. I also had the mistaken faith that when things crashed, he would be the saavy investor who could pick all the great bargains.

Well, his a-shares peaked at something like 174 grand at the height of the bubble less than a year ago, and now they are sitting at 92 grand, up from a low of 70 grand. Though I was completely wrong about his agility during stock market crashes, I did not go down with the ship like I did during the tech bubble crash.

While I took a bit of a hit on berkshire hathaway, fate, or perhaps a divine intervention spared me the 50% losses many others absorbed.

You see, buffet put some kind of market cheerleading story in the new york times early on in the unfolding of the crisis, and based on that article I concluded that he was completely incapable of getting his mind around the severity of our crisis.

When I saw the article, I immediately sold my brk shares and bought gold. While a superficial analysis offered in an earlier post suggested that the world’s most successful investor trumped austrian thinkers, I took the road less travelled, and it has made all the difference.

There is no point in grinding the numbers for value investing when a credit bubble is bursting, the government is manipulating the market with taxpayer money, and preparing to debase the currency.

And to top it off, st warren, while speaking eloquently about the evils of options, has apparently taken option positions based on the price levels in the stock market, no less. Hypocracy, and embarrassing judgement. While inflation will probably bail him out, its clear to me that what works for warren doesn’t necessarily work for me.

So, gold… True, it doesn’t earn, but just its avoiding of debasement has made it one of the most successful investments of the past decade. Its not making money, its just not losing money like dollar-based things are.

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