Bill Bonner

Drums keep pounding rhythm to the brain
La dee da dee dee
La dee da dee da

The beat goes on! Here’s the world’s most successful investor talking about our favorite metal:

Warren Buffett on gold:

“You can fondle it, you can polish it, you can stare at it. But it isn’t going to do anything.”

Except protect you from losing every dime!

“Gold really doesn’t have utility,” the 80-year old told shareholders at Berkshire Hathaway’s annual general meeting. “I’d bet on a good producing business to outperform something that doesn’t do anything.”

Yes, so would we. And we’d usually rather have a jacket from Ralph Lauren…or Brooks Brothers…than a Life Jacket. And we’d usually like to see a pick-up truck or a delivery truck in our driveway, rather than a fire truck. And we’d much rather spend the night with Julia Roberts stark naked than with a heart surgeon in full medical regalia.

But hey…guess what? There’s a time and a place for everything.

Why did God bother to create gold, anyway? Is it just for ornamental purposes?

Historically, gold has had one other very important use. And, while most of the time it is useless, occasionally it is indispensable. Most of the time, gold is as dumb and lifeless as a joint session of Congress. Buffett is right; most of the time, it’s as useless as a seat belt.

But there are times when a common lifeboat has greater utility than a luxury sailboat.

Could this be one of those times?

Well, something is going on that is turning this do-nothing metal into an investment champ. The price of gold is up 10% already this year. It’s gone up every year for the last decade. You don’t have to look too far to see what it is.

How about $4.5 trillion in deficits over the last 3 years? How about tripling the Fed’s balance sheet holdings since the end of ’08? How about TARP, TALF, QE1, QE2…and zero interest rates?

Oh, and lest you think it is all just an emergency response to the crisis of ’07-’09, soon to be history…here’s The Washington Post with some perspective:

WASHINGTON – The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.

In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses for the foreseeable future. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.

Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in US history except for the period shortly after World War II.

Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits essentially forever. As policymakers grapple with the legacy of the past decade, a demographic wave of senior citizens is crashing at their doorstep, driving up the cost of Medicare, Medicaid and Social Security.

How will the feds cover this debt…and future deficits? Do you think they will put on the brakes…raise interest rates…cut spending…and raise taxes? If so, you should not own gold. Gold would go down and the dollar would go up. Of course, the bond market would crash and the economy would go into a depression too. Rehab isn’t for sissies. Getting clean can be painful.

More likely in our view: the feds will keep flying…until they crash.

“There’s something peculiar about an asset that will really only go up if the world is going to hell,” said Charlie Munger.

Yep. Very peculiar.

But occasionally, the world does go to hell.

And here’s another problem with gold. As the danger of inflation increases, so does the cost of protecting yourself. When you finally realize you need a life-vest, you’re already in over your head.

Yesterday, gold changed hands at $1,557. If you bought when we first told you to, you’re congratulating yourself. Your life vest has gone up more than anything, except, investment grade wine!

But if you didn’t buy then, is it too late now? Now, it’s not so easy. You’ll be reluctant to get in now – the price is more than three times higher.

So what do you do? You wait for a correction. But the correction doesn’t come when you want it to. And then, when it does come, you hesitate. You check your bearings. You read the financial press. You read about all the “poor gold bugs” who are getting killed. You hesitate more. You wonder: maybe all the run-up in gold was just a fluke. Maybe the problem has gone away. You worry that it’s not a correction in a bull market, but a new bear market that will take gold back down for the next 10 or 20 years.

Then, before you know what has happened, the metal has swung up again. And soon it is more expensive than it was when you decided not to buy the last time.

So what should you do? We don’t give advice here in The Daily Reckoning. Giving advice is for our colleagues, who know what they are doing. But we will repeat the non-advice we offered for the last 11 years:

Buy gold on dips. Sell stocks on rallies.

You have a rally in the stock market, no question about that. But a dip in gold? Not now. Not yet. Stay tuned. It will come.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • The InvestorsFriend

    Good point. Gold will (likely) protect wealth in the event the dollar depreciates significantly.

    … Though that is not for sure, Gold remember has soared in the past decade when we had little inflation. Much threat perhaps but little inflation. Gold is actually very poorly corrlated with inflation- certainly if measured over decades. Over Millenia it may have a better correlation. Gold fell hard in the 80′s and 90′s DESPITE inflation. Remember? (No… I thought not). (bit of a leaky lifeboat in those years)

    Other ways to protect wealth from inflation and a devalued currency include investing in real return bonds, investing in assets like houses, investing in proftiable corporations. All of these will protect you unless you buy them at too high a price.

    … You’re Welcome!

  • Bruce Walker

    Maybe not gold, but what about silver? Does the price action the last two days in silver qualify as a correction? You would think they uncovered a 600,000 ton cache of silver in Bin Laden’s compound by the drop in price since he got himself capped. Perhaps the expectation is that while the contract on Bin Laden cost the United States about 2 trillion dollars, at least its now a closed-end proposition and the militairy expenses will wind down. When it becomes apparent that isn’t the case at all, LOOK OUT! The train will have left the station and anyone not already on board the metals wagon is going to be left behind.

  • John

    Why are you advising your readers to hold on to an over inflated commodity that produces nothing? Gold and silver were great deals ten years ago but not anymore. What goes up comes back down. Many people are going to lose their life savings because of all of the hype about these over inflated commodities. Buffett is a very wise man who has lived through all of these manias and ignored them to become one of the richest guys on Earth. Value investing works. Holding gold is highly risky at these prices. You can save your readers their fortunes if you head Buffett’s council. Read “The Intelligent Investor” and any other value investing books that you can find. Read Buffett’s annual shareholder reports. Berkshire Hathaway is a great buy right now. Gold is not at all even remotely close to a good value at today’s price. The world is not coming to an end. Stocks have earnings and put people to work. Gold looks pretty but is expensive and a gamble. Sure it could go up way higher, but it’s dangerous and a risk that I don’t recommend.

  • Gaurav Marwah

    Excellent analogies comparing “Useless” Gold with “Useless” Lifejacket.
    And excellent description of the confused state of a general investor during the course of a bull market. Felt as if you are talking about me (I being the “YOU” in “You wait for a correction” which never comes when expected).

  • 2 funny

    John: Buffet will retire soon.

    And he no longer has a right hand man to step in. Remember Peter Lynch?

  • John

    I know that Buffett is old. But Peter Lynch ran a mutual fund which is entirely different. Berkshire is a holding company that owns some of the world’s best brands that have great moats. And Berkshire is trading at only 1.3 times book value. When you add in the fact that many of Berkshires holdings are whole companies that are worth much more than book value you basically can get one hell of a bargain. I also think that it is safe to assume that whomever takes over Berkshire will be qualified.

    But, the real point that I wanted to make was that gold is a gamble and you shouldn’t just buy gold because it has gone up so much. You shouldn’t hold gold to protect yourself from inflation when it is overpriced. And you shouldn’t buy gold just because you don’t know where else to stick your money. Learn to invest and stop speculating. Just a recommendation for your financial health and survival in this uncertain time. I don’t want to see people get hurt. They got hurt in tech stocks, real estate, stocks, and sometime probably sooner rather than later, they will get hurt with commodities.

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