Gold: No utility but perception

May 3, 2011

Baltimore, Maryland

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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, QE 1, QE 2...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'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 U.S. 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 in 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 is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "Gold: No utility but perception"

Maulik Suthar

May 3, 2011

I hate market timing, bubble prediction theories. I can calculate the intrinsic value range of stock and hence Margin of safety, and relative insulation from competition in market that is managed by honest and skilled management.


Raj Dhillon

May 3, 2011

Wow! Bill, you've given a mirror for us to realize our folly. I know of folks not well versed with exchanges & funds dealing in metals but shrewd enough to go to the local market to buy gold, silver and diamonds in physical form. They are the ones laughing all the way to the bank. Eons ago, every coin minted had an intrinsic value. That is the utility of gold or silver etc. even today. Only the metal got separated from the currency!


Anupam Garg

May 3, 2011

Usage of amazing sarcasm, as always but good insight & advice


krishna murthy

May 3, 2011

i am yet to come across more intelligent write-ups in the mornings/noons soon after u clear up your daily urgent office matters. i have become a fan of Bill now. but what is Bill's new investment idea for the next decade? i mean apart from gold.

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