Gold, Buffett and a New Monetary Order

How would Buffett do under a new regime…?

WHO IS Warren Buffett? asks Julian Phillips of GoldForecaster.

He's 'Yoda' of the financial world. He is a man brilliantly skilled at making profits with considerable expertise in the US economy and its corporations.

Gold is, as he says, a dormant item pulled out of the ground and stored in vaults thereafter. It is not for 'just making profits' because it is an entirely different animal to corporations.

The big difference is that Buffett has been making money for around 70 years, whereas gold has been preserving wealth for around 5000 years. Buffett is mortal and coming to the end of his life, whereas gold is not. 

Mr Buffett's ability to make money is dependent on the continuation of a growing US economy. More importantly it depends on his mortal skills as an investor. Gold is immortal.

Gold will survive if there is no US economy. Gold has no investment skills, but has done very well in growing its price 42 times in as many years. Not bad for a totally inanimate item.

Gold for investors would have done far better if it had been bought in 1970 then sold before Volker came to office at $850 an ounce, then repurchased in 2005 at $300 an ounce. Its return would have been nearly 120 times since the sixties if you had done that.

The world has known that gold will always preserve value over time, but hindsight is needed to know Buffett would do so well. By far the majority of investment managers have come nowhere near to the results Buffett has, nor are we likely to see that again. With Buffett, it is a case of "if only we had known!" 

In gold's case, the very arrogant 42 year experiment with government-promise backed paper excluding gold became the basis on which Buffett's fortune was made. Right now, that system is undergoing strains that are sapping confidence in it. If the US loses Dollar hegemony the value of the Dollar will decline heavily. Warren Buffett's fortune may rise in weaker Dollar terms, but if the US experiences a loss of wealth and power to Asia more than it is at the moment and the US economy sinks into stagflation, the real value of his fortune may have to be measured in gold? In other words, his fortune rests on the mortality of the US Dollar.

Meanwhile, the Fed continues to hold the world's largest gold reserves at 8,133 tonnes –4,742 tonnes more than Germany, which holds 3,391.3 tonnes of gold and considers it an important reserve asset (to fund imports if the Dollar becomes unacceptable).

Even now Mr Ben Bernanke holds the view that gold is not money. So why hold gold?

We quote the saying, "Gold is not bought by people to make money, but by people who have money." In that saying lies the appeal of gold. That's why around 20,000 tonnes of gold are owned by Indians, and China is buying as much as they can afford at a rising pace. Emerging nations' central banks are buying persistently for the same reason the US continues to hold gold.

Gold is an insurance against nation's governments and monetary systems. It is not bought for profit but for financial security. Hence, it has never been in competition with brilliant investment manager's performance. 

It has enabled investors in gold to retain their wealth through two World Wars and the destruction of their currencies on two other separate occasions. Fortunes made in those currencies during those times evaporated, despite the brilliance of their makers.

Of course Warren Buffett will not invest in gold because he's a skilled operator and will continue to do well as long as he is able to manage investments in the system he knows so well. His brilliance remains in the perishable system we have now, leaving his wealth just as perishable. But he remains as mortal as the Jedi Knights were.

The skill in handling gold is to buy it at a low price ahead of a change of system. We believe the changes in the next five or so years will be fundamental and gold an asset that will increase its value during those transitions, no matter what level of instability lies ahead. We believe its value in Dollar terms will outperform the performance of the last forty years and become a pivotal part of the future monetary system.