Banquo’s Ghost and Gold

WE have all been mesmerized by action in the price of gold lately. In the past few weeks, gold rallied over $200 per ounce and traded solidly about the $2,000 per ounce level and hit a new all-time high taking out the previous high from August 2011.

Of course, gold is volatile (well, the paper gold market is volatile) and has its down days alongside the up days. But the trend to much higher prices is firmly in place.

It’s trading at around $1,940 today, but it’ll soon be back to $2,000, and much higher in the years to come.

Everyday investors understand this price action, but the Federal Reserve does not.

Gold reserve requirements on the U.S. money supply were ended in 1968 and the ability of foreign trading partners to convert U.S. dollars to gold at a fixed price was ended in 1971.

Ever since then, central bankers in general and the Fed in particular have banished gold from the conversation and insisted that if you think gold has a place in the monetary system you are a “gold bug,” a moron or worse.

But, like Banquo’s ghost in Shakespeare’s Macbeth, gold keeps showing up as an uninvited guest at the dinner table to haunt the central bankers. Economists may have abandoned gold, but investors have not.

And perhaps the most famous investor of all is now betting on gold…

In the past, Warren Buffett has mocked gold for having no utility. Why dig it out of the ground only to rebury it in a vault?, he has asked.

Incidentally, Buffett’s father, Howard Buffett, was a U.S. congressman. He strongly believed in the gold standard and was one of the last remaining public officials who argued for it after WWII.

The apple fell pretty far from the tree in this case.

But, it seems that Warren Buffett has changed his mind about gold…

Buffett dumped much of his stake in JPMorgan and Wells Fargo bank and made a huge $563 million bet on Barrick Gold.

There are fundamental reasons for this, including the fact that bank earnings are likely to suffer both because of a flat yield-curve (banks can’t make profits on a spread when there is no spread) and accumulating loan losses from the COVID-19 economic collapse and coming defaults.

Of course, Barrick Gold is a beneficiary of rising gold prices which have enabled it to pay off most of its debt so it’s well positioned to go on an acquisition binge buying smaller miners with proven reserves.

But, there’s another way to think about this trade with more profound implications for investors.

Banks create money by making loans and adding the loan proceeds to borrower accounts through a few accounting entries. The banks create paper money.

But, gold miners create money by digging up gold, processing it and selling it to refiners. In other words, the gold miners create hard money.

Buffett is signaling a loss of confidence in the dollar. He’s getting out of the paper money business and into the hard money business.

Economists call this a “liquidity preference.” I call it a sign of the times. If Buffett is moving into hard money in the form of gold, maybe you should too.

But it’s not just Warren Buffett, of course.

Turkey’s central bank has lost its independence and the president of Turkey is demanding low interest rates and more money printing. That’s leading to runaway inflation. Gold is the obvious hedge.

People are also turning to gold in China, South Korea, Germany and elsewhere around the world.

Once again, this proves that everyday investors are the first to act at important economic turning points and central bankers are the last to know.

It’s not too late to add to your gold allocation before new restrictions on gold buying or gold ownership are imposed.


Jim Rickards
for The Daily Reckoning

The Daily Reckoning