Buffet, Berkshire and Gold

I'm getting calls to the Priced in Gold hotline, emails, questions from friends – all asking the same thing: "Have you seen the 2011 Berkshire Hathaway annual report and Warren Buffet's comments about gold?"

On pages 17 to 19, Mr. Buffet outlines three big categories of investments and comments on each. The first category are "Currency-based", things like bonds, mortgages, bank deposits and so on. He rightly argues that these are bad news in times of declining currency values.

The second broad category are non-productive assets such as commodities, and he uses gold as the poster-child for this asset class. Stored in a vault, these assets just sit there, doing nothing. As Mr. Buffet says, you can fondle them, but they will not respond.

The third category, his favorite, are what he calls productive assets: businesses, farms, and real estate. His assertion is that in the future, the value of these assets will grow enough to provide a real return, even taking currency depreciation into account.

I understand (and mostly agree) with his comments on gold… but he hasn't looked at the investments he likes so much PRICED in gold. He doesn't realize just how much erosion of currency value there is these days – it is much worse than the government and mainstream economists he relies on will admit. So while he is correct that it is theoretically better to invest in companies that can create value and growth, that only makes sense when there is a positive growth climate and stable money… which is not where we are today! Someday, he will be right in spades; but for now, it is much better to be in cash (real cash, that can't be devalued by governments, that is to say GOLD, and maybe silver.)

Take a look at the performance of Berkshire Hathaway stock, as an example. In the 1990s, it did great, making it's shareholders rich compared to buying gold or holding other forms of cash – multiplying their capital invested by 10x or more. But from 1999 to today, those investors have lost more than 75% of their money, as compared to just holding gold. My sense is that they will lose the rest of their gains as well, if they just hold on. Eventually, those BRK-A shares may start to really grow again… but that won't occur until the economy is sorted out and money is once more stable. And that will take some serious doing, and won't happen for a long time, maybe decades. Virtually everyone who bought shares of BRK after 1996 is now in a LOSS position on that investment, as compared to just holding onto a lump of gold instead… Sometimes it is better to just hold cash!

Berkshire Hathaway A Shares priced in gold from 1990

Of course, while BRK has been declining, there are investments that have been growing in true value. Apple Computer (AAPL) is one example. During the 1990s, it held it's value pretty well, but didn't grow the way Berkshire did. But while Berkshire lost value after 1999, Apple began to grow, really picking up steam after 2003. While it is possible to grow your wealth in gold terms, it takes careful attention to what is really happening, avoiding investments that are falling in gold value – regardless of how attractive they may look when measured in depreciating currency – and focusing on investments that are providing genuine returns.

Apple Computer priced in gold from 1990

Will Apple keep going up? I can't know the future with any certainty. But I can implement a sound money management system that will keep me from holding investments that are declining in gold value, and I can seek out opportunities that offer a shot at true growth as measured in gold. And until I find a good opportunity, I can keep my capital safe by holding gold rather than depreciating currency or declining stocks.

Some people worry that interest rates are too low, and that as inflation continues to head higher, rates will begin rising, increasing the attractiveness of currency-based investments and hurting the price of gold. While that might create an updraft for the USD and other currencies relative to gold, significant and sustained rises in rates would also destroy the stock markets, the bond markets, the housing markets, and the Government's budgets… so I don't think the central banks will be allowed to take that action any time soon (by which I mean pretty much forever). More likely they will continue the gradual destruction of currency values that has been so successful for decades, until a major war or other emergency gives the excuse to take direct control of the economy and "reset the game" for another round.

If such an updraft develops, take advantage of it to accumulate more gold, or even speculate on rising currency values by trading some of your gold for currency-based assets. But realize that holding government issued currencies and currency-based investments is a highly risky speculation. Gold is where you want to keep your savings, preferably in physical form, safely stored outside your home country.

Eventually, when the monetary insanity has run it's course, government has receded to a much smaller footprint, budgets are in surplus and debts have been defaulted on or paid down, money is stable and interest rates are being set by the free market, and the central banks have disappeared or lost their power, then you should trade most of your gold for solid, growing companies and other productive assets – maybe even some shares of BRK, if it's still around! But not before then.


Sir Charles
Editor, http://pricedingold.com