Why Buffett and Gartman are Wrong About Gold

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