Warren Buffett is not always right, indeed has been particularly wrong on precious metals over the years, and this article is a response to his recent comments on gold at the Berkshire Hathaway AGM.Author: Bill Bonner
Posted: Wednesday , 18 May 2011
BALTIMORE (Daily Reckoning) -
Here's the world's most successful investor talking about our favourite metal. Warren Buffett had this to say about gold: "You can fondle it, you can polish it, you can stare at it. But it isn't going to do anything."
Except protect you from losing every dime!
"Gold really doesn't have utility," the 80-year old told shareholders at Berkshire Hathaway's annual general meeting. "I'd bet on a good producing business to outperform something that doesn't do anything."
Yes, so would we. And we'd usually rather have a jacket from Ralph Lauren... or Brooks Brothers... than a Life Jacket. And we'd usually like to see a pick-up truck or a delivery truck in our driveway, rather than a fire truck. And we'd much rather spend the night with Julia Roberts stark naked than with a heart surgeon in full medical regalia.
But hey... guess what? There's a time and a place for everything.
Why did God bother to create gold, anyway? Is it just for ornamental purposes?
Historically, gold has had one other very important use. And, while most of the time it is useless, occasionally it is indispensable. Most of the time, gold is as dumb and lifeless as a joint session of Congress. Buffett is right; most of the time, it's as useless as a seat belt.
But there are times when a common lifeboat has greater utility than a luxury sailboat. Could this be one of them?
Well, something is going on that is turning this do-nothing metal into an investment champ. The price of gold is up 10% already this year. It's gone up every year for the last decade. You don't have to look too far to see what it is.
How about $4.5 trillion in deficits over the last 3 years? How about tripling the Fed's balance sheet holdings since the end of ‘08? How about TARP, TALF, QE1, QE2... and zero interest rates?
Oh, and lest you think it is all just an emergency response to the crisis of ‘07-‘09, soon to be history... here's The Washington Post with some perspective:
WASHINGTON - The nation's unnerving descent into debt began a decade ago with a choice, not a crisis.
In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses for the foreseeable future. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.
Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in US history except for the period shortly after World War II.
Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits essentially forever. As policymakers grapple with the legacy of the past decade, a demographic wave of senior citizens is crashing at their doorstep, driving up the cost of Medicare, Medicaid and Social Security.
How will the feds cover this debt... and future deficits? Do you think they will put on the brakes... raise interest rates... cut spending... and raise taxes? If so, you should not own gold. Gold would go down and the dollar would go up. Of course, the bond market would crash and the economy would go into a depression too. Rehab isn't for sissies. Getting clean can be painful.
More likely in our view: the feds will keep flying... until they crash.
"There's something peculiar about an asset that will really only go up if the world is going to hell," said Buffett's right hand man, Charlie Munger.
Yep. Very peculiar. But occasionally, the world does go to hell.
And here's another problem with gold. As the danger of inflation increases, so does the cost of protecting yourself. When you finally realize you need a life vest, you're already in over your head.
A few days ago, gold changed hands at more than $1,550 an ounce. If you bought when we first told you to, you're congratulating yourself. Your life vest has gone up more than anything, except possibly investment grade wine!
But if you didn't buy then, is it too late now? Now, it's not so easy. You'll be reluctant to get in now - the price is more than three times higher.
So what do you do? You wait for a correction. But the correction doesn't come when you want it to. And then, when it does come, you hesitate. You check your bearings. You read the financial press. You read about all the "poor gold bugs" who are getting killed. You hesitate more. You wonder: maybe all the run-up in gold was just a fluke. Maybe the problem has gone away. You worry that it's not a correction in a bull market, but a new bear market that will take gold back down for the next 10 or 20 years.
Then, before you know what has happened, the metal has swung up again. And soon it is more expensive than it was when you decided not to buy the last time.
So what should you do? We don't give buy-sell recommendations; we leave that to our colleagues, who know what they are doing. But we will repeat the non-advice we offered for the last 11 years:
Buy gold on dips. Sell stocks on rallies.
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