Read the Beforeitsnews.com story here. Advertise at Before It's News here.

By Brian Bloom (Reporter)
Contributor profile | More stories

Story Views
Now:
Last hour:
Last 24 hours:
Total:

Warren Buffett Is Not A Stupid Man

Sunday, April 15, 2012 1:07

% of readers think this story is Fact. Add your two cents.

The link below will take the reader to a summary of a report by Warren Buffet to

shareholders of Berkshire Hathaway. In it, he implicitly makes the point that

investors may be regarding gold with too much emotional attachment.

http://www.businessinsider.com/warren-buffett-the-investment-everyone-thinks-is

-safe-is-actually-the-riskiest-in-the-world-2012-2

I think that the most significant point Mr Buffett makes is that “wealth creation” is

a function of building businesses that satisfy market needs/demands.

Businesses are living, breathing multi-cellular organisms that create value

regardless of what the stock market is doing.

From my perspective he is not saying that gold is “bad”. He is saying that if you

want to “preserve” wealth, then gold is okay but if you want to “create” wealth then

sitting on a pile of gold won’t help you do that. Another observation, if I

understood him correctly, was that too many people are buying gold nowadays

because they are motivated to “add” to their wealth. Too many people are buying

gold because they think a “greater fool” will pay them a higher price than they

paid.

I agree with this observation. It’s a mindset issue. If, for the sake of argument,

gold was merely a commodity and not a currency then, when it outperforms

commodities, that excess performance would flow partly from speculation and

partly from relative demand/supply forces. But “real” (volume) demand for gold

seems likely to slow over the coming years as less real wealth is created in a

slowing global economy (i.e. less real wealth will be available to invest in gold)

and supply is likely to keep growing as new mines open. That, essentially, is why

I think that the gold price is due for a strong correction. Have a look at the relative

strength chart below, courtesy stockcharts.com (Gold divided by commodities).

Since 2006, a sort of hysteria has been building and the “ratio” has almost

quadrupled – from slightly over 150 to slightly less than 600.

Based on the “pure” commodity chart below (courtesy stockcharts.com), the

commodities index has risen in price since 2001 from 231 to 304 – that’s a

compound growth rate of 2.5% p.a. and the lower growth rate probably flowed

from “relative” abundance, as will be examined later in this article.

Now let’s look at the counter argument in relation to gold:

If, for the sake of argument, gold was a “currency” then it should “hold” its value

against paper currencies – i.e. as the volume of paper currencies rise, so the

gold price should rise proportionally.

The fact is that M2 money supply in March 2001 was $5 trillion, and in Feb 2012

it was $9.8 trillion. (source:

http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm )That’s a compound

growth rate of 6.3% p.a.

Whilst the stock of money has been rising at a higher compound growth rate than

commodity prices, production of commodities has also been compounding – so,

from a “demand” perspective, more money has been chasing more goods.

That’s one reason why the prices of commodities have not kept pace with money

supply. Another is that because of greater productivity, we need a lower quantity

of commodities to do the same job as before. For example, cars nowadays get

a higher number of kilometres per litre of fuel.

By contrast, gold production hasn’t gown as quickly as that of other commodities

so, relative to paper currency, its price had to rise more than other commodities.

But, as I understand Mr. Buffett, he thinks that the gold price has run too far. If he

is correct (and I think he is) then gold must correct in price WITHIN THE

CONTEXT OF A CONTINUING BULL MARKET FOR AS LONG AS

GOVERNMENTS CONTINUE TO PRINT MONEY.

(Author note: Because the US Dollar has been the default international currency, I

have used US M2 statistics as a proxy index for global statistics. Of course, this

is not necessarily true but it is the principle on which the reader needs to focus. )

In fact, the gold price has risen from about $300 an ounce to $1660 an ounce in

the same time period. That’s a compound growth rate of 16.76% p.a.

By contrast, if gold was rising in price to compensate for actual growth rate of the

money supply at 6.3% p.a. then it should have risen from $300 to $591 an ounce.

But let’s not jump to conclusions. Arguably, the market is looking forward and is

anticipating a compound growth rate of money supply that is much higher than it

has been historically. But even if the growth rate in future is (say)10% p.a. and,

looking backwards, had been 10% p.a. from 2001, then the price today would

only have been $855.

For gold to fall to the technical target level of $1109 (as is being indicated by the

3% X 3 box reversal Point-And-Figure chart shown in my article of last week),

this implies that money supply growth rate will need to accelerate to a level

where compound growth rate from 2001 will have been 12.62% p.a.

Based on these numbers, there has clearly been an element of speculation –

flowing from the assumption that the world is heading back towards a gold

standard; and that gold will become the world’s currency of last resort with all

existing paper money backed by some ratio of gold. Frankly, for reasons that I

have articulated many times, I think that such an outcome is not practical. It is an

expectation that is based on theoretical reasoning that does not take reality into

account. The reality is that industrial demand for gold will grow over time and,

relatively speaking, gold will become even scarcer.

Financial authorities cannot dictate that gold may not be used for industrial

purposes. What if the growth in the amount of available gold (available for

currency purposes after industrial demand has been satisfied) slows down to be

lower than growth in population? Will that mean that money supply per capita will

shrink? Are we aspiring to build “deflation” into our economic management

toolbox? All this talk about gold being a currency of last resort is, in my view,

nonsense. But it doesn’t follow that gold is not valuable. It merely means that the

gold price is currently in a bubble (that may or may not expand further; i.e. the

“risks” are growing) and it needs to correct – within the confines of a continuing

bull market.

So, after it corrects to wash out the speculative element, if governments are

predisposed to continue inflating the money supply – which is what the Fed has

been doing – then gold will allow you to stand still without having to get on a

treadmill. But Mr. Buffet’s point is that no-one got rich by standing still. Ergo, you

need to already have wealth to aspire to own gold.

Where I am predisposed to disagree with Mr. Buffett is that this central bank

predisposition to deliberately create monetary inflation is a “growth” oriented

approach to building an economy. His thought processes are geared to inflation

– as are the thought processes of the gold bugs. In my mind, the world economy

will not survive in the longer term if it continues to be “growth” focussed. As

climate change is demonstrating, there is a new dynamic out there. The

“environment” is not the benevolent cornucopia that it once was. We need to

stabilise global population numbers (which might take 20-30 years), and, in

doing so we need to start thinking in terms of a stable economy where people

can improve their standards of living only if they add value. An implication of this

is that speculative trading will become irrelevant and those who do not add value

will remain poor, because the gross size of the pie will not grow. On the other

hand, the net size of the overall pie will likely keep growing because costs will fall

through improved productivity and greater efficiency in usage. Therefore, overall

standards of living can continue to grow – for those who add value.

Of course, if the gold price was being suppressed in the years leading up to

2001, then the target price (fundamentally) of gold might be higher than the range

of $591 - $855 that is discussed above. For example, if the starting number

“should have” been (say) $600 (for ease of discussion) then the current number

should be somewhere between $1200 and $1700. Either way, further upside in

the gold price is limited

In my mind, both the charts and the fundamentals are in alignment. The charts are

(subtly) calling for a correction in the price of gold and I believe them. Warren

Buffett’s logic only served to reinforce my view that gold should not be thought of

as a “currency”. It is a commodity that will grow significantly in fundamental value

over time.

In my forthcoming factional novel, The Last Finesse, I suggest how gold might

play an important contributory role in a new era of financial discipline. Via the

book’s storyline, the rationale of how gold can form part of a solution (but not the

entire solution) is laid out for even the lay person to understand. A long term

“real” price of around $2,000 an ounce seems reasonable to me, but the gold

price might churn at around these levels for up to a decade.

In closing, there are some who will remember that Mr Buffett bought a large

quantity of silver some years ago and will argue that, therefore, he is speaking

with a forked tongue. I think the reason he bought silver was, quite simply, that he

thought it was underpriced. It should be born in mind that at the time that he

bought it he paid somewhere around $5 an ounce and it is now trading at over

$30 an ounce. Things change and our thinking needs to adjust to the reality of

that change.

In all my published articles – and in both my books – my main thrust has been

this: Precisely because life is dynamic, one needs to avoid “dogma” in all

decision making – not only in financial decision making. I have recently been

reading an article on “wisdom” in corporations, and here is a relevant quote

(Source:

http://econpapers.repec.org/article/ephjournl/v_3a5_3ay_3a2010_3ai_3a2_3an

_3a2.htm ):

“Embeddedness is an important systems principle: problems cannot be

isolated from the systems in which they are located, or embedded; the system,

itself is nested within a larger context that must also be understood and,

perhaps, changed for viable problem resolution (Devine,2005; Keating et al,

2001.). This explains why holistic approaches to problem analysis and

intervention are more likely to succeed in complex environments than

formulaic ones (Clayton and Gregory, 2000; Sice and French, 2006) while also

accepting that problem diagnosis or analysis is more challenging”

The bottom line is this: The world in which we live is a highly complex system of

which the economy is a complex subsystem. The mountain of global debt is one

symptom (there are other symptoms) of imbalances in both the system and the

subsystem. Honing in on a gold standard as the way to redress these

imbalances is a formulaic approach which has a low probability of success. To

solve our problems, we need a holistic approach, not sound-bite cleverness, or

even the charisma to sell facile, clever sounding, sound-bite solutions. In short:

We need “wisdom”.

Personally, I am prepared to accept that the world’s most successful investor has

a modicum of that wisdom. When he expresses a view on something as

important as the gold price, I am prepared to stop and listen carefully to what he

is saying. Warren Buffett is not a stupid man.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

April 15th, 2012.

In the global corridors of power, a group of faceless men is positioning to usurp

control of one of the world’s primary energy resources. Climate change looms

large. Can the world be finessed into embracing nuclear energy? Set in the

beautiful but politically corrupt country of Myanmar, The Last Finesse, through its

entertaining and easy-to-read storyline, examines the issues of climate change,

nuclear energy, the rickety world economy and the general absence of ethical

behaviour in today’s world. The Last Finesse is a “prequel” to Beyond

Neanderthal, which takes a right-brain, visionary look at possible ways of

addressing the same challenges. The Last Finesse takes a more “left brain”

approach. It is being published in all e-book formats.

Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Please Help Support BeforeitsNews by trying our Natural Health Products below!

Order by Phone at 888-809-8385 or online at https://mitocopper.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomic.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomics.com M - F 9am to 5pm EST

Humic & Fulvic Trace Minerals Complex - Nature's most important supplement! Vivid Dreams again!

HNEX HydroNano EXtracellular Water - Improve immune system health and reduce inflammation.

Ultimate Clinical Potency Curcumin - Natural pain relief, reduce inflammation and so much more.

MitoCopper - Bioavailable Copper destroys pathogens and gives you more energy. (See Blood Video)

Oxy Powder - Natural Colon Cleanser! Cleans out toxic buildup with oxygen!

Nascent Iodine - Promotes detoxification, mental focus and thyroid health.

Smart Meter Cover - Reduces Smart Meter radiation by 96%! (See Video).

Comments

Online:
Visits:	1,606,057,324
Stories:	8,157,894