Buffett on gold

[shalab]

http://money.cnn.com/2010/10/18/pf/investing/buffett_ben_stein.fortune/

 

[biaggio]

Thanks salab

 

makes it so obvious:

 

 

"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

 

[Guest Bronco]

Harry - you're not suggesting a high net worth person could escape the estate tax (for their estate) by passing on gold to their heirs, are you?

 

I'm damn near positive that this doesn't happen in practice.

 

The value of gold argument is almost the same for fiat currency - people believe it to have value, so it has value.  I'm not bright enough to trade around gold; however, I love those Kruggerands and wish I had some right now.

[libor.plus1]

Heh. I find the 'gold is fiat money' argument almost amusing since inherently it derives from the idea that within a current investors lifetime or investment horizon, people will suddenly wake up from a 20,000 year old norm and decide 'yaa, gold is really not money.'

[Myth465]

I would own gold if I had real money. If net worth is $100k, having $10k of gold seems pointless. You are screwed should civilization end. If its $100 million it seems stupid not to have at least half a mill in gold should S hit the fan.

[StubbleJumper]

Gold has no fundamental use beyond a few minor industrial applications such as electronics.  The entire "demand" for gold is thus predicated on a continuing role in pecuniary expression and in speculation.  If the former should ever cease to be, it's virtually worthless.  Now some have questioned whether its role in pecuniary expression will ever subside, but I would observe that our culture has changed significantly over the past few hundred years, and could continue to do so.  I have no difficulty with the notion that gold could ultimately become as fashionable as eagle feathers....

 

For my part, I'll take productive assets.  And if I were worried about the collapse of my country, there are any number of safe havens where I can buy productive assets to hedge my risk.  Perhaps an apartment in Rome, a villa in Spain, a ranch in Texas and a plantation in the Dominican....but they'll all have a productive use!

 

SJ

[beerbaron]

I'm sure Warren would massively buy gold if the price was attractive enough. Didn't he buy like 50% of the silver in the end of the 90's?

 

Everybody is right on Gold, it is a fiat currency but it's also the mother of all fiat currencies.

 

BeerBaron

[ExpectedValue]

I would own gold if I had real money. If net worth is $100k, having $10k of gold seems pointless. You are screwed should civilization end. If its $100 million it seems stupid not to have at least half a mill in gold should S hit the fan.

 

This is my view on gold. I think for people who are extremely wealthy, it might make sense. If you are worth $100M, setting aside $1 to $5M in gold might not be bad. You could think of it as disaster insurance if we enter into a really bad period where you need to bail out of the country and start a new life somewhere.

 

But if things really got that bad, maybe you would be better off investing in firearms, ammo, survival training, and canned food.

[Munger_Disciple]

I don't know anyone who got wealthy just by hoarding gold. We see people all around us (or in Forbes magazine) who have gotten rich by owning businesses.

[premfan]

Wow the gold discussion could go on forever. My take is buy gold if you think the government will continue to debase the dollar. Dont buy gold as inflation hedge. In inflation enivornment everyone loses. The winners are companies that have pricing power even in a flat demand enivornment. Also companies that are not asset heavy and have low capex that have the ability to increase volume of product without much capital injection. Buy gold as a hedge against government policies. Currently supply/demand dynamics of gold is favorable. It will take some time until the supply catches up with the demand. Gold is not in a bubble yet. We are not in the europhic period yet.

[Buffetteer]

If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk. Charile Munger

 

ps. great post shalab.

[tnp20]

"Throughout history at all times Gold has always been money"

 

US Airforce fighter pilots survival suite contains gold soverign coins, not US dollar notes.

 

Gold is not an investment, it is a currency that has historically been established  as universal store of value. Like any other currency, it will fluctuate in value against other fiat currency. However it has particular usefulness/utility in times of war, economic chaos, strong debasement regimen when its value will increase in relation to the impacted fiat currency. It is a highly portable currency and virtually universal in acceptance. It is a currency without country. It is a currency than can only be printed in the amounts that can be mined.

 

So in some respects Warren is right, gold is not an investment. Most other investments will out run gold in stable well managed economies.  In some respects Warren is wrong, gold is an insurance policy against black swans such as war, economic collapse, debasement etc...where those other investments might become worthless.

 

I personally own 5% of my assets in physical gold. If we get a spike in the gold price as happened in the 1980s, without the corresponding war, hyper inflation or economic chaos....the gold is out of the door and converted to cash.....other than that it will stay in my portfolio.

 

Throughout history, gold has always flowed from West to East. We are about to embark on a massive flow of gold from West to East as Chinese and Indians become wealthy and there are a lot more of them and growing in number faster than gold is being mined. Gold is an integral part of the culture which won't change in just one generation no matter how rational they might be.

 

Diamonds are not the same. Its a creation of DeBeers.

 

 

 

[ERICOPOLY]

But if things really got that bad, maybe you would be better off investing in firearms, ammo, survival training, and canned food.

 

Most of you probably don't have guns and don't think about them much... but I found this out recently and find it rather interesting... in most places right now you can't buy ammo for popular handgun calibers like 38 special and 357 magnum.  And it's been that way ever since Obama was elected (I asked at a couple of local places that sell ammo).  You can go online and try Cabelas.com and it actually takes months to get 357 magnum -- it's a long backorder.  Now, there are a lot of companies producing ammo out there for the retail market, yet they can't keep up with the flow of business.  People are hoarding -- for real.  There are a lot of flipped out rednecks I suppose, but nonetheless it is interesting to observe this aspect of the people that live around us.  I don't know if they are just panicked that society is going to collapse, or rather they simply worry about Obama taking away their right to bear arms.  You would be making a lot of money though if you were an ammo manufacturer -- these boxes of ammo (50 rounds) of 357 sell for $26 at Walmart nearby locally, and that's basic target rounds (the cheap stuff).  They were sold out so I asked the guy at the sporting goods counter when they were getting their next shipment -- he said he sells 3 to 5 boxes a week (this is for the entire store!).  That's only 150 to 250 rounds of target ammo for the entire Kitsap Peninsula here in Washington state (Poulsbo Walmart location).  So he said he was expecting to get 2 more boxes that evening -- so I said "2 cases you mean?".  "No" he said, "two boxes".  Okay, let me get this straight -- this giant Walmart store is only able to procure 2 boxes of ammo -- that's it?  That's only 100 rounds.  One person can blow through that in 40 minutes of casual shooting at the range.  THis is because, even Walmart can't get ammo in sufficient supply -- they are rationing it out to their stores from their warehouse.

 

Anyways, I started target shooting this summer which is how I know this -- because I couldn't find ammo, I started loading my own (buying the shell cases, bullets, primers, and powder separately).  So even the unloaded components (the shell cases) are sold out and backordered practically everywhere (takes a couple of months to get them). 

 

It might be Obama, it might be the global financial crisis, but something is driving people to hoard ammo right now.

 

 

[Guest broxburnboy]

 

It might be Obama, it might be the global financial crisis, but something is driving people to hoard ammo right now.

 

 

 

It seems that it definitely is Obama.. I recall reading at the time of his imminent election that ammo/firearm sales were up 400%.

There seems to be a demographic that really believes (and continues to believe) that Obama is bringing a Marxist takeover of the US.. quite irrational really, but rationality has nothing to do with the whole NRA/Tea Party/Evangelical thing... it seems to be an emotional reaction by the recently disenfranchised/disillusioned and in-denial.

In former times they would hoarde gold and silver... now they are stockpiling firearms... the rest of us can look forward to an increasingly

violent underclass subculture.

[manualofideas]

In former times they would hoarde gold and silver... now they are stockpiling firearms... the rest of us can look forward to an increasingly

violent underclass subculture.

 

People do all kinds of dumb things.  It's sort of interesting that the doomsayers like gold.  What are you going to do with it when doomsday comes?  Eat it?  Heat your cave with it?  Then I'd much rather own a farm and plant my own fruits and vegetables.  If you own gold, you are basically relying on other people to accept it in exchange for goods and services.  So, you are again relying on what OTHER PEOPLE do.  Gold is not safe, and it won't help you if doomsday comes.  What do you think would happen to the "smart" investors who hoard gold if the economy does unravel and we have unrest.  What would the revolting masses do with those who have the gold?  Simply accept it and say, you are rich and we are poor?  No, they would take your gold and put you in jail or worse.  If you think you can escape the country and go somewhere else with your gold, good luck with that too.  It ain't going to happen.  So, the bottom line, as always: Listen to Buffett.

[biaggio]

"there are a lot of companies producing ammo out there for the retail market, yet they can't keep up with the flow of business."

 

Are you sure they are not purposely decreasing production,to drive up price? This would be what I would hope. It is frightening to think that they can t keep up with demand.

 

Are there any publically traded ammo companies?

[Guest broxburnboy]

In former times they would hoarde gold and silver... now they are stockpiling firearms... the rest of us can look forward to an increasingly

violent underclass subculture.

 

People do all kinds of dumb things.  It's sort of interesting that the doomsayers like gold.  What are you going to do with it when doomsday comes?  Eat it?  Heat your cave with it?  Then I'd much rather own a farm and plant my own fruits and vegetables.  If you own gold, you are basically relying on other people to accept it in exchange for goods and services.  So, you are again relying on what OTHER PEOPLE do.  Gold is not safe, and it won't help you if doomsday comes.  What do you think would happen to the "smart" investors who hoard gold if the economy does unravel and we have unrest.  What would the revolting masses do with those who have the gold?  Simply accept it and say, you are rich and we are poor?  No, they would take your gold and put you in jail or worse.  If you think you can escape the country and go somewhere else with your gold, good luck with that too.  It ain't going to happen.  So, the bottom line, as always: Listen to Buffett.

 

Buffett won't save you either if doomsday comes... and I doubt you will be able to live your idyllic self sustaining farm life either, especially if you have a mortgage on it. If the new order confiscates your gold, your farmland title will probably be gone as well.

Good luck with the ammo thing.

 

 

 

 

[goldendad]

Are there any publically traded ammo companies?

 

Off the top of my head Olin and National Presto come to mind for publicly traded ammo companies.  And Ruger and Smith & Wesson for firearm manufacturers.

 

But the gun/ammo market already peaked (short-term anyway).  Shortly after Obama's election, the demand for black rifles (i.e. AR-15's and the like) skyrocketed and many/most were selling for $1500 or so.  Demand has been satisfied and now the prices are more like $1000 for them (roughly speaking on the numbers).  Ammo is similar.  Supply was limited and prices were high, but supply has reached most stores now.  After a year-and-a-half of bare shelves at WalMart, for the last few months my local WalMarts now have a decent supply of most calibers in stock.  And most things are in stock and ready to ship from Cabelas and other ammo shops.  And prices have dropped some as well.  I've seen in-stock, name brand 9mm ammo for $12/box now, whereas during the shortage it was a few bucks more.  FWIW, even during the shortage I didn't have any problems ordering 1000+ rounds from Cabelas, although certainly certain brands were out of stock from time to time.

 

As for gold, I'm of the mindset that a very small amount is a reasonable idea as a different kind of insurance . . . once you own your property free and clear, and have all of the cars, tools, food, fuel, weapons and other personal property you need.  But intellectually, WEB is right -- gold doesn't create income and I'd rather own an income producing asset.  Also, I would personally choose silver over gold, because there is a lot more industrial use for silver so there is more of a real value with silver (IMHO) and it has a similar historic role as money as does gold, so to me silver makes more sense if choosing a precious metal.

[turar]

Another contrarian indicator? Gold bar vending machines are now in Germany, and are on the way to the US.

http://www.smh.com.au/executive-style/luxury/you-chose-gold-bar--please-insert-11350-20101022-16xs5.html

[Guest broxburnboy]

Thanks salab

 

makes it so obvious:

 

 

"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

 

 

The real question of course is what ultimately is money - something that has intrinsic value as a commodity, uninflatable, indestructable, universally accepted and not subject to counterparty risk? Farmland is not portable, is dependant on weather and valid title, it can become suddenly unproductive due to drought or other calamity (like the dirty thirties on the North American plains). Gold produces no additional value (or loses it either) other than its intrinsic value and if you manage to get it all in one room, you must have traded something of value for it... and should be able to trade it back again, if you feel the need... after all it is money.

The trouble with a room full of trillion dollar bills is that another can be produced at the discretion of political authority and can dillute the purchasing power of your roomful by half or an infinite amount.

 

Further on the topic of gold, here is an article that illuminates the dynamics of the dollar/gold ratio..

 

http://www.zealllc.com/2010/neutgold.htm

[Myth465]

I think you completely missed his point.

[Mark Jr.]

I was invested in gold before I was ever exposed to the concept of "value investing". I still hold my gold shares, and I have a pile of physical. I got my gold shares so cheap I wouldn't really care if gold sold off by 50%. In terms of my physical, I own the only domain registrar that accepted e-gold for a few years, and I just redeemed it into physical coins as fast as it came in. I also sold a few domain names which cost me essentially nothing and pocketed tidy sums which I just rolled into gold and silver at much lower prices. From where I'm sitting it feels like my cost basis is zero (since I obtained it selling services with a very very low COGS) and my physical stash is worth a decent sum at today's prices and my gold shares are worth more.

 

So basically, I've done well with gold and basically got there for all the WRONG REASONS because when I started investing in gold I had absolutely no idea what the hell I was doing and thought I did. It's basically an investment that I fell into backwards.

 

Today, I stay in gold because my cost basis is just so bloody cheap and there's a bull market on. I plan to keep my physical gold forever, as a currency hedge. I'll sell the stocks when I see a "buying panic" ensue and I don't see us being there yet.

 

Here's where I think non-goldbugs get it "wrong" when they look at gold. They think "If gold goes up in some meaningful way, it'll mean the end of civilization, so what's the point?"

 

Currencies collapse all the time (in a historical context), and civilization marched right along. The Black Swan event is most people think this is an unthinkable scenario is when it comes to the USD. In fact if you look at the historical patterns, it's not only "thinkable", it's damn near inevitable. The one sentence scenario is simply: US defaults on debt via currency devaluation which terminates with or without a bout of hyperinflation in a "new currency", probably a North American Dollar of some sort and a new worldwide monetary regime in which central bank reserves are held in a basket of euro, north american dollar and something else.  In the overall scheme of things it'll be confusing to the masses, newsworthy and novel, but it won't mean we're living in a "Mad Max" world fighting over tins of dogfood with clubs.

 

In that process, gold will probably experience a massive spike/bubble whatever you want to call it. It's just pure speculation to play it and make no mistake, it's a trade, not an investment. But since I'm in early and up huge (purely by luck, not by skill) I'm going to let my profits run and see how far it goes. (When it's finally time to take the money off the table I hope to benefit from my recent years of education and be able to deploy that capital fairly sensibly. The thought has crossed my mind to roll the whole enchilada into FFH, depending on how it's doing when the time comes)

 

There will not be a return to the gold standard, and that far fringe of goldbugs called "free gold" who think there will be a "terminal event" where the paper currencies go worthless and everybody owning gold will become instant trillionaires are wrong, for reasons  too numerous to cite here.

 

We can start sniffing for a top in the gold spike when:

 

- the inflation adjusted highs of the last gold spike are surpassed (around $2500/oz)

 

- when there is a buying panic in gold (during the last gold/silver spike people were lined up around the block at one particular silver foundry in the US. They were smelting it, stamping it, cooling it and selling it in one motion)

 

- when the popular press shifts from calling new highs the top, to calling new pullbacks opportunities

 

- all the standard bubble hallmarks: bookstores full of "get rich in the gold market", when the TV hucksters flip from buy-side ("sell us your unused gold for top dollar") to sell-side ("if you don't buy gold now you're missing out on a fortune!"), late night infomercials hawking gold investing workshops, the works.

 

This is another bull market, and a bubble in the making. There will be a time to pull the trigger and take the profits.

 

I am NOT recommending anybody here try to invest in gold on the basis of this argument, not unless you find something that has a real value angle to it, and I've frequently commented that if I had no position in gold at all, I'd really hate to try building one at these prices.

 

[Guest HarryLong]

We should reframe the discussion as one about a prolonged dollar bear market, rather than about a gold bull market.

 

Being long gold is a more elegant way of expressing a short dollar thesis without being synthetically short gamma, or volatility.

[Mark Jr.]

We should reframe the discussion as one about a prolonged dollar bear market, rather than about a gold bull market.

 

Being long gold is a more elegant way of expressing a short dollar thesis without being synthetically short gamma, or volatility.

 

Wow, you said it in two sentences. Although you could go one further and say we're shorting more than just the dollar, since right now there is a competitive devaluations going on, or at risk of flaring up.

[Rabbitisrich]

We should reframe the discussion as one about a prolonged dollar bear market, rather than about a gold bull market.

 

Being long gold is a more elegant way of expressing a short dollar thesis without being synthetically short gamma, or volatility.

 

That still doesn't answer the question of how to benchmark gold pricing to some "fair value". I recently attended a lecture where the speaker claimed that gold would retain value in the event of a broad global currency devaluation. Why would people agree to this principle that gold should be able to purchase %X more of Y over Z period? And how would we know that a 1.5(%X) move is irrational? It seems like the only mechanism to realize overvaluation is when the sellers find that they can't move product, which puts valuation in the circular position of being realized by people who are guessing about people who are guessing, and so on...