Buffett and Gold - Some historical perspective

[Eric50]

I just found the following comment from Buffett in his 1979 letter to shareholders:

 

"One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil."

 

I thought that the gold investors in this board might enjoy that perspective relative to the current events.

 

Eric

 

[Guest kawikaho]

Nice.

[saumil]

good note

[ragnarisapirate]

In light of this, I think that I have devised the ultimate pair trade:

 

Long gold, short BRK.  ;)

[bargainman]

Just saw a national geographic issue about gold.  Apparently all the gold ever mined up is just enough to fill 2 olympic sized pools!  50 percent of that mined in the last 50 years it said.  They also had a distribution graph which showed that the *vast* majority was used for jewelry.  I can't seem to find that graph online.  Does anyone have a source that shows Gold use?  The other uses were ETFs, hoarding, electronics plus some others, but those were much less.

[ERICOPOLY]

I read an interview yesterday showing that Peter Schiff (running for Congress) wants to put the United States back on the gold standard.  Even if the United States held all the gold in the world, it would only amount to about $20,000 per person.

 

So there simply isn't enough to go around Peter.  Ah, but somebody would say that they coins distributed would be silver or copper (or both).

 

So why not a silver or copper standard?  Why beat around the bush?

 

[twacowfca]

There are a few inflationary periods when stocks tanked

that gold out performed equity indexes e.g. 1930's,

1972-1982, but it's a lousy long term investment that doesn't

compound.  

[twacowfca]

Oops, inflationary and deflationary.

[Myth465]

I listen to Peter Schiff's podcast weekly and am listening to Ron Paul's End the Fed.

 

Their branch of economists is quite interesting. I believe they simply dont want the government to have the ability to monkey with the money. I think they would support any logical way of accomplishing this goal. They want to tie to money to something that is fixed or only increases with significant effort to find (gold and other commodities, IE something that cannot be printed or electronically generated).

 

I agree with several of their argument from a political standpoint but am not sure how they could be implemented practically or what type of ramifications they would have. Basically the believe that if the government had to pay for things it promised then many things would be looked at differently. Currently the government can more or less do anything it wants and the outcome is largely hidden from the average American though inflation, deficient spending, and a weakening dollar.

 

Interesting stuff but, not very useful from an investment point of view. Schiff is credited with calling the crisis, but not profiting from it. He believes the dollar will continue to weaken and other economies will decouple at some point leaving the US to sort out its own mess. He also has an invested ideological interest in the outcome which may distort his analysis. Prem on the other just wants to avoid risk and profit from his investments and seems more agnostic about what the government does.

[benhacker]

Schiff has many interesting ideas.  Unfourtunately, it appears that he has lost his compass and no longer can seperate BS from fact (including his own).  It is sad becasue while many would be well served to hear *some* of his ideas, most rational people are turned off by him quickly (from my experience).

 

I strongly recommend the book "History of Money" on this topic.  Boring as I'll get out, but it brings to light what money is really for, and why we use paper instead of coin.  Each comes with it's own risks and drawbacks of course, and the history is fascinating.

 

Ben

[keerthiprasad]

I've followed Ron Paul and Peter Schiff for some time now.  I agree that not everything they suggest is practical.  However, I will say that I am convinced they are much smarter than most of the people making decisions today. 

 

Remember that Buffett's father was very similar to Ron Paul and it seems to have worked well for Warren....

 

"History of Money" sounds like an interesting read.  I think I may pick it up.  Thanks for the suggestion.

[Cardboard]

Bargainman,

 

Here is the information that you are looking for:

 

http://www.invest.gold.org/sites/en/why_gold/demand_and_supply/

 

IMO, the situation is actually simple. You have a fairly steady demand that is roughly growing in line with the world's population. Then you have a gap in supply that has been met by "Net central bank sales" for at least a decade.

 

What happens when "Net central bank sales" become "Net central bank purchases" when you know that:

 

1- Mining has not produced any more ounces per year since 2000 despite much higher prices. Looking forward, new projects at most miners appear only capable to replace depletion. It also takes around 10 years to put a new mine into production from discovery.

 

2- While some may be tempted to melt away their family jewellery for a few bucks and increase "Scrap" supply, this is a minority. Also keep in mind that refining has limited capacity.

 

So with supply decreasing, you need a higher price to choke demand.

 

Industrial demand is very inelastic. If they use gold into an application it's because nothing else can do and it is such a tiny amount that higher prices won't make much difference on the total cost of that product. Jewellery demand has already decreased, but the problem is that with a higher price "Investment" demand is likely to keep on growing. People invest and hoard gold, not copper, oil or aluminum. With a higher price comes popularity and greed or like what we have seen with stocks and housing. So we will likely never reach equilibrium. So far the climb has been pretty orderly, but it will likely accelerate upwards until something really breaks down.

 

Cardboard

[Mungerville]

Buffet is not doing much better in this decade relative to gold.

[Guest kawikaho]

Buffet is not doing much better in this decade relative to gold.

 

Very true.  I posted about this awhile ago, but relative to gold and oil, equities (especially if you price that in terms of USD) have sucked horrendously!

[EricSchleien]

For anyone interested in understanding monetary policy as well as the gold standard I'd highly recommend a book called Gold: The Once and Future Money by Nathan Lewis.  It's a really comprehensive book and super interesting read.  Goes into how the Gold Standard is implemented, debunks a lot of myths, and also goes into the history of monetary policy for the past few thousand years.

[Josh4580]

I agree with eric, the best way to learn about gold is from Nathan Lewis.  His book is a must read and shows how easy it is to have a gold standard, without all the usual problems people bring up. 

[EricSchleien]

Another good source too is Mises.org in terms of reading about this economic school of thought.

[Guest Broxburnboy]

Just saw a national geographic issue about gold.  Apparently all the gold ever mined up is just enough to fill 2 olympic sized pools!  50 percent of that mined in the last 50 years it said.  They also had a distribution graph which showed that the *vast* majority was used for jewelry.  I can't seem to find that graph online.  Does anyone have a source that shows Gold use?  The other uses were ETFs, hoarding, electronics plus some others, but those were much less.

 

By far the major owners of gold are the world central banks, the World Bank and the IMF. They hold it as partial backing of their currencies. Most also hold a variety of currencies like Yen, Euros and Greenbacks.

For some reason which escapes me holding gold is called "hoarding" while holding other currencies is a laudable act of asset diversification.

In the US and elsewhere the housing "bubble" was typified by a mania which possessed just about every household. Most household indebted themselves to the tune of 100s of thousands of dollars to speculate on the future of home prices and was fueled by cheap credit with little or no collateral.

The supply side reacted by overbuilding the supply to the point that there was more houses to go around and people were buying second homes in order to double their money, not noticing that renters were getting harder to find and that rental revenues could not cover the financing of the "investment". The sad result of the inevitable collapsed bubble is still unfolding.

Some have compared the current price of gold as a "bubble" like the housing market, yet hardly any householders own gold and if they do the investment is modest and almost certainly unlevered. The supply side cannot react by fueling the speculative frenzy with fresh supply.. because there isn't any. Such comparisons of the two markets are beyond ludicrous.

[Guest Broxburnboy]

A good summary of the bull case for gold:

 

http://www.321gold.com/editorials/saxena/saxena111309.html

 

 

[oec2000]

Even if the United States held all the gold in the world, it would only amount to about $20,000 per person.

 

The total value of all gold stocks is, I believe, about US$6 trillion. The monetary base of the US, even after the recent "helicopter Ben" surge, is only $2 trillion. So, technically, there is still enough gold to back the USD.

 

In my view, there is something to be said for having the discipline of a gold standard - to prevent irresponsible politicians from debasing the currency. Even Buffett and Watsa, who are clearly not gold bugs, feel that govts will tend to succumb to the temptation of inflating their way out of debt rather than take the politically much tougher option of fiscal austerity.

 

On the other hand, history has taught us that a fixed gold standard can wreak havoc on an imploding economy - which is why the system was dumped. I have a problem understanding how it makes sense to tie the hands of monetary policy to the supply of an arbitrary commodity. What happens, for example, when we run out of gold? Does that mean that money supply has to remain forever fixed?

 

I've followed Ron Paul and Peter Schiff for some time now.  I agree that not everything they suggest is practical.  However, I will say that I am convinced they are much smarter than most of the people making decisions today. 

 

As with most things in life, I suspect that the right path is one that lies in the middle somewhere. The people at the extremes, like Schiff and Pauls, are just trying to sell books or get elected. When buying a used car, the last person whose advice I would trust is that of the used car salesman!

 

Note: I'm no economist but my two-handed impersonation should count for something. ;)

[Myth465]

I dont think they at least Ron Paul are concerned with selling books. He seems to really believe that he has gotten to the hard of a lot of the United States problems.

 

He believes the endless wars (on drugs, and the middle east) and several other issues relate to the ability to not pay for something and then inflate your currency to cover its costs. He believes it gives politicians an easy way out instead of leveling with the people and making them make tough decisions. Look at healthcare, I am for universal healthcare and dont mind paying for it in some reasonable way but, the left is promising it can be done at a cost of $0. That makes no sense.

 

Gold has no intrinsic value to me and is pretty ugly as jewelry. I would like to tie the hands of politicians so that what they vote for they have to pay for but, going back to gold for historical purposes doesnt make much sense to me. There has to be a sensible way of accomplishing this. The average person thinks that the government can just give them stuff for nothing and doesnt realize it comes from someone or something.