Eric Fry

Warren Buffett doesn’t like gold. Neither does Dennis Gartman. That settles it for us; gold must be a table-pounding buy.

In this year’s annual letter to Berkshire Hathaway shareholders, Warren Buffett scorned gold as an asset that is “forever unproductive.”

“[Gold] will never produce anything,” he wrote. “Gold has two significant shortcomings, being neither of much use nor procreative.”

Buffett’s statement is literally correct, but it has two significant shortcomings, being neither of much use nor insightful. No one holds gold hoping it will produce something. They hold gold because no one can produce it. Precisely for this reason, mankind has considered gold the ultimate money for several thousand years…and it has performed this role with meritorious distinction.

Gold’s appeal waxes and wanes, of course, depending upon the monetary environment in which it resides. But the less folks trust the cash in their pockets, the more they trust gold…and that’s exactly what’s been happening throughout the Western world for more than a decade.

Therefore, despite gold’s “significant shortcomings,” it has delivered a much higher return during the last 14 years than the “useful” and “procreative” Berkshire Hathaway. As the chart below shows, the “rolling 10-year return” of gold has been higher than that of Berkshire Hathaway since January 2008.

Rolling 10-Year Investment Return on Gold vs. Rolling 10-Year Investment Return on Berkshire Hathaway

In other words, an investor who purchased gold at any time after January of 1998 would have received a higher investment return over the following 10 years than an investor who purchased Berkshire Hathaway. That seems like a fairly useful investment result.

But Buffett is the investment genius sans pareil. We aren’t. He knows gold is a losing bet. We don’t. But here’s the good news: You don’t need to be a genius to buy gold. You can be an idiot. In fact, according to Buffett, you are.

“This type of investment,” says the Oracle of Omaha, “requires an expanding pool of buyers who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future.”

Like Buffett, Dennis Gartman has also scorned gold recently. Unlike Buffett, Gartman has recommended buying gold from time to time — and even buys it for himself on occasion. But he recently notified the world that gold was a “Sell” and the he would no longer be “long of gold,” as he says in his bizarre version of English.

On December 15, the editor of “The Gartman Letter” announced, “I sold all gold in my personal account… Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.”

A week later, Gartman kicked the “yellow dog” again. “I expect equities will outperform gold [in 2012] without any question,” Gartman told the CNBC viewers. Unfortunately for Dennis, his “Sell alert” on gold happened to coincide with a brand-new “Buy alert” from Ben Bernanke and a few of the Fed Chairman’s counterparts around the globe.

As you may recall, last November the Federal Reserve and the European Central Bank (ECB), along with the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank announced “coordinated actions…to provide liquidity support to the global financial system.”

These banks have kept their promise. They have all ramped up their money supplies since November 30.

The day this announcement crossed the wires, we observed:

A new phase of monetary destruction is underway…All the largest central banks are committing to printing money in some way, shape or form.

Who knows what’s next? Probably, we can look forward to a new era of clandestine bailouts, backdoor lending facilities with inscrutable acronyms and global monetary game-playing that will look a lot like a massive money-laundering operation.

Perhaps someone should notify the authorities. The Fed is engaged in highly suspicious, un-American activities.

As it turns out, the Fed’s suspicious activities are merely part of a global crime syndicate — a worldwide counterfeiting ring. The following chart, courtesy of James Bianco at Bianco Research, tells the tale.

“Bianco’s chart,” observes Tim Price, Director of Investment at PFP Wealth Management, “shows the extent to which the eight largest central banks (China, the ECB, the US, Japan, Bank of England, Banque de France, Swiss National Bank, and Germany’s Bundesbank) have allowed their balance sheets to explode, in a desperate attempt to compensate for banking and private sector deleveraging since the debt crisis began. The Big 8 central banks now account for the equivalent of one third of world stock market capitalization.”

Combined Balance Sheet Assets of the 8 Largest Central Banks

“If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves,” Bianco remarks, “then all eight of these central banks are engaged in QE.”

True statement…which means that as long as the line on the chart above continues soaring higher, the precious metals are a “Buy”… no matter how frequently and self-assuredly Buffett and Gartman call it a “Sell.”

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • Scott Benson

    I have yet to find a normal, rational explanation as to why a large “balance sheet” for a central bank (the Fed, etc.) is a bad thing. It obviously is, but I can’t find anyone who can explain why. So they have millions of “bad” mortgages on their balance sheet? So what?

  • 2 funny

    Funny that Buffet didn’t say such things about silver that he does about gold.

  • Jean

    And the balance sheets after debt destruction in the Great Correction?

  • http://www.economicsfanatic.com Macro Analyst

    Gold was in a bear market for nearly 20 years (1980-2000). Currently, gold is in a secular bull market, which can last for another decade (if not more). As long as policymakers continue to flood the financial system with liquidity, gold prices will be supported at higher levels.

    Further, the holdings of gold with individuals and Central banks is still very less as compared to their total investments or reserves. Therefore, the upside potential is significant in terms of demand in the foreseeable future.

  • CT

    Rah, Rah, stand and shout.

  • Pappy Fiat

    Warren Buffet or Eric Fry?

    Difficult… very difficult choice ….

    Both billionaires with no absolute need to hawk gold.

    Eric, yes, Eric has the edge.

  • Rusty Fish

    Every year comes a time to lineup the billionaire, by world ranking, Africa ranking, Asian ranking, European ranking and so forth. To determine who would rank no 1 in respectivey continents. These billioaires may have 200, 150, or 100 billion figures in their wallet.
    Then, uncle Sum has roughly 3 trillion IOUs. On a broader front, hundred billions ends up on those so called billionaires out of the 3 trillions. The connection is these billionaires are more or less agents, representative of uncle Sum in respective lands, else, trade connection would be online. Hundreds of billions may seem lots to them. But, what about comparison to the trillions? And, on top they are probably be used as donkeys to carry resources out of the respective lands on their sturdy back.
    Figures implicates with far reaching effect on sovereign, integrity, security, self-esteem on each and every piece of land. Maybe, an accountant can craft a good balance sheet out of the interminable, entangled human conflict.

  • Rusty Fish

    Lastly, the trillion IOUs would be inflated away in due course of history.

  • Clay

    How can one say that Gold can not produce a thing. Anything that can be held as collateral, can help to produce!

  • dmb

    i bought gold in 1982 along with three bags of silver. i still have it all locked away in a vault. it is insurance as well as part of my retirement account.

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