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Guest Post: Ben Graham’s Curse On Gold

Tyler Durden's picture




 

Submitted by David Galland of Casey Research

Ben Graham’s Curse On Gold

It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold’s most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object “incapable of producing anything,” so any investor holding it instead of stocks is acting out of irrational fear.

How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?

Perhaps it has something to do with his mentor, Benjamin Graham.

Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history's most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham’s work.

According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over- or undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham's theory clearly shows periods when one asset class offered a better value than the other:

(Click on image to enlarge)

But what of the periods when both stocks and bonds stagnated or fell together? For much of the 1970s and again from 2001 through today, any portfolio allocated solely between stocks and bonds would have at best treaded water and at worst drowned in a sea of stagflation. To earn any real return, an investor would have needed to seek alternatives. 

It’s clear from this next chart that gold was exactly that alternative, a powerful counter-trend investment for periods when both stocks and bonds were overvalued. Yet gold is conspicuously absent from Graham's allocation model.

(Click on image to enlarge)

But this missing asset class is entirely understandable: for most of Graham's adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn't re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds.

All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?

We can never know.

We can know, however, that given Graham's outsized influence on investment theory, there is little question that his lack of experience with gold, and therefore its absence from his observations, has had a profound effect on how most investment professionals view the yellow metal. This, in our opinion, goes a long way toward explaining the persistently low esteem in which gold is held by the mainstream investment community. And, as a consequence, its widespread failure to even be considered as an asset class.

A couple of takeaways: first, perhaps now you can stop wondering why your broker, the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding. More importantly, however, is that in order to have sustained, long-term investment success, one must accept that an intelligent portfolio allocation needs to include not two but three broad categories of investment – stocks, bonds and gold, with the amounts allocated to each guided by relative valuation.

Investors who understand this tenet have an almost unfair advantage over other investors as it allows them to get positioned in gold ahead of the crowd and enjoy the bulk of the ride, while others sit on their hands.

So when you hear commentators ridiculing gold as a barbarous relic, lamenting that they cannot eat it or smugly asserting that it produces nothing, rest contently in knowing that they’re operating with a severe handicap in their own portfolio. Meanwhile, we’ll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing.

Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

 

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Wed, 02/22/2012 - 20:39 | 2187189 SHEEPFUKKER
SHEEPFUKKER's picture

Funny how back in the day he tried to corner the silver market and now he is so outspoken against pm's.  Nice one Warren Buffoon. 

Wed, 02/22/2012 - 20:55 | 2187238 ACP
ACP's picture

He is no buffoon. He sold his silver too soon and is willing to unleash all hell and brimstone on those who dare question his mistake...with an army of schmuck reporters and other jackasses with degrees in communications and political science who have no hope of paying back their $150k student loans...he says, "Why the fuck not bash PMs? I got all these peon bitches to back me up! Strate gangsta!"

Case in point: I've heard Buffett talk about China's "chink in the armor" several times. Not a GOD DAMN THING from the media.

Wed, 02/22/2012 - 21:28 | 2187389 fourchan
fourchan's picture

lol he would have been straight paid if he hung on to that billion dollars of 2002 silver.

 

buffet can go pound sand.

Wed, 02/22/2012 - 21:49 | 2187459 strannick
strannick's picture

Goldman buying oil, Buffet buying railroads, Rogers buying agriculture. What more screaming commodities/inflation support do you need. Since they rely on corrupt government collusion (Goldman/Buffet) they cant go screaming gold. So gold goes up most, without any fanfare.

Wed, 02/22/2012 - 22:17 | 2187522 engineertheeconomy
engineertheeconomy's picture

Pan Asia Gold Exchange

   http://www.forexlive.com/blog/2012/01/30/p-a-g-e-and-what-it-means-for-the-gold-price-and-currencies/ 

paper currency will most likely begin losing  it's value at an exponential rate once this thing gets rollin. The tale will no longer be able to wag the dog

Gold bitchz

Thu, 02/23/2012 - 06:55 | 2188449 Snidley Whipsnae
Snidley Whipsnae's picture

" How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio? "

........................................

Lest we not forget; Buffet made his bucks during the greatest credit expansion the world has ever seen, using a 'buy and hold' strategy after doing excellent analysis of mostly new corporations.

How many believe that the same strategy would work today?

Buffet's switch from new companies like 'Wendy's', a onetime winner for him, to the proven old technology of railroads, that can move more freight for less dollars than all but river barges, is telling us what Buffet sees coming.

During the great credit boom Buffet was correct to avoid gold and go with the booming new industries. Now he is wrong about gold and PMs in general. I don't know if he is too grounded in his old strategy or if he is simply helping the feds keep the price rises in PMs orderly... It doesn't matter.

Gold is money and nothing else... JP Morgan 

Wed, 02/22/2012 - 20:52 | 2187240 duncecap rack
duncecap rack's picture

I don't think he tried to corner the market. He just exploited a weakness in the way miners were financing their production by selling futures. When he took delivery of huge ammounts producers were in danger of failing to deliver on the comex. He sold the silver back at a huge profit and walked away. Whatever you think of him he is not a buffoon.

Wed, 02/22/2012 - 22:02 | 2187477 duncecap rack
duncecap rack's picture

For those who junked me I actually read about it here on zero hedge. Give it a try- it is a fantastic read.

Exclusive: Second Whistleblower Emerges - A Deep Insider's Walkthru To Silver Market Manipulation
Wed, 02/22/2012 - 20:41 | 2187197 Zola
Zola's picture

Buffet is not successful, he is a clown who would have imploded in 2008. Crony capitalist at his best.

Wed, 02/22/2012 - 21:06 | 2187288 Moneyswirth
Moneyswirth's picture

Amen. 

Wed, 02/22/2012 - 21:40 | 2187428 Ceteris paribus
Ceteris paribus's picture

He made out like a bandit with his BAC stock.

 

Wed, 02/22/2012 - 20:42 | 2187206 Jeronimo
Jeronimo's picture

Surely he feels secure, surely he serves his own self interest and surely he should as Gov. Christie so eloquently stated on Piers Morgan, shut up and write a check - for some bullion baby.

Wed, 02/22/2012 - 20:44 | 2187208 Cheesy Bastard
Cheesy Bastard's picture

Buffett doesn't need gold to preserve his wealth.  He has insider information to do that.

Wed, 02/22/2012 - 22:49 | 2187599 ReactionToClose...
ReactionToClosedMinds's picture

amen to that brother

Used to be deferentially respectful to Mr Buffett........

Then about 2 decades ago .... WSJ tried to peel away some of the "Omaha" veneer ala the 'real' lifestyle ... but all the Berkshire Hathaway shareholder maniacs let the WSJ know (orchestrated?) they were cancelling their subscriptions and going to the NYTimes or FinTimes, etc.

I kid you not ..... WSj was intimidated to shut down on WB ... and never again has anyone in the financial media tried to convey what the 'real' image is.

So keep plowin's Governoer Chistie .... you tell WB to write a check if he is so happy with numb bureaucrats spending  your money wildly & stupidly.   And you know why? ,,, because, as the precieding poster states. .... WB is nothing more than a 'play-for-pay' crony capitalist ..... Hyde Park-style

 

Wed, 02/22/2012 - 20:45 | 2187215 Seasmoke
Seasmoke's picture

and Gold will do better when Buffet passes away

Wed, 02/22/2012 - 20:45 | 2187216 SDRII
SDRII's picture

the fed is printing f#c#in% money. What more is left to analyze? F o f o a has a much more lucid takedown of buffet

Wed, 02/22/2012 - 20:48 | 2187227 lsbumblebee
lsbumblebee's picture

Maybe if Warren held his head under water in the bathtub while talking to Becky Quick he could release himself from the powerful hypnotic hold that Benjamin Graham has on his thought processes.

Wed, 02/22/2012 - 21:40 | 2187234 Mercury
Mercury's picture

Gold isn't an investment exactly...its money.  Sitting on cash doesn't produce an income stream either (unless you lend it out and good luck with that right now).  So, I can understand that its no favorite of (especially) value investors.

But when long term wealth preservation is the benchmark, it's hard to beat.  And more and more people are adopting that benchmark in this environment.

Like I've said before, if the head-on current is strong enough, the best strategy in a sailboat race might be to anchor for a while....

Wed, 02/22/2012 - 22:30 | 2187545 engineertheeconomy
engineertheeconomy's picture

let's say you put down a stack of cash today in exchange for a home. In 10 years you would basically still own a home.

let's say instead you put that same amount of cash into Gold today. In 10 years you could exchange that Gold for enough cash to buy 2, 3 or maybe 5 homes.

Gold is an investment, but only because a percentage of assets valued in fiat currency generally lose 50% of their value every few years or so  relative to the shiny stuff

Thu, 02/23/2012 - 00:27 | 2187835 Mercury
Mercury's picture

Actually, if inflation/fiat currency debasement is the only factor under consideration, the "cash" price of both gold and the house should rise equally as should just about everything else which retains it's utility value.  But gold has various value storage advantages and investment disadvantages vs. the house.

 

Thu, 02/23/2012 - 06:07 | 2188417 EmileLargo
EmileLargo's picture

Bingo. That's all there is to it. Nothing more needs to be said. Trade it like a currency - its a hard currency. I prefer to keep my liquid assets in gold rather than fiat. Just a personal preference.

Thu, 02/23/2012 - 08:20 | 2188506 Ghordius
Ghordius's picture

no, you left one little thing out: the intrinsic value of gold in soothing my nervous system. medicinal properties, bitchez - watch out for the side-effects: boating accidents

Wed, 02/22/2012 - 20:51 | 2187239 BLOTTO
BLOTTO's picture

They dont want us to know the true value and importance of gold.

Anyone that has over 1 Billion dollars - i dont trust for a second. Just how it is.

Wed, 02/22/2012 - 20:59 | 2187259 CvlDobd
CvlDobd's picture

My net worth is $975 million and I say buy gold. Good thing you can trust me.

Wed, 02/22/2012 - 21:21 | 2187316 LowProfile
LowProfile's picture

Anyone that has over 1 Billion dollars - i dont trust for a second. Just how it is.

I don't trust anyone that has over 1 Billion dollars...And that doesn't also own at least $100mm in gold.

Wed, 02/22/2012 - 20:56 | 2187248 oldman
oldman's picture

I didn't know any of this, but I am grateful to have read it

Thank you     om

Wed, 02/22/2012 - 21:05 | 2187276 halflink123
halflink123's picture

This is definitely one of the worst articles I have read on zerohedge. Zerohedge does great reporting, usually better than mainline reporters.

 

But...Graham didn't have "access" to metals?  Are you joking?  Yes perhaps ownership of gold was illegal - that doesn't mean that ownership of silver, platinum, copper, or other metals was illegal. Nor does it mean that ownership of gold stocks was illegal.  If Graham wanted to, he could have invested in metals.

Secondly, Graham IS NOT the father of modern portfolio theory. Quite the opposite. Modern portfolio theory is derived mainly from the Efficient Market Hypothesis, which Graham had nothing to do with.

So yes this article is replete with errors and uninformed writing, I am sad to say, and really is below par for such an excellent site as zerohedge.

In fact you address none of Buffett's criticisms of gold (many of which I disagree with myself).

Wed, 02/22/2012 - 21:13 | 2187323 LowProfile
LowProfile's picture

You missed the point, which was the author was trying to explain why Warren Buttface bashes gold.

Wed, 02/22/2012 - 21:21 | 2187357 halflink123
halflink123's picture

No you missed the point because you didnt read my fucking post because you are another brainwashed follower.

Wed, 02/22/2012 - 21:22 | 2187364 halflink123
halflink123's picture

When people start talking down to Ben Graham...that's a sign. Ben Graham was a genius; he was a very, very intelligent man.  To say you disagree with him is one thing; to imply that he's a loon or uninformed is quite another.

Wed, 02/22/2012 - 23:42 | 2187746 Spitzer
Spitzer's picture

Graham was dealing with sound money you fucking fool, not a moving target.

Thu, 02/23/2012 - 20:40 | 2191287 halflink123
halflink123's picture

No that's the point - he wasn't dealing with sound money. The dollar was heavily debased during his investment career, especially in the '70s. Was Graham buying GOLD in the '70's - NO. In fact, in the 1970s he wrote an essay called "the Remergence of Investment Values" or something to that effect, after the great 70's bear market in stocks.  

 

This article is as misinformed as the readers.

 

You shouldn't be so quick to call someone a fool. Coming from you, Spitzer, that means a lot, LOL.

Thu, 02/23/2012 - 02:56 | 2188049 Elmer Fudd
Elmer Fudd's picture

I agree, DG's premise that Graham didnt know about gold cuz he wasn't allowed to buy it is a bit of a stretch.

"Gold is money, nothing else"  JP Morgan

 

Wed, 02/22/2012 - 21:06 | 2187284 Ben Graham
Ben Graham's picture

But I bought PM's when they became undervalued relative to other investments, so of course I added gold and silver to my investment mix.

Wed, 02/22/2012 - 21:14 | 2187320 slewie the pi-rat
slewie the pi-rat's picture

PMs have the best dividendReinvestmentPlanTM don't they ben?   L0L!!!

Wed, 02/22/2012 - 21:17 | 2187342 LowProfile
LowProfile's picture

Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

Quietly?

I hope the curse (along with fiat) goes with an Earth-shaking explosion, a tremendous cloud of dust, and leaves a gigantic, acrid smoking crater.

That way it will be burned into the collective memory of humanity for 1000 years.

Wed, 02/22/2012 - 21:18 | 2187348 A Lunatic
A Lunatic's picture

Bashing gold makes about as much sense as bashing air, or water, or food..........................

Wed, 02/22/2012 - 21:24 | 2187375 lieto
lieto's picture

The second chart seems to show that gold has caught up to the two other bubblicious asset classes.

In a world of unrestrained printing I will still mostly take my chances on physical but on a relative basis it ain't cheap today.

I doubt Ben Graham pictured the US with these maniacs in charge of the presses and the country.

Just saying!

Wed, 02/22/2012 - 21:26 | 2187381 astroloungers
astroloungers's picture

I am sick of Warren Buffet, I am sick of his face on TV, I am sick of hearing his ideas, I am sick of the money bunnies fawning over him.

Cult of personality. Did I mention I'm sick of Warren Buffet?

Thu, 02/23/2012 - 06:18 | 2188425 Sokhmate
Sokhmate's picture

Do you actually own a TV? Tsk tsk.

Wed, 02/22/2012 - 21:30 | 2187399 Robslob
Robslob's picture

 

 

Let's parade out the dead guys portfolio and see how they would have performed moving forward...probably why they are dead?

 

When Warren Buffet dies I will find a way to piss on his grave...I am sure to see steam rising form the ground as he burns in Hell!

Wed, 02/22/2012 - 21:36 | 2187401 ebworthen
ebworthen's picture

Of course Buffet and other Wall Street scheisters don't like gold - it isn't infinitely fungible, you can't put parasitic fees on it quarterly, and if you physically possess gold it isn't "MF Globable".

Wed, 02/22/2012 - 21:31 | 2187402 Reese Bobby
Reese Bobby's picture

Of course Buffet hates gold.  Gold exposes false nominal asset price gains.  But I bet he has a lot stashed away somewhere for himself.

Wed, 02/22/2012 - 21:31 | 2187403 dolph9
dolph9's picture

Who the fuck cares what Warren Buffett says.  I certainly don't.  That geezer was lucky throughout his life and is now wrong on just about everything.

He sounds just like the lying banksters and politicians.  Full of shit.

Wed, 02/22/2012 - 21:37 | 2187421 jimmyjames
jimmyjames's picture

Lastly we should perhaps point out that we think Buffett still has 'daddy issues'. His father Howard Buffett was a conservative/libertarian businessman and Congressman of the 'Old Right', who advocated a return to the gold standard throughout his life. It is probably not too far-fetched that his son's support of a liberal-socialistic worldview and hatred of gold is connected to an ongoing rebellion against his father, even if this is probably only on a subconscious level. We can of course not prove this, but we suspect it plays a role. We have always been baffled by the dichotomy of Buffett's success as an investor and businessman and his support of socialism and all that goes with it in terms of regulations and taxes.

http://www.acting-man.com/?p=14458

Wed, 02/22/2012 - 21:57 | 2187475 ebworthen
ebworthen's picture

Stalin saw nothing wrong with Socialism as long as he had his caviar, his Women, and the ability to send anyone to Siberia.

Wed, 02/22/2012 - 21:55 | 2187471 sodbuster
sodbuster's picture

Warren Buffet is an inanimate object “incapable of producing anything". He's just a leech.

Wed, 02/22/2012 - 22:04 | 2187494 rosiescenario
rosiescenario's picture

"...if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?"

 

No, he would have been buying the pm miners which you could have picked up a few years ago at exactly the kind of valuations that Graham espoused.

Wed, 02/22/2012 - 22:07 | 2187500 rosiescenario
rosiescenario's picture

Also, how did WB do on his brilliant purchase of U.S. Air? I was short that terminal dog at the time he went and bought....he couldn't have even looked at that company's balance sheet or understood that the airlines never make money long term.

 

He is going to look equally stupid on his pm call.

Wed, 02/22/2012 - 22:12 | 2187511 Zero Govt
Zero Govt's picture

"..so any investor holding it instead of stocks is acting out of irrational fear."

Presumably over-confident from Omaha was acting out of "irrational fear" when he tried to buy-up the Silver market not so long ago surrepticiously via brokers in London?

..exposed for his irrational fear by the Bank of England no less who demanded to know who the big player was playing silly buggers in the London Silver market

Warren clearly pisses his pants sometimes and dips into periods of metallic non productivity

Wed, 02/22/2012 - 22:40 | 2187575 suckerfishzilla
suckerfishzilla's picture

I don't care what dead people think.  I'm dumping all my dough on white metal.

Wed, 02/22/2012 - 22:40 | 2187577 engineertheeconomy
engineertheeconomy's picture

Buffet does not short Gold. Put on your thinking caps. Buffet shorts PAPER for a profit. Then when he drives the paper (and physical) price down, he buy's PHYSICAL, goes long paper and sells both for a profit. Rinse and repeat. I'm going to start wearing an aluminum foil cap to prevent you anti-brainwashers from brainwashing me

Wed, 02/22/2012 - 23:07 | 2187640 DavosSherman
DavosSherman's picture

You only have to be really right or wrong once to make it or break it.

Wed, 02/22/2012 - 23:09 | 2187647 riphowardkatz
riphowardkatz's picture

Buffet is a statist plain and simple. To understand buffets antagonism towards gold all you need to do is read Greenspans essay. It sums it up perfectly

http://www.usagold.com/gildedopinion/greenspan.html 

It has nothing to do with Benjamin Graham.  

Thu, 02/23/2012 - 00:00 | 2187775 loveyajimbo
loveyajimbo's picture

Buffet is a diseased hyena in a rabbit suit... this toxic old shitbag needs to be buried in a nebraska dung heap and forgotten.  He is suspected of having a thing for Lloyd Blankfein's manly buttocks.

Thu, 02/23/2012 - 00:10 | 2187792 Missiondweller
Missiondweller's picture

Makes sense that in Graham's time gold/money were a constant rather than an investment. Once the dollar/ gold peg ended that constant was broken and gold priced in dollars became a new variable.

 

Now we need gold as an asset class given the dollar as a variable rather than a constant.

Thu, 02/23/2012 - 00:14 | 2187802 BernankesBeardS...
BernankesBeardStimulatesMoreThanQE's picture

Check out Seth Klarman's 13F in his own words (paraphrased), "I'm still in the cigar butt phase" of investing when compared to Warren Buffett. A True disciple of Ben Graham, a hero of my own, and he has numerous gold mining stocks. Gold exposure with a value approach. You gold bug/doomsday pushers oughtta love that!

Thu, 02/23/2012 - 00:27 | 2187836 lubyanka
lubyanka's picture

Gold is definitely not an investment. It doesn't yield anything.

However, it's a good way for savers to diversify their savings.

Thu, 02/23/2012 - 01:12 | 2187918 jimmyjames
jimmyjames's picture

Gold is definitely not an investment. It doesn't yield anything.

However, it's a good way for savers to diversify their savings

************

Gold doesn't yield anything is correct-but the fact that it has had a 60 fold increase since 1971 more than makes up for not generating income-

Thu, 02/23/2012 - 01:05 | 2187907 Dermasolarapate...
Dermasolarapaterraphatrima's picture

 

 

Buffet v. the yellow metal in sweet graph:

 

http://finance.yahoo.com/q/ta?t=1y&s=BRK-A&l=on&z=l&q=l&c=gld+pall

 

poor Buffet......

Thu, 02/23/2012 - 01:24 | 2187933 Bansters-in-my-...
Bansters-in-my- feces's picture

If goldz  such a good thing to own,why does Jon Nadler from kitco,hate it...?

Thu, 02/23/2012 - 05:45 | 2188403 StychoKiller
StychoKiller's picture

He can't print more of it.

Thu, 02/23/2012 - 01:27 | 2187937 Bansters-in-my-...
Bansters-in-my- feces's picture

Someone should get uncle warren to tell us why his buddys Rothschilds hold so much gold.

Thu, 02/23/2012 - 01:55 | 2187978 mt paul
mt paul's picture

long silver 

 and walrus flippers

Thu, 02/23/2012 - 01:56 | 2187982 nah
nah's picture

pms are a hege against a globalist elite mega fuck up.... revolution in the oil caliphate 'whether the russians and iranian nuclear war sabberr rattlers will allow it or not' is being chosen to challenge democracy

.

even boy bands got balls

www.cahrecords.com

Thu, 02/23/2012 - 03:05 | 2188060 warren.buffett
warren.buffett's picture

Gold's intrinsic value is $0. Some supply/demand/hoarding fundamentals may put the value around $250

 

When will Gold come crashing to that price? When the real rates turn positive or even if the markets perceives that the real rates will be positive.

 

How to make your million $$$ during this drop?

You wouldn't go wrong buying way out of the money put options on GLD when things are crashing around

Bookmark this post... Gold will come crashing to $250 (withing 5 years)

Thu, 02/23/2012 - 05:18 | 2188336 dogbreath
dogbreath's picture

will hamburgers be 25 cents when that happens

Thu, 02/23/2012 - 10:02 | 2188640 Badabing
Badabing's picture

In Fortune magazine Warren B. has article that states his strategy is identifying under and over valued stocks. If so, what the fuck happened with gold so far this decade?

Also he gives no credit where credit is due, to the tax payer, that’s us!  If his investments weren’t bailed out he would have lost all the inheritance from his father.


He also states that gold earns no interest while ignoring the gold leasing by the big boys.

He must clarify his statement and say gold earns no interest for the little people that have to pay taxes!

 

 

Thu, 02/23/2012 - 06:19 | 2188426 EmileLargo
EmileLargo's picture

There's no such thing as "intrinsic value" - another stupid academic concept. You can wait for $250 gold and for $8 per barrell oil. My medical advice is don't hold your breath.

In fact, I even wagered a precious metals trader in Wall Street that you won't see $1000 an ounce gold again in your lifetime. The guy thought I was nuts.

Thu, 02/23/2012 - 10:28 | 2188749 riphowardkatz
riphowardkatz's picture

Can you go into more detail on why you think nothing has intrinsic value? Not disagreeing but seems to be if something has physical properties that are valuable to people through time then it can be said to have intrinsic value maybe that is just value?

Thu, 02/23/2012 - 14:50 | 2189834 EmileLargo
EmileLargo's picture

What concept of "intrinsic value" can one attach to a currency? Currencies are not, by definition, productive assets in and of themselves. True, you can deposit your dollars in a bank account and earn interest (subject to inflation and credit risk). But the truth is, measuring the "intrinsic" value of gold with something that has zero "intrinsic value" (Dollars) is where the whole analysis breaks down into a total nonsense. 

The only "intrinsic value" anything has is what the market is willing to pay for it at any time. Oil may be considered to have "intrinsic value" but that is only because we still have the internal combustion engine. In two decades, if we have cars that can reliably run on batteries (not unthinkable if you follow the Tesla story), oil may become worthless because it is abundant if you don't burn it to power your transport system. "Intrinsic value" is a subjective concept - one man  thinks gold is "intrinsically" worthless, another thinks it should sell at $3500 an ounce (a view I hold). The point is neither view is right or wrong. The only thing that matters is what the market thinks at any time (which also changes every moment). 

The fact is that in the entire recorded history of human existence when a society moved past the hunter/gatherer stage into an agrarian society, gold has never been worthless. Greenspan wrote a fantastic article on this once. That's all we need to know. Even if gold's value is only in the human imagination, to the extent that the imaginary value is utterly unshakeable (as I think 6000 years of recorded history shows), we don't need any modern crackpots like Buffett to tell us gold has no value. No value in whose eyes? Martians? So long as we are dealing with earthlings and with human beings, we can disregard such nonsense. 

Thu, 02/23/2012 - 14:57 | 2189868 EmileLargo
EmileLargo's picture

One further point: both Winston Churchill and Benjamin Franklin noted that every single human experiment with fiat currency in the entire recorded history of man has ended in disaster. No fiat currency survives. This is because the rulers cannot resist abusing the power to print in unlimited amounts. Marc Faber has a brilliant chapter on currency collapses in his book. From the Chinese to the Romans to the French and to the Soviets, this has happened time and time again. 

Thu, 02/23/2012 - 03:37 | 2188082 edmondantes
edmondantes's picture

er... they are going to raise rates are they?  how are they going to do that without bankrupting the entire government, financial and consumer sector... and if these sectors are bankrupted what will be the value of a currency issued by this same government and 'safeguarded' by this same financial sector

they are in the ZIRP trap... they can never raise rates again... currency destruction is the only way out for them...

Thu, 02/23/2012 - 07:39 | 2188471 mogul rider
mogul rider's picture

Thanks David Very good persepctive. It is interesting how many financial advisers refused to advise their clients on gold this last decade. Your perspective on Graham and Buffet probabaly is correct I think from afar.

One thing I can assure all of you is.

Buffet is not short nor against gold.

He has and probably always will have a stash. He is far too smart not to. He is probably talking the price down like Soros and the Chinese. There are a few warehouses somewhere......

Think about it.........

 

He has done the perfect head fake on gold bugs and Joe Sixpack

Thu, 02/23/2012 - 08:06 | 2188495 overmedicatedun...
overmedicatedundersexed's picture

i hold PM's for one reason only: as long as criminal elites hold power they can only debase money the true crimes of the FED and captured gov, cannot yield anything else..the corruption now on a world wide scale will debase everything it touches. PM cannot be debased that is why vermin like Buffet hate it like a vampire hates holy water.

I care not if it makes me rich, only that I have something not violated by the reptiles who rule.

Thu, 02/23/2012 - 08:20 | 2188507 Nnthnt1
Nnthnt1's picture

Graham argues for fundamental margin of security. This means earning something on the assets youve bought. Dont get me wrong, Im also long gold but gold is purely based on the greater fool theory. Gold holds no intrinsic value (or at least not above 1/100th the current price). Therefore this is bullocks

Thu, 02/23/2012 - 09:16 | 2188569 jimmyjames
jimmyjames's picture

Dont get me wrong, Im also long gold but gold is purely based on the greater fool theory. Gold holds no intrinsic value (or at least not above 1/100th the current price). Therefore this is bullocks

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Gold is money-nothing else-it has very limited industrial demand about 2,000 tons/yr jewelry demand is about the same-so not much at all-yet the ratio between all currency and gold keeps widening-which proves that gold is the senior currency-so it is really the relatively new paper currencies that hinge on the greater fool theory and not gold that has been a proven currency for thousands of years-

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