The
gold doomsayers have found their champion in the media's favorite financial
advisor and one of the world's richest men. Warren Buffett, the man dubbed
the "Oracle of Omaha," has repeatedly and publicly denied that gold
is an investment, and called gold buyers "speculators" and people
"who fear almost all other assets." In fact, Buffett claims that
gold's rise has the same characteristics as the housing and dot-com bubbles,
and it is only a matter of time before it reverses course. He doesn't mean
that the price will decline because of austerity measures and a free-market
interest rate, mind you. He just asserts that because he's deemed it a
bubble, it will inevitably burst.
The
financial world by-and-large views Buffett as an objective observer, a rare
investor who still considers the best interests of common man when he speaks.
Each year, there is much hullabaloo over the letter Buffett writes to the
shareholders of Berkshire Hathaway. When Buffett makes a claim, the financial
world coos and repeats it without question.
I
concede that Buffett is a talented investor and a great communicator. He
clearly has had great success and has much to offer. But that shouldn't blind
anyone to the fact that Buffett is not a trusted observer. He's a crony
capitalist who bends the truth to serve his long-held ideological commitment
to big government.
In
the early stages of the financial crisis, when I was writing and promoting my
first book Crash Proof to warn private investors about trouble ahead,
Buffett was accumulating shares in companies such as Goldman Sachs, Wells
Fargo, Bank of America, and General Electric. I knew these companies were
insolvent, so I wouldn't touch them with gardening gloves on. When the credit
markets seized up, Buffett worked behind the scenes and in public to make
sure each of his pet companies were bailed out. This
was not by coincidence. Buffett actually stated in September 2008 that he
would not have invested in Goldman Sachs if not for the implicit guarantee of
federal assistance. As a result, he profited at the expense of taxpayers at
the very time when they were losing their savings in the markets. Meanwhile,
many "in the know" politicians bought Berkshire stock during the
height of the crisis, making a profit from their votes, and giving them
incentive to revere Buffett all the more. Buffett once said if that if the
government didn't bailout failed companies, he would
be "having my Thanksgiving dinner at McDonald's instead of having a big
dinner at my daughter's." Seems like there were two bloated turkeys at
that meal.
If
Buffett were a true capitalist, he would be in favor of gold. He has noted
that the value of the dollar has fallen 86% since he took over Berkshire Hathaway
in 1965 and even said in his latest shareholder letter that investors are
"right to be fearful of paper money." But he continues to harp on
gold. It seems the only unit of account Mr. Buffett approves are shares of
his own company!
The
adoption of an independent measure of value like gold presents two problems
to Buffett. First, it would reduce the nominal returns of his dollar-based
investing strategy. Second, it would restrict Washington's ability to goose
the financial system in his favor.
In
the 19th century, when gold and silver were legal tender, the outsized
returns to which Buffett has become accustomed were much harder to earn. Most
people kept their money in physical bullion or bank deposits - and earned a
real rate of return. Now, under the fiat system, working folks are forced
into the more complicated world of equity investing. This, too, can generate
real returns, but it's a tougher playing field for the inexperienced.
Also,
the fiat system artificially balloons the financial services portion of the
economy. In the 19th century, fortunes were made more often by business
owners than simple equity investors. People were more likely to rewarded for providing a productive service than having
direct access to the Fed's discount window.
A
quick look at Berkshire's performance verses gold since the Credit Crunch
goes a long way to explaining Buffett's antipathy toward the yellow metal:
Source: Google Finance
But
Mr. Buffett's lack of credibility goes deeper than a differing monetary
philosophy. He has been in the press since last August claiming that he pays less taxes than his secretary - and urging Congress to
pass a "Buffett Rule" mandating a 30% minimum tax on millionaires.
The natural reaction is to say, "If you want to pay more, go
ahead." But Buffett has gone on record saying that it's not enough for
him to lead by example, and demanding that all of America's well-off bear the
burden of Washington's reckless spending binge.
The
problem is that Buffett's entire argument is constructed on deception.
Buffett is rated as the third richest man in the world for managing the
nearly $393 billion in assets, and he highlights that he pays only pays 17.4%
of his income in taxes. But this is because he earns less than 1% of his
annual wealth from his salary, while over 99% is earned as the largest
shareholder of Berkshire Hathaway. Buffett claims that he discounts his
Berkshire holdings because he plans to give it all to charity when he dies.
So, it's not that the tax rates are so low, it's
that Buffett plans to give away 99% of his wealth.
But
even accounting for this clever accounting trick, Buffett is still grossly
understating his personal tax burden. He owns roughly 1/3 of Berkshire's
outstanding shares, the profits from which are subject to a 29% corporate tax
rate. Last year, Berkshire paid $5.6 billion in taxes - and the IRS says they
owe $1 billion more! In addition to corporate taxes, Buffett is also subject
to an additional 15% capital gains tax on his stock when he cashes out, not
to mention any future estate tax, leaving many to conclude that his share of
taxes is certainly higher than his secretary's.
You
might wonder what Buffett would hope to gain by understating his own tax
rate. To answer that, you have to understand Buffett's ideological
background. His father, Howard Buffett, was a US Congressman known for his
staunch libertarianism. As has been recounted by biographers, Buffett
resented being uprooted from his Omaha, NE home to move to Washington, DC and
felt estranged from his stoic father. That is to say, Buffett's commitment to
the nanny state runs very deep.
But
also, as mentioned earlier, Buffett personally benefits from the current
corrupt state of affairs. He gets prestige from nominal gains in his stock
price. He gets bailout money to guarantee the insolvent companies in which he
invests. Even that estate tax that will hit him when he passes currently
allows him to buy out other businesses at a steep discount.
It
also shouldn't be a surprise that humble Howard was a staunch advocate of
gold and silver as money - nor that wealthy Warren rejects precious metals as
having "no utility."
The
media has built Warren up to be a demigod, a straight-talking Nebraska boy that
can hold his own against the vipers of Wall Street. But he is just a man with
a talent for making money, and his motives should not be beyond reproach. Is
he advocating the use taxpayer money to bailout his
business interests so he can profit? Is he being honest about what money is?
Does he even understand the business cycle?
Gold
prices will only go down when governments change course and make significant
cuts. Until then, gold is not in a bubble. It's the only way to protect your
wealth; and in the current economic condition, it's poised to go much higher.
I think it's high time Buffett takes to heart his
father's wise words: "For if human liberty is to survive in America, we
must win the battle to restore honest money."
Peter Schiff is CEO
of Euro Pacific Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. To learn more,
please visit www.europacmetals.com or call (888) GOLD-160.
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