Guest Post: About Those High Gasoline Prices… Look Again

Tyler Durden's picture




 

 

Submittedby Simon Black from Sovereign Man

About Those High Gasoline Prices… Look Again

In Warren Buffett’s latest round of gold-bashing last weekend, he described all the gold in the world as a useless cube that would fit snugly within a baseball infield.If you owned such a cube, you would only be able to ‘fondle’ it… but generate no investment return.  The same ‘value’, meanwhile, would allow the owner to purchase all the productive farmland in the United States plus 16 Exxon Mobils, in total yielding over $800 billion annually.Granted, Buffett’s views on gold are perhaps stymied by his poor experience investing in silver some 15-years ago. But still, he fails to see some obvious fallacies in his logic.

Most assets left unmanaged will fail to produce an investment return. The virtuous farmland that Buffett extols in his hypothetical example does not magically spawn corn, nurture it, harvest it, sell it, and deposit the proceeds into its owners’ pockets. Our farmland here in Chile certainly does not.

No, it takes a lot of work, a lot of experienced people, a lot of know-how, and a little bit of luck. All of this has to be managed.

Even the baseball field that Buffett references (when trying to give his investors an idea of the scale of all the gold in the world) is an asset. Simply left sitting there, a baseball field will soon be overtaken by erosion, weeds, and the dilapidation that comes with neglect.

Maintained and well-managed, however, a savvy owner of a baseball field can lease it out to the local little league. Or pull a Kevin Costner and turn it into a tourist attraction. None of this happens without appropriately managing the asset.

Even Exxon Mobil, with all of its royalties and intellectual property, requires tens of thousands of employees to manage the company’s assets, collect the profits, and ensure shareholders get paid.

Likewise, a huge cube of gold left alone in a baseball infield will fail to produce any investment return. When managed, however, gold is like any other asset– it can be leased, traded, loaned out, used as collateral, etc.

More importantly, though, the reason that many gold investors purchase the metal to begin with is because physical gold carries no counterparty risk.

Unlike paper currencies which are issued at will by corrupt central banks, or even Exxon Mobil, whose success depends heavily on the management team’s goodwill and diligence, a one ounce gold coin in your pocket will still be a one ounce gold coin tomorrow. This is the entire premise behind money as a store of value.

As my friend Tim Price told me over drinks in London several months ago, fiat currency is simply an abstraction of the concept of money; paper money conjured out of thin air cannot be real money, it’s merely an idea based on confidence and collusion.

Curiously, only a tiny percentage of worldwide money supply is actually physical paper– most ‘money’ is in digital form, simply entries in a computer… a few bits of code which constitute your net worth. In this way, our currency is actually an abstraction of an abstraction of the concept of money.

To this I would add that the entire financial system is underpinned by a complex network of hypothecated debt and derivative instruments whose notional total exceeds (by many multiples) the entirety of world GDP. In this manner, we are talking about abstractions of abstractions of abstractions.

Gold is real. It exists. And it scarcity dictates that it is a reasonable store of value, particularly in a world of abstract money.

There’s a lot of talk right now, for example, about rising oil prices which have created uncomfortably high gasoline prices. In gold terms, however, gasoline prices are in a deflationary spiral. The chart below shows unleaded gasoline prices in grams of gold since January 1976:

and for the last five years:

Priced in grams of gold, gasoline is near an all-time low. [In fact, there's a great site run by my friend Charles V. that shows this trend with a variety of commodities and retail goods.] Buffett (and others) argue strongly that investors should be in stocks… that a company like Coca Cola or productive farmland is a better long-term investment than a useless hunk of metal.He’s probably right. Except that the useless hunk of metal isn’t really an investment. It’s an anti-currency… appropriate for those who want to sit out of the market and be in cash without having to be in cash.

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Thu, 03/01/2012 - 13:30 | 2213166 orca
orca's picture

Perrrrrrrrrfect, eat that Warren!

Thu, 03/01/2012 - 13:44 | 2213241 johnk78
johnk78's picture

Buffet is a financial terrorist!

 

-John
http://www.youtube.com/watch?v=z3VDJDPMOmk

Thu, 03/01/2012 - 13:50 | 2213267 JPM Hater001
JPM Hater001's picture

Time to take a shot.

 

Thu, 03/01/2012 - 13:52 | 2213270 JPM Hater001
JPM Hater001's picture

Sorry, Shot Hit Shot.

Edit: Shot Hit Shot hit Shot...

Thu, 03/01/2012 - 13:55 | 2213291 spiral_eyes
spiral_eyes's picture

While oil prices in gold have remained stable in the last ten years, Berkshire Hathaway's share price has, shall we say, not:

http://azizonomics.com/2012/02/29/warren-buffett-priced-in-gold/ 

Sorry Warren.

Thu, 03/01/2012 - 14:04 | 2213335 Caviar Emptor
Caviar Emptor's picture

Uncle Warren will lead us all down to the shopping mall, strumming his  magical little guitar. And he'll keep on strumming and singing as you empty your wallets with a smile. And when that's done he'll ask you to leave because business is business, you know, and anyway it turns out he owns the mall

Thu, 03/01/2012 - 14:12 | 2213348 hedgeless_horseman
hedgeless_horseman's picture

 

 

Bank of America Corp is planning to introduce a monthly fee for its customers holding checking accounts unless they agree to bank online, buy more products or maintain certain balances, the Wall Street Journal said.

 

http://finance.yahoo.com/news/bank-america-considers-checking-account-062154199.html

 

Essentially-free Fed money, mark-assets-to-unicorns, and barely a reserve requirement, yet they still can't make it! BAC up 2% on this awesome news.

 

Thu, 03/01/2012 - 14:13 | 2213366 Caviar Emptor
Caviar Emptor's picture

Because they're still living in the pre-2008 world, bloated payrolls and headcounts, pretending that they didn't fail and nothing has changed. They're living off American corporate welfare

Thu, 03/01/2012 - 14:27 | 2213449 Common_Cents22
Common_Cents22's picture

It's time for people to pull their money out of the big banks, and put it in regional/community banks, credit unions.   Peer to Peer lending will grow as well.

Thu, 03/01/2012 - 16:51 | 2214357 donsluck
donsluck's picture

Longer term, the death of credit entirely.

Thu, 03/01/2012 - 14:07 | 2213344 JPM Hater001
JPM Hater001's picture

Timeeeeeen     aeo;i  rffffor     annnoiithher hit.

Thu, 03/01/2012 - 14:09 | 2213353 JPM Hater001
JPM Hater001's picture

Shit. bottoms up.

Thu, 03/01/2012 - 14:19 | 2213405 JPM Hater001
JPM Hater001's picture

Light up kids.

I need someone to shut the market down or I wont make it to dinner.

Thu, 03/01/2012 - 14:22 | 2213417 JPM Hater001
JPM Hater001's picture

Im gonna use the Niagra Falls momento shotglass this time...it's a bit smaller.

Thu, 03/01/2012 - 17:31 | 2214622 non_anon
non_anon's picture

cheers!

Thu, 03/01/2012 - 13:59 | 2213310 mayhem_korner
mayhem_korner's picture

 

 

I sh-t you not, but CNBC says that WTI is up today based on Economy Hopes

http://www.cnbc.com/id/46579141

Thu, 03/01/2012 - 14:12 | 2213361 Every Third Word
Every Third Word's picture

The media will soon say:

"Obama has brought back the economy WHY DOESN"T ANYBODY SEE THAT THE ECONOMY IS BACK?!?! WHAT IS THIS HATRED OF THE PRESIDENT?!?!!?

 

CNBC will say:

The EMP Attack on the east coast was bullish for buggy makers!

The Iranianian attack was great news for Johnson and Johnson!

The stock crach is great news for spam makers!

 

Thu, 03/01/2012 - 13:30 | 2213171 SILVERGEDDON
SILVERGEDDON's picture

Hey, Warren - I'll take all that worthless gold off your hands for free - no strings attached. I have a fucking truck load of old stock certificates you can jack off into and wipe your ass with in exchange. Good deal for you, bad deal for me - lets get 'er done, eh ?

Thu, 03/01/2012 - 13:45 | 2213247 oddjob
oddjob's picture

Giving kids diabetes is tough work, but Warren works hard at it.

Thu, 03/01/2012 - 16:27 | 2214134 boatwhiskers
boatwhiskers's picture

Sugar and flour by the trainload, whip it into soda and candy, poison the public, support Obamacare to sleep at night.

Warren your such a nice man.

Thu, 03/01/2012 - 16:53 | 2214372 donsluck
donsluck's picture

It's a difficult (profitable) job. But someone's gotta do it!

Thu, 03/01/2012 - 17:14 | 2214540 njrod
njrod's picture

Warren's hell, or afterlife, is going to be Carl Menger and LvM lecturing him on the orgins and proper theory of money: GOLD/SILVER.

Thu, 03/01/2012 - 13:32 | 2213182 Hugo Chavez
Hugo Chavez's picture

A little bit of anti currency never hurt.

Thu, 03/01/2012 - 13:42 | 2213232 mayhem_korner
mayhem_korner's picture

 

 

Do you have enough anti-currency to get to warp speed, Mr. Scott?

Aye, Cap'n, but she's goyn' da be a rough ride I tell ya.

Thu, 03/01/2012 - 14:28 | 2213447 piceridu
piceridu's picture

It has been written...the coming of the Anti-Currency. The sign will be $6,666

Thu, 03/01/2012 - 13:32 | 2213184 rqb1
rqb1's picture

i thought buffett bought ag ~ $4,  caused a double in spot b/c he wanted the physical.  i always wondered if he has held onto it.

Thu, 03/01/2012 - 13:46 | 2213254 mayhem_korner
mayhem_korner's picture

i always wondered if he has held onto it.

 

...and if he has whether he could locate it.  I can't help but see a lot of Mr. Magoo in Uncle Warren.

Thu, 03/01/2012 - 16:14 | 2214013 The Disappointed
The Disappointed's picture

Maybe Uncle Warren had a boating accident of his own.

Thu, 03/01/2012 - 14:32 | 2213469 Buckaroo Banzai
Buckaroo Banzai's picture

He got rid of it not that long after he bought it. I think he may have been visited by some gentlemen in trench coats and dark glasses who suggested it might be better for all concerned if he didn't hold onto all that physical silver for the long term.

Thu, 03/01/2012 - 13:33 | 2213185 GeneMarchbanks
GeneMarchbanks's picture

'Curiously, only a tiny percentage of worldwide money supply is actually physical paper– most ‘money’ is in digital form, simply entries in a computer… a few bits of code which constitute your net worth. In this way, our currency is actually an abstraction of an abstraction of the concept of money.'

So why do all these jag-offs continue with the physics analogies and epistemological garbage?

Thu, 03/01/2012 - 13:36 | 2213204 Tsar Pointless
Tsar Pointless's picture

Yep.

The prominence of digi-dollars (as I call them) means that nothing ever has to go down in price. Ever. And no entity or person is ever insolvent. Just add a 'zero' or two on the computer screen, and voila! Instant solvency.

If housing prices should only ever go up, why shouldn't the price of everything else?

Thu, 03/01/2012 - 13:54 | 2213286 GeneMarchbanks
GeneMarchbanks's picture

Since we've established that 'money' is a social agreement on the basis of mutual understanding then it should follow that it is by no means real but a world of make believe. So, if that is true, does applying general theory of... let's say classical mechanics make any sense?

Thu, 03/01/2012 - 14:16 | 2213326 Zero Govt
Zero Govt's picture

because a price needs 2 things, a buyer and a seller

Benny has bought toxic garbage (mortgages) off the steaming bankrupts of Wall Street, cash for crap. And pooper-scooper Ben wants to pick more of these turds up soon as Blankfein, Dimon et al want to dump them with the spin he wants to "support the US housing market"

that'll be because Blankfein & Dimon can't find buyers for their shit for if they did 'price discovery' would happen

only trouble is no matter how many zeros Ben pumps into an economy you always need a buyer to pay a price. Price discovery scares the crap out of central bankers, they're not used to market economics which is why Ben has recently self-awarded the Fed the ability to price assets/crap how he sees fit (ie. cook his own books)

You can see the problems the US Govt is getting in the long end of US Treasuries.. there's no buyers for Tiny Tims long dated trash, sorry Treasuries, Benny has to fabricate a market (buyer) from zeros

Thu, 03/01/2012 - 17:58 | 2214756 zerozulu
zerozulu's picture

Is there a way we can make people understand that this is not the price of oil going up but price of dollar going down?

Thu, 03/01/2012 - 19:45 | 2215084 Zero Govt
Zero Govt's picture

Yes... 'price discovery' at the pumps

Thu, 03/01/2012 - 13:33 | 2213186 LawsofPhysics
LawsofPhysics's picture

Preaching to the chior.  I love it when a friend will say "this or that is expensive".  I always ask them, "priced in what", then I get the deer in the headlights.

Thu, 03/01/2012 - 13:33 | 2213190 Tsar Pointless
Tsar Pointless's picture

Good to know. The next time I go fill up my gas tank, I'll take gold as payment for services rendered.

I'll let you know how that goes.

Oh, I think I can in advance - THEY WON'T TAKE THE GOLD AS PAYMENT.

So, basically, this post - much like my moniker - is pointless.

Thu, 03/01/2012 - 13:37 | 2213207 Beam Me Up Scotty
Beam Me Up Scotty's picture

I actually own a gas station.  Come on in, bring your gold.

Thu, 03/01/2012 - 13:45 | 2213255 jiggerjuice
jiggerjuice's picture

I have wondered about this. As far as I understand it, US Silver Eagles or Gold, denominated at $1 and $50, are "actual currency" meaning you are receiving $1 or $50. Therefore, you exchange say $1700 for a single golden coin, and then mark the 1650 as a loss to the business, which is tax deductible? So with silver, you sell 35 bucks worth of gas, take a silver coin, and then mark a 34 dollar loss? Is that correct?

Makes me want to start a small business that accepts only silver/gold coins. IF this is correct. Is it?

Thu, 03/01/2012 - 13:48 | 2213265 johnQpublic
johnQpublic's picture

thats beautiful

i like it....must research

Thu, 03/01/2012 - 14:11 | 2213360 Thomas
Thomas's picture

I think you're probably toast (see suggestion below about the court case). However, you would be closer to an airtight case by using pre-1964 silver coins.

Thu, 03/01/2012 - 13:52 | 2213274 Conrad Murray
Conrad Murray's picture

You may want to look into a man by the name of Robert Kahre of Nevada...and his court case.

Thu, 03/01/2012 - 14:25 | 2213431 Sophist Economicus
Sophist Economicus's picture

Technically, no one can tell you what price to charge for anything.   If you sold $35 dollars worth of gasoline for a $1 silver coin, you could do that.   However, how long could you do that for?    At some point you would need to convert your silver coins to FRNs to purchase more inventory.   You would now take a capital gains hit (youclaimed it was $1 at transaction time and now got more for it), you run the risk of the market going south on you in the short run, etc...

 

I have played with this myself.     You could give your employees a bonus in PMs with legal tender amounts.    You could withhold the legal tender tax values - that would drastically minimize your employee's tax liability.   As long as you didn't declare any 'losses' .vs. the actual cost basis or expect the 'cost basis' to be the business wage value, you would be fine.    You would be giving your employees a 'tax free' bonus and you would bear the tyrue cost of the bonus (no offset wage deduction).

 

Your employess would be taxed at the time of conversion (capital gains tax), if someone reported the sale. 

 

 

Thu, 03/01/2012 - 15:48 | 2213865 NidStyles
NidStyles's picture

Selling Physical PM's does not incur Capital Gain's taxes, as you are exchanging like items.

Thu, 03/01/2012 - 17:01 | 2214419 donsluck
donsluck's picture

Huh? You are incorrect on one count and ambiguous on another. First it IS considered a SHORT term capital gain by the IRS. Second, if you are "selling" for dollars (presumably, as you are unclear on this point) it is fully taxable at your normal income tax rate (and may push you up into a higher bracket for the profits as well).

DO NOT SELL YOUR PMs.

Thu, 03/01/2012 - 13:47 | 2213258 johnQpublic
johnQpublic's picture

a gas station a block from here advertises they take silver, based on coinflation.com websites values

 

 

each and every day

they also accept it for auto repairs

may not be gold, but close enuf

Thu, 03/01/2012 - 17:16 | 2214497 defencev
defencev's picture

 I would say, it is more than pointless :it is misleading. It always amazed me that people who have absolutely no understanding of finance, economics and investment like to reason about precisely these subject matters. SB has absolutely dismal record when it comes to "investment advice" ( as , by the way 100 percent of bloggers posted here: that is precisely the reason why they post their" predictions" on various obscured websites) and yet here is this ignorant guy again passing his judgement on pretty much everything that moves...

   The major lie promoted by Goldbugs is that Gold is a universal storage of value. It is nonsense and do not take my word on it:

think of 80es (the period of high interest rates) where gold and PM in general plunged to 250 per ounce and stayed there for a very long period of time. What is the point in bringing diagrams showing that measured in Gold prices of most of the commodities plunged during last 5 years (surely, it was a bullish period for Gold and general deflationary envorinment). The truth is that there is no universal storage of value and hence the only right way to invest is to keep reasonably diversified (and that is what investors with proven record like Mark Faber do recommend). Those who put all eggs in one PM basket will end up (with high probability) with nothing.

   Do not get me wrong I do own physical PM but my ownership is a relatively small fraction of my investment portfolio.

Thu, 03/01/2012 - 13:34 | 2213193 Burnbright
Burnbright's picture

I think you mean hold money without having to hold cash.

Thu, 03/01/2012 - 13:38 | 2213211 cygnetsong
cygnetsong's picture

I think you mean hold money without holding tokens.

Thu, 03/01/2012 - 14:00 | 2213312 Uchtdorf
Uchtdorf's picture

I think you mean hold money without holing asswipes.

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