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As usual, Warren Buffett sounds
folksy and sharp in his casual dismissal of gold. But a look beneath the
surface shows the Oracle's true motives.
So Ben Stein interviewed Warren
Buffett for Forbes last week. (You can find that interview here.)
If the name doesn't ring a bell,
Ben Stein is notable for four things. First, he played the infinitely boring
teacher in the classic '80s movie, Ferris Bueller's Day
Off. ("Bueller... Bueller...") Second, he had an epically bad game
show for a while called Win Ben Stein's Money. Third, he was
the Clear Eyes eye drops guy.
And last but not least, in an
odd post-TV and movie career as a financial columnist, including a stint with
The
New
York Times, Ben Stein has made a habit of penning
some of the most vapid, schlocky nonsense ever put in print.
Think that's unfair? Check out
the opening of the latest Buffett piece, which is absolute classic Stein:
The first thing I notice on my
most recent visit with Warren E. Buffett, who recently turned 80, is how
incredible he looks. He would look terrific for 50; for 80, he looks like
Charles Atlas. He's modest about it, as he is about everything. "It all
works great," he says. "The eyes, the hearing -- everything works
great ... which it will until it all falls apart."
The second thing you notice is
that he is so smart it curls your hair.
Oh, that Buffett. So charming,
so self-deprecating. No wonder Stein got a little verklempt.
But "Curls your hair"? The guy sounds like Aunt Edna crooning
over Lawrence Welk. At least the majority of
groupthink Buffett worshipers out there have the common decency not to air
their hot flashes in public.
Stein, being Ben Stein, then
leads off with an utter softball of meat-headed conventional wisdom:
My first question, as I sit
there on the couch in his office, is: "What about gold? Is this a
classic bubble or what?"
One hesitates to ask why sitting
on the couch (in Buffett's office!) is important. Unless, of course, Stein is
intimating the magic of being so close to WB he can smell his aftershave --
no doubt the brand Charles Atlas would have worn.
Buffett, being Buffett, responds
to the cream puff question by utterly trashing gold:
"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 ExxonMobils, 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?"
Which would I take -- are you
kidding? That's a dumb question. I would take the gold. In a heartbeat.
See, what Buffett says about
gold here sounds folksy and sharp and oh so smart. But it really
isn't. Instead, it's a blatant misrepresentation of why gold has value, where
that value comes from, and why investors should have exposure to gold in
their portfolios.
Red Herring
#1: Franchise Value
First off, to describe gold as
"a big cube of metal" is disingenuous -- a red herring. This is to
suggest that, apart from its physical properties, gold is no different than,
say, a "big cube" of nickel or tin or bauxite.
But we know this is not true,
because gold has been money -- that is to say, gold has been ubiquitously
seen as a reliable and widely accepted store of value -- for thousands of
years.
If anyone understands the
concept of franchise value, it should be Warren Buffett -- he of the
mountainous mass of Coca-Cola (KO:NYSE) stock. I mean, when
you get down to it, what is Coke really (besides Buffett's favorite drink and one of Berkshire's major permanent
holdings)?
Basically it's just sugar water.
A little fizz, a little syrup, and there you go.
So why does the Coca-Cola
Company have a $140 billion-plus market cap? Because of franchise value.
Because of the brand... the psychological hold and longstanding reputation
that Coke as a drink of choice has on its customers.
Gold is the same, yet even more
so. Those who say gold is "just another commodity" consistently
ignore thousands of years of human history. They gloss over literal
millennia's worth of franchise value. They ignore the fact that, like the
very concept of wealth itself, gold has a powerful psychological berth in the
minds of men that stretches across virtually every border, to every country
on the planet, dating back at least 80 generations to the Lydians of the 5th century BC.
"Lookit,"
as Uncle Warren likes to say. Gold has been money since around the time man
invented the plow. Meanwhile, the modern fiat
currency system is less than 40 years old. Put that in your See's
Candies/Coca-Cola franchise pipe and smoke it.
Red Herring
#2: Investment vs. Insurance
The idea that anyone could own
all the gold in existence is another red herring. News flash: Most of the
gold in the world simply isn't for sale... and probably never will be, at ANY
price.
And for those who don't yet own
gold -- or who don't own enough gold -- the yellow metal is not a standalone
retirement plan, an "all in" investment, or something to plunge
one's entire net worth into. It's a form of insurance, plain and
simple.
Buying gold is no less sensible
and prudent than buying fire insurance on your primary residence --
especially when gleeful pyromaniacs like Tim Geithner
and Ben Bernanke show every inclination of burning down your monetary house.
To talk about gold as a lousy
investment versus, say, Exxon Mobil or farmland, then, is just another bait
and switch. Who says you can't own all three?
And of the three, which has the
most historical value, ease of conversion, and natural reputation as a
"neutral currency?"
Here's the thing that Uncle
Warren won't talk about. From a pure insurance perspective, those who need
gold as a form of protection still don't have enough. Not nearly
enough.
The idea that the investing
public is loaded up on gold is a myth. For every investor who says they own
gold, there are more investors who pooh-pooh gold and say it's a bubble.
Apart from precious metals
conferences, when you take surveys of who actually owns gold and how much,
the net result is usually twofold: Those who actually own gold have a
relatively small percentage of their portfolios allocated to such; and the
percentage who don't own any gold at all is still surprisingly high.
Then you have the institutions,
the pension funds and the central banks -- three giant sources of
potential demand whose total allocations to gold are still miniscule. These
three groups have net allocations to gold in the low single digits as a
percentage of their total portfolios.
Were that percentage of gold
allocation to double -- while still remaining in the single digits --
the price of gold would skyrocket. (That is one reason it probably WILL
skyrocket.)
During the crash of 1987, there
was an options trader who made millions by positioning himself the right way just
before it happened. He saw that volatility was going to explode, and so he
loaded up on puts and calls. Immediately after the crash, everyone wanted to
buy the inventory he had on his trading book. As he described it
(paraphrase), "The sun had just moved a lot closer to the earth, and I
was the only guy with zinc ointment left."
To borrow that metaphor, gold is
like the "zinc ointment" investors need to protect their portfolios
from fiat currency sunburn. And the stuff is in short supply.
Red Herring
#3: Relative Value
The third implied statement of
Buffett's is that gold is expensive. But expensive relative to what?
Equities?
There are credible arguments
that present equity markets are 30% to 40% overvalued, based on a more
realistic take in respect to earnings, and that lofty expectations of
"quantitative easing 2" is the main thing keeping markets propped
up.
Or maybe the naysayers think
gold is expensive because it has never traded at such high prices before. But
guess what? These are nominal prices. To best its
inflation-adjusted high, gold would have to trade well over $2,000 per ounce.
We would have to go 50% higher from here -- at least -- just to top 1980!
And wouldn't you think that,
given the 25-year leverage and debt supercycle we
have just been through, coupled with the biggest Keynesian experiment ever
conducted in the history of markets by governments worldwide, that gold would
at least,
as a reasonable minimum, beat out its old inflation-adjusted highs?
Doesn't seem too crazy to me...
Yes, all the gold in the world
could buy all the U.S. farmland and 10 Exxon Mobils,
yada yada. But so what.
The size of the gold market relative to global demand -- and long-run trends
in respect to that demand -- is tiny. There just isn't enough to go around.
Ben Stein is enough of a
hoity-toity lightweight that he might actually believe the "gold has no
value" argument. But Buffett? That's doubtful. Stein got one thing right
-- the Oracle of Omaha really is too smart to completely overlook gold's monetary
history, its embedded franchise value, and its usefulness as a form of
insurance.
So why is Buffett trashing gold
then? Because he's an equity guy. And because Buffett knows there are legions
of financial advisors who secretly despise and fear gold. These
convention-minded advisors hate entertaining the thought that the system
might be broken, or that the actions of the U.S. government might have severe
negative repercussions for their clients.
So they put their heads in the
sand, and try to justify just buying more good old blue chips instead. And in
that mentality Uncle Warren is happy to encourage them.
Justice Litle
Taipan
Publishing Group
Justice
Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader, and Managing Editor to the
free investing and trading e-letter Taipan Daily.
His articles have been featured in Futures magazine, he has been quoted in
The Wall Street Journal and has even contributed regular market commentary to
Reuters and Dow Jones.
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