The Curious Warren Buffet

Warren Buffet is so 1980's.  His aura peaked in the 1990's.  He should've sold out and moved to the South Pacific.  By the time he dies, he will have made himself look like a complete jack-ass, especially with regard to his comments about gold.

Before I start in on my commentary, I wanted to post a little update to the housing data that has been released over the past few days.  I think these numbers further support claim that the housing data is misleadingly manipulated and fraudulent and that the housing market is headed a lot lower.  New home sales were reported on Friday for the month of January to be a better-than-expected "seasonally adjusted" 321,000 annualized rate.  Here's the real data:  Only 22,000 new homes were contracted for in January;  in total, 4,000 new home sales actually closed;  6,000 were vacant lots - 12,000 have not started in construction.  Now how does the new home sales report look?  You can draw your own conclusions.

For me, Warren Buffet epitomizes everything about myth vs. reality and the power of the media's ability to influence the perceptions of large masses of the population.  The mainstream public and it's penchant for instant gratification will typically, at best, catch only brief snippets of real news, preferring to feed any thirst for news and gossip with "reality tv" and shows like Jersey Shore and The View.  What better way to shape perception than to flash ads with images of a smiling Warren Buffet sipping Cherry Coke?  The myth that, despite his billions, he lives in the same small red brick house in Omaha, Nebraska with his wife is just that - pure myth.  He hasn't lived in that house or with his wife for many years.  He has beautiful homes and mistresses all over the country in places where the very wealthy "quietly" congregate, like Sun Valley and Santa Fe.  I remember back in the mid-1990's reading an article that outlined the man vs. myth about Buffet which detailed how his simple "wrinkled, cheap sack suit" look was in truth very expensive Italian suits tailored for that look in order to give Buffet the Willy Loman veneer.  It's also pure bullshit that he's going to put all of his wealth in a charitable trust when he dies rather than pass it on to his heirs.

There have been several recent examples that have slipped out of the "do as I say, not as I do" reality of Warren Buffet.  A few years ago he wrote a piece that famously referred to derivatives as being financial weapons of mass destruction and said that he avoided them in his course of business.  But then not too long after that one of Berkshire Hathaway's large insurance companies, General Re, revealed that it was sitting on huge derivatives losses.  Executives at the company subsequent to that were prosecuted for accounting and business fraud.   In the latest reported quarter Berkshire's earnings were directly affected by big derivatives losses.  And how about Buffet talking big about how the very wealthy should pay more taxes, and yet Buffet's personal marginal tax rate is significantly lower than that of the secretaries who work for him.  To paraphrase NJ Governor Christie, Buffet should either shut the f_ _ k up or write the Government a big check.

I am going into all of this because I want to underscore the true lack of credibility Buffet has when he uses his annual shareholder meeting, in part, as a forum to make derogatorily incorrect statements about the investment value of gold.  How many of you reading this knew that Warren Buffet's father was a 4-term Congressman from Nebraska who championed the use of gold as a currency anchor?

Buffet spent - dare I say "wasted?" -  a considerable amount of space in his widely read shareholder letter explaining why gold is not a good investment.  You can see his thoughts on the matter  HERE.  In one sense, on a superficial level (of course, everything about Buffet's public display is superficial), his thoughts make perfect sense.  I'm not going to "invest" in gold to produce something useful in the same manner that I would invest in farmland or invest in a plant to produce widgets. 

But "investing," in that context and meaning of the term, is not why you buy gold.  In fact, you don't really buy gold.  When you acquire a holding in physical gold that you control, you are really doing no more than exchanging fiat dollars - which are used as a currency - for gold, which is the world's oldest currency.  It just so happens that over the last 10 years the number of dollars it takes to exchange into an ounce of gold has increased.  Why?  Because fiat dollars are rapidly being devalued by catastrophic public policy AND the dollar appreciation of gold - gold as currency - is not going up in value the way a successful investment might but instead is merely reflecting the fact that the market demands more paper fiat dollars in order to exchange gold for those fiat dollars.

Here's an interesting way to look at it.  In 1971, right before Nixon closed the gold window and took the $35 fixing off of the price of gold, oil was roughly $3/barrel and an ounce of gold would buy 11 barrels of oil.  Today, with gold at $1750 and West Texas oil around $109, an ounce of gold will buy 16 barrels of oil.  If the world was on a currency exchange standard that was based just on oil and gold, does it look like the price of gold is in some kind of investment bubble, as Buffet would have you believe?  That example shows the remarkable stability of gold as a currency versus the remarkable depreciation of fiat dollars, as it takes slightly less gold in 2012 to buy a barrel of oil than it did in 1971 BUT it takes 36 times more fiat dollars to buy the same damn barrel.  Which would you rather hold in your pocket to use as a currency?

But perhaps this is why Buffet is so unhappy with gold:

This chart shows the number of ounces of gold it takes to buy 1 share of Buffet's Berkshire Hathaway class A stock.  In 1999, at the peak of the internet bubble (which was fueled by Greenspan's money printing/dollar devaluation), it took 280 ounces of gold to buy one class A share.  Currently it takes just under 70 ounces of gold.   A picture says 1000 words, huh?  In less that 1000 words, and in summation of the chart, a market participant would be about 400% wealthier if they had exchanged their investible fiat dollars for gold in 1999 and simply held it until now than if they had invested in Warren Buffet.  No wonder he's coming out of his Depends over gold.

As you can see, gold is not an investment at all.  It's a currency that embodies relative purchasing power in the same way that the U.S. dollar or the euro contain relative purchasing power against each other and against the goods and services these currencies are used to procure.  The relative purchasing power of each global paper fiat currency pretty much fluctuates on daily basis.  But it is a fact that the relative purchasing power of each currency against gold has been rapidly declining over the past 11 years. 

So gold isn't even an investment, contrary to the notion of gold which Buffet absurdly attempts to explain.  Gold is a nothing more than something that possesses decorative value as jewelry, but more significantly has functioned for over 5,000 years as a remarkably stable currency for the purposes of commerce.  Looked at properly, Buffet's long-winded written pontification on why gold is not a good investment seems absolutely silly.