Is the world's greatest investor wrong about gold?

Oct 21, 2010

In this issue:
» 'We can't be bullied', message from China
» Ongoing trade wars could spell doom
» Government's disinvestment target runs into a happy situation
» It's indeed a 'Happy Diwali' for retailers
» ...and more!!

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It is a known fact that Warren Buffett isn't exactly a gold bug. Infact, it will not be out of place to call him a perpetual gold bear. Buffett talked about gold one more time in a recent Fortune interview. And was yet again at his acerbic best. He opined that one could take all the gold that has been ever mined and it would fill a cube 67 feet in each direction. And for what it is worth at current prices, one could buy all the farmland in the US, 10 companies of the size of Exxon Mobil and still have US$ 1 trillion of walking around money. Hence, according to Buffett, it is these assets that are going to produce more value than the big 67 feet cube of the yellow metal. This is the primary reason he is a big gold bear.

As far as we could gather, Buffett believes that gold has no intrinsic value. It is indeed a rare occurrence that we disagree with Mr Buffett. But we believe he may be wrong here. Buffett talks about intrinsic value. But we don't think a can of coke comes equipped with a lot of intrinsic value either! It is loaded with sugar and has no nutritional value. Infact, its overconsumption seems to do more harm than good. But people still have it in large numbers. This is because it appeals to the taste buds and gives some sort of mental satisfaction. Save for that, we don't think it does any good. And still, Buffett has invested heavily in Coke. Infact, he calls it one of his best ever investments.

In a similar vein, owning gold or gold jewellery gives mental satisfaction to people. People love wearing and flaunting it. Also, people own gold because they believe it is some sort of insurance. An insurance from the rapid devaluation of fiat currencies. Thus, if coke has intrinsic value, so does gold. Besides, there is only a very limited supply of gold in the world.

What do you think? Do you think Buffett is right about gold or gold certainly has some intrinsic value? Let us know your views. You can also comment on our Facebook page.

 Chart of the day
It is virtually a race to the bottom. Countries have started taking steps to debase their currencies so that exports could be boosted. Thus, the question that arises is, if everyone is debasing their currencies, what is it that they are debasing against? We believe the chart of the day shown below could perhaps help throw some light on the issue. It is indeed the yellow metal gold that is the sole gainer in the currency wars. As shown in the chart, all of the world's major currencies have seen their value go down against gold in the first nine months of 2010. In other words, gold has gained against all the currencies. Only the magnitude is different. Even the Indian rupee has lost some ground against the yellow metal. Depending on how you look at it, this may just be the start of currency wars and also of the surge in gold prices.


Continuing with macroeconomic problems, the economic slowdown in the West has brought with itself a whole host of issues. And one of them is concerning trade wars - economies imposing capital controls to boost domestic economies at the expense of global trade. Leading commodities investor Jim Rogers is of the view that such capital controls are very dangerous for the global economy. As he told an international business channel recently, "The world is on a very dangerous precipice, and if we do continue with trade wars, that's going to be the end of the world economy." Rogers goes on to warn, "If we don't solve this problem, it's finished, it's all over." Scary prediction indeed!

This year, it appears that the Indian consumers just have too much money. With Diwali just around the corner, people are spending big bucks. Be it high end televisions or high fashion apparel, money seems to be pouring in for the retailers selling them. So much so that it is sending manufacturers into a tizzy as they are adopting emergency measures to just keep up with the demand. The retailers are seeing almost 15-20% jump in the total bill values as compared to that seen last year.

The reasons behind this increased frenzy range from wage hikes and higher bonus payouts by the companies to availability of cheap finance. Whatever the reason, the festive season is yet again turning out to be a big boom time for the retailers.

Economists the world over seem to have a unanimous opinion over atleast one particular issue. And it is that China's artificially undervalued currency is exacerbating the consumption imbalances in the world economy. But chances that the rest of the world can get the dragon nation to change its stand on its currency look very slim indeed. A testament to China's increasing confidence on the global stage. Infact, it has now begun showing its clout in other ways too. As per a Bloomberg report, China is quietly halting shipments of crucial minerals to the US and Europe. This, after doing the same to Japan. China controls about 97% of the production of rare-earth materials in the world. Materials which are a crucial raw material to making various important products. These include things like hybrid cars, laptops, wind turbines and weapons. Thus the country is now finding its monopoly in these materials as another way to leverage its increasing global influence.

Even before the issue closes today, the Coal India IPO has received a tremendous response. Even as we write this, the issue has been subscribed 12 times over. And chances are that by the time you see this write up, the number would have gone up even more. A great confidence booster indeed for the government who is keen on reducing stakes in few more PSUs. Mint reports that up for grabs over the next few months could be Manganese Ore India Ltd, Hindustan Copper, SAIL and three energy firms, IOC, Power Grid and ONGC.

We don't know whether it is a coincidence or a well thought out strategy. But the fact remains that most of the companies that the Government has lined up for IPOs and FPOs are commodity companies. An asset class that is amongst the few that global investors are bullish on. Thus, if the Government gets the pricing right like it did in the case of Coal India, there are chances that it could go laughing all the way to the bank by the end of the fiscal.

Investors in the US will have to wait longer before they earn returns commensurate with risks. As per the world's largest bond fund PIMCO, the US economy is unlikely to grow beyond 1.75% in 2011. This is despite the Fed's attempts to pump prime growth by offering liquidity at rock bottom rates. What this means is that emerging markets are bound to see foreign capital inflows for a longer period. The export driven growth from developed markets may remain muted. Nevertheless, domestic consumption and government investment is likely to leave a very attractive spread between the return rates in the two geographies. For Indian investors the scenario warrants caution. With too much money chasing too few assets, euphoria and overpricing are here to stay. All the more reason for investors to look for some margin of safety.

Meanwhile, after languishing in the red in the past few sessions, the benchmark indices have gone from strength to strength today with the BSE-Sensex trading higher by around 340 points at the time of writing. Heavyweights like Reliance and ITC were seen lending most of the strength to the indices. While majority of Asian markets closed strong today, Europe is also trading in the positive currently.

 Today's investing mantra
"Learn every day, but especially from the experiences of others. It's cheaper!" - John Bogle

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51 Responses to "Is the world's greatest investor wrong about gold?"

Kundan Kumar Lucky

Feb 15, 2012

Investing in the company Coca Cola is not same as investing in the product Coke. Due to the demand of the product, the company makes profit and will continue to do for quite some time to come.

Gold as a consumed product has limited demand and also limited supply. And there is no single company controlling the production and supply of this product.

The recent jump in prices has been caused by the uncertain economic environment. The prices will go up if the situation worsens and can also fall down if the situation gets better.

So by betting on Gold we are betting against governments worldwide. And in that sense, it's a good bet in the short term and a very bad bet in the long term.

The world economy has passed through many such phases and things have a tendency to sort themselved out.

So gold is most likely to stay below this price level (inflation adjusted) in, say, 10 years from now. But Coca Cola shares will, most likely, be much above their current price (again, inflation adjusted).

A bad argument by an otherwise good writer (or maybe his secretary).


Malay Das

Nov 3, 2010

"owning gold or gold jewellery gives mental satisfaction to people"

The statement is valid only in India. The rest of the world does not buy or keep for the same reason. It is naive to assume that Indian consumers drive international gold price.

I support Buffet's views.



Nov 2, 2010

The `Intrinsic Value' of Gold lies in it neutralizing inflation


Satish Shah

Nov 1, 2010

The point is that people understand an investment in Gold. You buy say 10 gms, then you have something in hand. You do not have to pour over balance sheets and worry about whether the management is going to give returns. It is a bird in hand. Add together the fact tha its price has been increasing and the side advantges of wearing the jewellery , makes Gold win over other investments for most people.


Ranga Rao

Oct 27, 2010

I disagree with author's view that "owning gold or gold jewellery gives mental satisfaction to people".

This is true more in India or a Turkey. If see the west, it is not so much.

I see Gold purchasers in four different categories covering a wide spectrum.

1) Central Banks representing a country - they buy very occassionally as insurance to the country forex reserves. And only some fast growing countries in do. Currently only EM countries.

2)Central Banks of countries in bad economic state redeem their insurance (in form of gold) to support their economies. For example US does redeem its gold savings of past 70 years to help them in QE (quantitative easing). And remember rich people/economies have pricing power. They sell at prices they want. So US tries to run a media show that gold goes up. It really goes up in a 5-year time scale. But in a 10-yr time scale when US recovers, it will drop the gold and increase its insurance once more. I mean gold will increase in 5-yr scale and in 10-yr scale (longer than time scale of US debt funds) it should retrace part of it.

3. THe above 2 are investors of Gold. The next category is consumers of gold. They are jewellary purchasers. I remember this will be very small to have an effect on price on a one year time frame. Just ignore this category

4. retail investors who buy gold coins or units are effectively either importing gold coins through bank or banks selling RBI/central banks gold reserves which they have bought earlier as insurance (from IMF). So ignore this category effect on gold price.


Gold price goes up in 5 yr time frame and may retrace a good part of it in 10-year time frame. Remember 30 yrs ago gold went from 250 USD to 720 USD and returned to USD300.
Ofcourse gold will gain to the extent dollars are sold by all countries. Not an easy estimation.
Sir Buffet is long term investor beyond 10yrs. His stock study period is sometimes 10 yrs. Therefore, GOLD investing does not fall in his principles.

My view, i go with Ajit - only 10% investment, 10% consumption (jewellery). I believe GOLD is for Central banks to insure our economy and not really for me


Mrityunjai Atreya

Oct 25, 2010

W. Buffet is a investor and it is not necessary that whichever company a investor is investing in, he will be using products of that company. So in that sense I won't agree to compare the value of Gold with Coke. Its a very unrelated comparisan and shows the inefficiency and unprofessionalism of the writer. Secondly I wonder if the editor and his team checks that details before publishing material at mass level. Have they checked the details and also the gold prices in US? Please check the details and then comment on anything. Investment in selected stocks have given far more returns than in gold...especially if we see the US markets.


Deepak Maheshwari

Oct 23, 2010

Buffet is partly right and you are also partly right. What you are looking at only one aspect of it , if Gold has intrinsic value? Correct !It satifies people, they like to wear it and flaunt in the same way the consumption of Coke satisfies us, mentally though it has no nutritional value. But,Mr.Buffet is not talking of the Coke as a product , or say's Coke as a product will increase in it's value in a year's time. Issue is not of Coke vs. Gold . He is talking of the shares of the Coke as a company , whose proucts' demand keep increasing and Coke as a company through it's brand / marketing skills keep having more profts year after yearfor it's shreholders.



Oct 23, 2010

Warren Buffet is perhaps not aware of the emotional appeal that gold has in Asian societies. It is more or less compulsory to give gold ornaments as dowry even today in India. Gold has intrinsic value because we have invested it with that value.
Of course the yellow menace has caused so much greed that very cruel things have been done for its sake. Just like so many cruel things have been done for other forms of wealth as well. Greed is the common denominator. If we moderate greed in stock market investments or any economic activity, we can moderate it in gold as well.
Even the best companies that we invest in today would go bust if emotions changed. Suppose a powerfully inspiring persona happened and people started living in caravans in great joy and celebration we donít need a Fannie Mae or Freddie Mac or mortgage derivatives to bring home prices crashing down. Unemployment as defined by present norms would become total employment where everyone would work for the community fully giving and sharing resources available. Luxuries would look stupid, manufacturing chains would become obsolete, dress and demeanor would align with the climate around and, being would be more joyous than having. Education would be for yoga. Yoga may invest a few with miraculous powers so that what needs to be known will be known without the intermediation of cumbersome science and technology. Science and technology are also miraculous, of course, but yogic powers for common good without them would heal a deeply wounded environment faster and better than science and technology.
So what has intrinsic value, gold or stocks of solid companies with excellent managements and enduring product or service value in terms of unalterable demand in the foreseeable future? Or genuine Yoga that gives knowledge as much as needed, as and when needed, with minimal exploitation of the environment?
It could be any of these, depending on what we choose to give value to. As of now, itís the first two. The Oracle of Obama should spend quality time in India and live with Indian families and see for himself how a poor farmer starts saving for a girl child from its birth so he can give gold ornaments when she is given off in marriage.
Many Westerners have explored India this way. Trust me, itís a very tough thing to do.


Nitin Arora

Oct 23, 2010

Dear Sir
I endorse Mr Buffets view on Gold.
Lets take a example of 4 people vying to by an object x. If each one is given Rs 10 the price of the product cannot exceed Rs 10 individually or Rs 40 if they buy the product collectively. Now if the same 4 people are give Rs 100 each and the same product x is on sale the price of the product will increase to a maximum of Rs 100 for an individual buyer or Rs 400 if the buy the product collectively without the product becoming more useful in any way. This is the effect on gold of all the govt presses all over the world printing money with reckless abandon.

On the other hand investing in a company can give tremendous returns as the company can keep increasing the sales and profits of the company by venturing into newer markets, increasing capacities, and changing the product to suit the customers need over time. The less external capital used to increase capacities and profits the higher will be the value of the co (of course without any help from the govts printing presses and creating any artificial money)

Nitin Arora


G.S. Sharma

Oct 22, 2010

You are absolutely right in saying Gold definitely has much much more intrinsic value compared to any other metal. Keep up your research, it helps to pay heed to your essays.

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