One can go back to Buffet’s earlier years and see that he was always acutely aware of the threats of inflation, he warned of it openly and invested accordingly, always preferring stocks of companies that had ‘pricing power’, the ability to raise prices and keep pace with inflation.

In his defense, I think French is misunderstanding Buffet’s position. What Buffet is saying is that there is a price at which gold has already factored in the future inflation, it’s no secret that we will have inflation, and that is why buyers of gold have already bid gold to where it is today. To exxagerate, let’s say Gold appreciates yet another 25%. Should one still buy it? At what price would French say Gold is no longer a good place to put one’s dollars? History has also showed that buying gold at the “top” has been a very painful for experience as well.

What do you think?
—————————————————————
That was my problem; I could never come up with an intrinsic value, therefore I stayed away. Now if there was a company selling that owned X amount of gold that was selling for .5X, I’d be very interested. But paying $1 for $1 worth of gold doesn’t make sense to me. At 50 cents, I now have a market value to use as reference against. But I sort of feel like my arguments are not of much interest to most on this particular subject. No matter.

There is a big difference between KO or any other paper asset and gold. There were no guarantees that KO would have been around 10-50 years into the future. At least with gold, it can't be easily created or destroyed.

Regarding such statements as:

“But getting back to gold as a commodity, what uses does it really have other than a few pieces of jewlery?”

…meaning it shouldn’t be selling much higher than quartz or glass beads.

More than one respondant has said something similar to the above, often in the form of “gold has NO intrinsic value.”

But gold has many uses, and even if ‘gold bugs’ came to their ‘senses’ tomorrow, the price of gold can NOT fall below silver. With just it’s industrial uses AND jewelry demand, it simply can’t get anywhere near as cheap as silver, even IF everyone started loosing their faith in gold as money.

And of course, as long as virtually everyone in the world, including central banks, view it as having intrinsic value for just its monetary uses, then it HAS that value.

What’s funny is these statements are usually made by someone defending the PAPER dollar. That is the definition of something that ONLY has value based on the confidence we have that it has some value for its monetary uses.

ABCT sheds some light on the issue, and those who believe in it are mostly saying that the actions taking place right now will tank the dollar, but that still doesn’t give a clear answer of when gold is too expensive.

From a fundamental standpoint, gold is too expensive when other things with intrinsic value become much cheaper relative to it, which is true today when you look at anything from oil to many foreign equities.

From a psychological standpoint, gold is way too expensive when it is what everyone is buying it hand over fist and when almost everyone thinks it’s a can’t lose investment, and we’re not there yet.

Going by Ben Graham’s methods, I wouldn’t call gold a value investment today, especially with so many other things that are on sale, but I wouldn’t say it’s extraordinarily expensive either.

What do you think?

BRK just received a ratings company downgrade as well, nothing serious, just a sign that the mighty may just be mortal after all…

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.

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.

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.

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.

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.

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.

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.

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!

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.