GOLD VERSUS BERKSHIRE – WHAT HAVE YOU DONE FOR ME LATELY?
The Warren Buffett comments have ruffled some feathers gauging from the comments here at the site. And not without good reason. Among many broad generalizations that Mr. Buffett makes, one could also point to the case of “what have you done for me lately”? As Bespoke Investments points out, Berkshire has far underperformed gold since the turn of the century and not by a small margin:
“Buffett certainly has a point. An ounce of gold 12 years ago is still an ounce of gold today. But isn’t the same thing true of stock in Berkshire Hathaway (BRK/A)? Given the fact that BRK/A does not pay a dividend, no matter how much a holder ‘fondles’ or looks at their holdings, one share of BRK/A stock purchased twelve years ago is still one share today. Sure, you can sell it for more now than you bought it then, but the same is true of gold. In fact, your gain on gold is considerably more than your gain would be on BRK/A. Looking at the performance of the two assets since the start of 2000 shows that the value of gold has increased considerably more than the value of Berkshire Hathaway. In fact, with a gain of 466% since the start of 2000, gold’s gain has been nearly four times the return of BKR/A (466% vs 120%).”
Granted, there’s a mean case of cherry picking going on here, but I see the arguments from both sides….Gold is in fact money and can serve an important role in one’s portfolio. But it should NEVER be the centerpiece of someone’s portfolio.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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91 Comments
Cherry picking at its worst. Buffett’s point is that a stock is a share of a productive asset. Gold produces nothing.
I cannot choose from two (what I hope are) witty responses to use, so, I’ll let you decide:
a. Gold most certainly does produce something: a warm fuzzy feeling of security in times of trouble, or
b. The auto insurance certificate in the glove box of my car produces nothing, either; yet, I wouldn’t dare drive without it.
‘A’ is subjective, not objective. ‘B’ is an example of an insurance contract which produces a guaranteed return should you need it. Gold has no guaranteed return. Neither refutes my assertion that gold produces nothing.
Insurance is not guaranteed. It’s a contract, and contracts are sometimes violated. If the insurer goes bankrupt you are not getting your payout. It’s happened many times.
But more importantly so what if gold doesn’t produce anything? It may be a factual statement, but it doesn’t have any further meaning.
If the insurer goes bankrupt you’ve lost nothing unless you fail to get a new insurer following their bankruptcy. Can you provide some examples of where this has happened on a massive scale? Insurance companies are re-insured specifically to avoid bankruptcy associated with catastrophic losses leading to massive claims. And in the end, are you claiming that having insurance is not worth the minute possibility of it not paying out or are you claiming that gold is somehow a more trustworthy defense against a catastrophic loss? Gold has no guaranteed payout and produces nothing, unlike a bond or an equity.
“But more importantly so what if gold doesn’t produce anything? It may be a factual statement, but it doesn’t have any further meaning.” So what if gold doesn’t produce anything? That’s the entire point of what Buffett is saying. Why in the world would you want to own something that produces nothing of value? No further meaning beyond fact? What further meaning should there be?
If you’re concerned about inflation buy equities, industrial/agricultural commodities, or even stock up on household goods! If you’re concerned about deflation buy bonds or hold cash. Gold is not a safe store of value.
How about capital guaranteed notes issued by Lehman Brothers…
Sorry, I thought it was obvious what I meant: you get nothing if the insurer goes bankrupt when you need to file a claim. It has happened many times. I don’t think there’s ever been a case where an insurer went bankrupt and there were no outstanding claims.
“And in the end, are you claiming that having insurance is not worth the minute possibility of it not paying out or are you claiming that gold is somehow a more trustworthy defense against a catastrophic loss?”
No, just pointing out that insurance is not guaranteed as you claimed it was.
“If you’re concerned about inflation buy equities, industrial/agricultural commodities, or even stock up on household goods!”
Sure, I could buy those, and in fact do buy some. You seem to assume that for one to buy gold they must ignore all other possible assets.
Equities are no protection against inflation, and they require lots of skill and time to properly benefit from.
“Gold is not a safe store of value”
Of course it is, thousands of years of history have proven it, there’s nothing that’s held it’s value anywhere close to how gold has. A house, a pound of beef, or a pair of basic shoes costs about the same today in ounces of gold as it did during the Roman era.
did your investment in groceries.com in 2000 yield you something? “investing” in a stock may or may not be productive. I loved IBM selectrics in learning how to type. I don’t think there’s much market for them now.
I’m being a contrarian here, but gold has lodged itself in the human psyche for at least 3000 years in civilizations as diverse as Chinese dynasties to Incans. I don’t think you are going to intellectually marginalize this to a “barbarous relic” without doing some serious reprogramming of the limbic system….
rhp
Gold has lodged itself in the human psyche. But what drives the price? Supply and demand. Who is buying up gold? Over 2/3 of gold mined since 2000 has gone to jewelry (~54%) and central bank holdings (~22%). In other words, people that are using this false notion that gold is being snatched up as a prudent investment for portfolios are missing the big picture. You’re buying an asset whose price is being determined by factors other than investment.
And to those that purchase gold as some sort of hyperinflationary, end of civilization play, why not just buy stuff you would actually need and could use? You know, food, tools, weapons, etc. All of that barters just as well as gold. Understand I don’t hate gold, its just completely insane to buy it at these levels on the rationale that most people are offering. That gold is only present in 5% of the world’s portfolios is not a bullish sign. Its bearish. Because that analysis completely ignores all the other gold on the planet NOT in portfolios but no less ‘owned’ in the form of jewelry, industrial metals, or in central bank vaults.
Great points.
Gold jewelry buying is mainly investment, or more appropriately savings. It holds it’s value over time. In many Asian countries it’s actually used as money. Most Thai jewelry is sold by the bhat (a standard weight measure) and is all in the same quality. The price per bhat is posted daily and does not change much from one location to another, much like a currency exchange shop.
Central bank buying is also investment/ saving.
Regarding your question about hyperinflation or end of civilization. First, hyperinflation is not the end of civilization, just painful economic times.
Gold will certainly do well in hyperinflation, I think anybody can see that, so the real question is will hyperinflation happen? It’s certainly possible, but not guaranteed by any means. But then hyperinflation is not the only reason to own gold. High inflation alone is sufficient reason to own gold.
For those that are buying gold because they think civilization is coming to an end, yes they are foolish as the likelihood is so small as to be not worth worrying about, if it did happen guns, food and medicine would be much more worthwhile, and no matter how much prepping you do for a scenario like that, you are still unprepard.
But more importantly it’s wrong to assume that hyperinflation and the end of the world are the only reason to want to own gold, as I’ve mentioned before, it’s a great savings vehicle for people who don’t want to actively manage their money. You buy it, put it away, and leave it to your children when you die, or if something goes wrong and you lose your other savings or investments you sell it and use the proceeds to buy what you need.
Amen.
The fact that gold produces nothing is exactly the reason to hold it. You see, when real interest rates are negative, dollar denominated money/bond holding produce less than nothing. When real interest rates go positive again, the gold market will crash, just like the bubble and bust of the 70s and 80s.
I’m still not sure I understand the gold as an “insurance policy” argument. I mean, if we’re talking about hedging against some sort of dystopic economic collapse…wouldn’t things like firearms, ammunition, non-perishable food stores, and alcohol serve as better “stores of value” to use for barter ?
Depends. I didn’t say it was the best hedge. It’s just an option of many. Different environments require different hedges….
Depends on where you sit in society. For most average folks, yes to all of the above. And they should all work as good hedges against inflation as well.
But for a millionaire living in an urban high rise, gold might make more sense, especially since it is so portable.
That being said, I believe owning own some gold makes sense for all who can afford it. Gold chains (necklace/bracelet) are a good option, because they can be broken down and traded a little at a time. “Trash” silver coins work well too. This has proven to be the case in many recent economic collapses such as in Argentina.
You don’t have to believe we are heading towards a Mad Maxian end of days to see how gold is insurance: It insures you against bad fiscal policy, and generally against inflation (not perfectly, but pretty well over the long term). It’s the safest asset for people who want to buy and hold and not have to worry about managing their money. There’s still risk of course, but it’s about as low a risk as you can still get.
Buy-and-hold only works if the price isn’t already hugely distorted…
That depends on which way the distortion is…
Very true, and I realized I missed out an important aspect of my point just after I hit “post”
My opinion is that the rise in the gold price is too strongly correlated with Chinese credit growth for it to be fairly valued right now. The Chinese have always loved gold and silver (because their govts keep blowing up their fiat currencies), and are likely convinced it will always go up in price. We know how that one ends.
If China wants to use gold and silver as money in China then I say go for it — though I hope that fixed exchange rate works out better for their economy than their USD peg. Personally I’ll stick with the US dollar, and buy Chinese jewellery if the gold price collapses.
I personally don’t think China has too much of an influence on gold’s price yet, I think China’s impact will be more along the lines of a global recession, which will definitely hurt gold, just like the last one did, but only temporarily, just like the last time.
Gold’s recent growth started well before China was much of a player, and if you look further back, it’s value is correlated strongly with the weakness of the dollar. After Nixon closed the gold window gold started steadily advancing until it reached parabolic growth until Volcker successfully defended the dollar with high interest rates. After that gold fell as the dollar regained it’s premier status, until the end of the dot com era when Greenspan’s policies failed to result in sustainable growth and interest monetary was further eased. After that interest rates were kept low and the dollar has pretty much steadily fallen since then.
The U.S. leadership wants the dollar weak, and they will succeed, therefore gold will continue to strengthen. There will certainly be fluctuations, but the trend will be maintained over the medium and long term.
Well, of course the gold price moves inversely to the value of the dollar — it’s denominated in dollars!
But I’m not sure why you’re so certain the US govt wants a weak dollar. A strong dollar would be hard on exporters but the rest of the world isn’t going to have as much money to buy things going forward. A strong dollar would allow the US to buy commodities cheaply and — maybe, just maybe — build some factories in which raw materials are converted into finished goods for sale to other Americans. Since a flight to the dollar would by definition weaken almost all other currencies, Americans would be able to take cheap vacations and buy up foreign assets. Very negative real interest rates would make govt borrowing a no-brainer, especially with floating-rate debt which would actually *decrease* America’s interest burden in real terms.
What are your reasons for thinking the US govt wants the dollar weak?
I’m certain for 2 reasons:
1) Everything the US is doing indicates the desire for a weak dollar
2) The US debt will only be more problematic with a strong dollar. To the point of being impossible to service soon.
Labor is a far more expensive portion of manufacturing than the materials. While commodities would get cheaper, labor costs would go up more than enough to compensate, making us less competitive. A weak dollar is actually more beneficial to American industry than a strong one. China is able to sell us cheap goods because their currency is kept artificially week, not in spite of it.
Cheap vacations would put local tourism out of business and send money to other countries, not all that good for the American economy. Same thing with buying foreign assets, that’s of no benefit to the American economy.
Negative real rates only exist in a very weak economy. The dollar may strengthen relative to other currencies while the global economy is in trouble, but that’s not really the dollar strengthening, so much as everything else weakening, which is only illusory strength.
A truly strong dollar requires strong global economic growth, but then people will demand real returns. Our current level of debt service will skyrocket, and at a certain point we will have to start borrowing just to make the payments. A strong dollar means we will have to lower our debt burden, and that’s not going to happen.
Interesting points, but I’m still skeptical.
1) I think everything the US is doing indicates the desire to recapitalize their banking system. US banks are still deleveraging to the tune of 5-10%/year (think credit default swaps) and they need large spreads to repair their balance sheets — Japan took the same approach during their balance-sheet recession to fix their zombie banks. By allowing the dollar to strengthen that will cause inflation and rising interest rates in countries with very overvalued currencies (e.g. Canada, Australia, Asia in general), allowing the banks to buy high-yielding bonds with fewer US dollars. Is it a coincidence that mark-to-market was suspended until 2017, and the Fed is gradually pushing forward its “exceptionally accommodative stance until” date towards that year? Perhaps that’s when they figure the banks will finally be able to deal with all the derivatives without govt-sponsored financial repression.
2) It’s true, a strong dollar will increase the stock of debt in real terms, but floating-rate bonds will allow the govt to borrow at even more negative real yields than they do now, reducing their interest expenditures in real terms and allowing them to pump money into Main Street (we can always hope). The total stock of govt debt is less of a concern than private debt. As Bernanke keeps saying, the US has plenty of time to fix its fiscal house; in the short- to medium-term the country must focus on growth (and repairing its banks as quickly as possible before all hell breaks loose in Asia and Europe). Govt debt has been much higher as a percentage of GDP; what matters is productivity. We aren’t on a gold standard any more.
Why would labor costs go up during deflation? In a deflation wages fall, as indeed they have been doing for quite some time.
If local tourism goes out of business then other businesses will replace them. Economies change, people adapt — and Americans adapt quicker than anyone else in the world. The already-underway shift to renting will be a huge boon in terms of increased labor mobility, and the Internet opens up the entire world to entrepreneurs. Americans do the Internet better than anyone else, too. I’m starting to think I’m more optimistic about America than a lof of Americans! It’s a real shame, but that will change as people learn to innovate again.
It seems to me that you perhaps haven’t yet fully grasped all of the concepts behind MMT/MMR and how govt financing really works at the operational level. Cullen has excellent introductory material in the archives, it’s well worth checking out
I agree that much of what is done is to the benefit of zombie banks, although I disagree that it fixes them, it merely allows them to continue to eat brains
And I definitely don’t consider it to be a good thing.
The U.S. has a 100 year history of weakening the FRN dollar, and as far as I can tell that’s only become more the case today.
Suspending mark to market until 2017 is just their way of saying they haven’t got a clue as to when things will be stabilized, I wouldn’t count on that date being honored.
Negative real rates will only exist while the global economy is bad, and as long as that is the case, the US will have to grow the deficit wildly to keep any semblance of growth.
“As Bernanke keeps saying, the US has plenty of time to fix its fiscal house”
I simply don’t believe that. As far as I can tell it’s already too late to fix, at least in a way that doesn’t involve a scenario much more painful than the last (current?) recession.
“Govt debt has been much higher as a percentage of GDP…”
I think you are mistaken. The only case I’ve seen in the U.S. with a higher debt to GDP ratio was during WWII, and while it was significantly higher, we didn’t have the massive social security and medicare unfunded liabilities overhanging us. Plus after the war we were the only functioning economy and everybody had no choice but to buy our products. Things are very different today, and not to our advantage.
There was a recent study release by Carmen M. Reinhart, Vincent R. Reinhart, Kenneth S. Rogoff covering nations with extended debt to GDP ratios over 90% (which we are well above, and have been for years now). Their finding was that in most cases growth was significantly lower than it was before the high debt ratio.
“Why would labor costs go up during deflation? In a deflation wages fall, as indeed they have been doing for quite some time.”
The dollar can be strong without deflation, although deflation definitely means a very strong dollar. A strong dollar without deflation means increasing wages, and a strong dollar with deflation almost certainly means a recession. I think some of our differences may be about timing and/or terminology. I definitely the dollar will strengthen relative to other currencies in the near future, but I see a long term downward trend. I also see a potential deflation in the not too distant future, but I don’t see either scenario as good for the U.S. economy in anything more than the most superficial ways.
“If local tourism goes out of business then other businesses will replace them. Economies change, people adapt — and Americans adapt quicker than anyone else in the world.”
It’s quite an assumption to say one industry disappearing will automatically result in another appearing. I offer Detroit as an example.
I’ve read about MMT here and elsewhere. I think it has some interesting ideas, but overall I don’t agree with it.
“A weak dollar is actually more beneficial to American industry than a strong one. China is able to sell us cheap goods because their currency is kept artificially week, not in spite of it.”
And wages in China has risen enormously, to the point that they’re no longer competitive with e.g. Vietnam. That’s what happens during inflation, not deflation. A strong dollar reduces costs all around, which is good for the bottom line. It could lead to a resurgence in American manufacturing — which is precisely what needs to happen. The imbalances must end or the chaos will continue.
Gold isn’t money, at the moment. It’s a commodity. The Chinese have been blowing up the biggest credit bubble the world has ever seen, and bidding up prices on commodities, developed nations’ real estate (most recently Germany, hence the pop in manufacturing), luxury consumer goods (hence the pop in BMW and Porche’s profits), art, wine, college tuition fees by sending their kids to school overseas, and on and on. China’s economy is in serious trouble and I believe the global slowdown we’re seeing is the result. There is more debt in China than the vast majority of people imagine. I believe inflation has been understated and GDP growth overstated. Let’s just say I’m not long AAPL.
Gold might be money again one day, but I’m anticipating a massive liquidation event before that happens, so I’ve reduced my exposure to the bare minimum.
Er, meant to say “Porsche”, obviously.
And I also should have added that this credit has not exactly been wisely spent: new bridges and freeways are collapsing already, entire cities stand empty, there are cracks in the Three Gorges Dam, high-speed trains are crashing, villagers are losing their life savings speculating in a colossal RE bubble, and the environmental degradation has been appalling. The latter alone will cost unknown billions to fix. I’m astonished that so many self-professed capitalists can be bullish on a centrally planned economy run by brutal totalitarian thugs which was until the advent of the Internet almost entirely opaque to the outside world. The govt’s censorship efforts are beginning to fail and the truth is emerging. It will not be pretty.
I generally agree with you RE: China, but gold IS money right now, and while it may be considered a commodity, it is unique as commodities given that it’s value has nothing to do with it’s industrial use.
I think dollar weakening is a stronger factor to golds price than China will be, and I don’t see the dollar’s trend changing anytime soon.
The way I see it gold will tank if Bernanke starts raising interest rates, but I don’t see that happening… The U.S. gov can’t function without low interest rates.
If I’m right about China then the dollar is about to rip off not just our faces but our clothing and accessories too. When people finally appreciate the the Chinese miracle is really a mirage, where else are they going to put their money? Emerging markets? Canada, Australia, Brazil, Germany, Russia, all hugely reliant on China? The yen, presumably. Also the Swissie, which will cause havoc with their Euro peg. The pound too. Currency issuers who have a history of economic excellence and whose exposure to China is limited. America’s economic history is second to none, and dollars will be in high demand. Why do you think the Treasury is proposing issuing floating-rate bonds? They know deflation is coming. Real interest rates are going down and they want to profit from it. So should you.
Add the increasing likelihood of a EZ breakup and you have all the ingredients for an epic dollar rally over the next few years or longer. At least, I sure hope so
I’m sure that gold will take a hit when China has a hard landing, probably pretty significant one, but China is the number 1 holder of U.S. treasuries, and they will start selling them in a big way when their economy collapses to try and shore it up. Japan is a close number 2, and that story isn’t going to end well either, but the timing may be different.
I’m sure the dollar with strengthen for a time after China goes down for exactly the reasons you state, but China collapsing will cause a global recession, and as you state prices will likely go down, AKA deflation. What will the Fed do then? QE to the max, as there aren’t any other options left to fight recessions and deflation. They will force inflation back up, and the dollar will weaken dramatically. Treasuries will drop and yields will rise, meaning the U.S. gov will have to spend more on debt service, meaning they will have to print even more. Once treasuries start dropping what is left? Gold will go way up once that starts happening.
I’m not yet entirely convinced that China will hard land (probably 80-90% convinced) as there are some reasonable arguments that there are options that can make it a soft, if bumpy, landing, but I’m pretty certain gold will drop noticeably either way.
So I’m prepared for a 10% (soft landing) – 30% (hard landing) drop in gold, but I expect it to more than make up for my losses over the following few years.
Well, assuming you believe China’s foreign exchange reserve figures (I don’t believe any number the Chinese govt publishes, but I’m a bit paranoid), the Chinese are very unlikely to sell them all at once, becaue they’d collapse the price of their own assets. Even if they *did* do that, perhaps in a misguided attempt to bankrupt a currency issuer, there will be plenty of people wanting Treasuries at that point.
China has about $3,000B in forex reserves. That’s about $2,300 per capita. Assuming that money hasn’t already found its way into Swiss bank accounts, let’s hope that the public’s stock of savings is at least equal to that. But is that likely? Take a look at the assets of Chinese banks. All those assets have corresponding liabilities. The Chinese are not as rich as we think.
I definitely don’t think China will dump all those treasuries at once, but it will start selling them, and it will be a net seller for many years, which will put a strong downward pressure. When the number one buyer becomes a seller the others will likely follow suit.
Note: China and many other countries such as Russia, Iran and India are not particularly happy with the dollar as a reserve currency and are already in the process of transfering to another alternative. Some are doing exchanges directly in their own currencies, others are using gold as a means of large scale trade.
Well, looks like we’ll have to agree to disagree. I think if the situation arises where China needs to sell down its forex reserves then financial markets will be in enough chaos that even such a large supply will be snapped up by yield- and safety-seeking investors: the stock of AAA-rated collateral is dwindling rapidly (due to downgrades, quantitative easing and rampant rehypothecation in the repo market). Besides, it’s estimated that China holds about $1T of US Treasuries The govt currently issues that much new debt in a year, and yet rates are declining. If China sold over the course of, say, 10 years, that’s $100B/year sold into a $10T market under conditions making it rather likely that new supply will be snapped up by banks, insurance companies, pension funds and retail investors around the world. I don’t really see what the fuss is all about, but maybe I’m missing something.
(Incidentally, the composition of China’s reserves is a state secret. But don’t worry, I’m sure there aren’t any Bo Xilais at the People’s Bank of China, the Ministry of Finance or the China Investment Corporation.)
So I have an honest question for those of you who think China will decide to sell their Treasuries.
Who are they going to sell them to?
Sell to the Japanese for yen?
Sell them to Europeans for Euro?
Convert them to dollars, and give up the interest income?
And what are they going to do with all those dollars they keep rolling in from their massive trade deficit with the US? Ditto with euros from Europe?
I just don’t see many good options for them, but to continue to play along nicely.
Well, one possibility would be to funnel the US dollars through the banking system and out to Chinese expats as lines of credit so that even more of the people’s money can be stolen by the elites before the V for Vendetta masks start veneering venomous villagers’ visages to visit some violent vengeance upon their vile and venal vermin overlords.
(Sorry, couldn’t resist
.)
There’s always a buyer, especially for something as liquid as treasuries. If there were no buyer they would be worthless. I mentioned elsewhere that they will well it over time, not all at once. Really all they have to do is stop buying them and effectively they will be selling those treasuries back to the U.S. for dollars. Why would they care about interest if the rates are negative?
“And what are they going to do with all those dollars they keep rolling in from their massive trade deficit with the US?”
Continue to do what they are already doing with it… buy up commodities, and U.S. and Euro companies that generate real revenues and they can then raid their technology. Or buy gold if all they want to do is sit on it.
I look at what they are doing today, forging trade agreements with Russia, Iran, India and other countries that do not involve the dollar and that tells me they don’t want to be under the yoke of the U.S. So if the unlikely case of them not crashing they will continue to move away from the dollar, and if they do crash I don’t see why they wouldn’t try to put their reserves to better purposes than sitting and slowly losing value.
They were content to buy and hold treasuries when real rates were positive and their economy is going strong, I doubt they will be as content under changed conditions.
“What will the Fed do then? QE to the max, as there aren’t any other options left to fight recessions and deflation.”
Forget the Fed — their job to keep the banking system liquid and manage USD-denominated collateral. The solution is fiscal. Provided govt money is spent on productive projects (e.g., repairing crumbling infrastructure, systematically sorting through all our trash to maximize reclamation of recyclable material, fixing our environment, planting trees, etc.) then the result will not be inflationary. We will realize that eventually.
I know the job guarantee is not a popular topic on this blog, but it needn’t be permanent. Or the govt could lend to small businesses. There are lots of ways to get money into the economy, provided we do it sensibly, with lots and lots of checks and balances, and much better media oversight.
One other thing, I agree that deflation is likely, but it’s the easiest thing to stop when there is nothing backing the currency. Bernanke is terrified of deflation, but thinks he can control inflation.
The deflation will be brief, no more than a year, followed by a high inflationary environment, much like was seen during the 70s stagflation. Once high inflation kicks in the Fed will be powerless to stop it since the cure is high interest rates, but the debt burden will take that option off the table as the U.S. will be unable to service it’s debt under high interest rates.
Deflation will come, but it will be brief and should not be the focus of ones concerns. Plan to make some money, or at least protect yourself from loosing too much, but the real concern is high inflation.
If deflation is coming first then that should be your primary concern right now!
We had deflation during the recession, although it was mild. It wasn’t that big a deal, in fact it was great for me since I was mostly in cash! I’m not worried about a Great Depression type deflation because the conditions are entirely different. The deflation back then was made much worse due to monetary tightening, but that will not happen today. Easing was difficult because the dollar was gold backed. But today the dollar is without backing and the national debt is high, so tight monetary policy is very difficult, while easing is trivial.
I’ll certainly try to protect myself from some mild deflation, but I’m not particularly concerned because it just isn’t going to be a big deal. The deflation will be quickly and easily managed, high inflation is the real worry.
It doesn’t have to be a 1930′s scenario to lose a lot of money. Ask Japan.
Gold has done quite well vs. the Yen over the last 20 years, so if that’s the scenario I’m not too concerned.
The only scenarios that I would be worried about with relation to gold ownership is a Great Depression like deflation, or a return to a sound economy and real growth, neither of which do I see happening.
I definitely see tough times ahead, but the scenarios that seem likely will do well for gold ownership.
“Gold has done quite well vs. the Yen over the last 20 years, so if that’s the scenario I’m not too concerned.”
During that time credit was accelerating in the rest of the world. We’re not in the same circumstances now.
Ross,
I manage a team of engineers and technicians in China, and I am in contact with them almost daily. And I’ve worked with Chinese factories/people for about 14 years.
All I can say is “YES!” to everything you just pointed out. And I can add that corruption is staggering and extremely frustrating. And that wages have gone up around 3X in the last few years. And that it is extremely difficult to keep good employees on board, even with constant pay increases.
It was also rumored today that the government has decided to postpone their planned transition. I can think of many reasons they might want to do that, and none of them are positive…
Thanks for the news from the ground! I’ve had to piece this all together from blogs and news reports over the last few years, and have become increasingly alarmed. I’m now positioned for a crisis in China, whether it’s merely financial or more… encompassing.
I read recently that 60% of rich Chinese have already either left the country or are in the process of trying to leave. The capital flight has been much bigger than most people have appreciated, hence the inflation in most developed nations’ assets. China’s been exporting inflation for years. I suspect a lot of things are about to get a lot cheaper.
“It was also rumored today that the government has decided to postpone their planned transition. I can think of many reasons they might want to do that, and none of them are positive…”
This sounds ominous. What do you think is going on behind the scenes?
WB could care less, really, about performance “since the turn of the century”. Yes, he could have bought and sold gold during that period for a profit, and for more of a profit than anyone could have made with BRK/A. But aren’t we all overlooking the fact that WB doesn’t sell? Ever? He buys businesses he thinks are going to be around for generations and that he believes will generate increasing income streams. As for comparing gold with BRK/A: If you bought gold in 1980 and sold it in 1990, you did very poorly. If you bought BRK/A in 1980 and sold it in 1990, you did pretty well.
I always thought of gold as an alternative currency. If for whatever reason people began to question the future value of their own currency, whether through inflation or something else, the value of gold would increase. About 15 years ago it appeared relatively inexpensive to me so I began buying gold. Most people I know didn’t want it then and they don’t want it now. They just don’t feel it’s something they would want to invest in. They’re entitled to their opinion and I’m entitled to mine. We don’t refer to each other as being uncivilized or stupid. Thats the problem I have with Buffett and Munger. If the guy doesn’t think it’s something he’d want to put his money into why not just say Gold isn’t something we care to invest in, or we don’t know how to place a value on it instead of implying that gold was something only an uncivilized fool would own. I felt his comments were totally out of line.
“They’re entitled to their opinion and I’m entitled to mine. We don’t refer to each other as being uncivilized or stupid. Thats the problem I have with Buffett and Munger. If the guy doesn’t think it’s something he’d want to put his money into why not just say Gold isn’t something we care to invest in…”
Well said!
Well said.
And I’m sure that at some level, Buffett is kicking himself for missing the move in gold.
Buffett never said he doesn’t *trade* gold. I recall reading that he placed a very large bet on silver a few years back, and would be very surprised if he hasn’t done the same with gold. The man has ears everywhere.
As Dave Rosenberg would put it, Buffett rents rallies in non-producing assets, but he doesn’t own them.
Any thoughts on how gold would be affected in the event of a massive monetary response from the ECB (direct bond purchases all across the board)? My first thought was that it would be bullish, however it would definitely mean a weaker euro and therefore a stronger USD, which doesn’t fit the bullish scenario.
I agree. Dollar strength is the biggest risk for gold (and all commodities) right now.
@Patrick
“I agree that much of what is done is to the benefit of zombie banks, although I disagree that it fixes them, it merely allows them to continue to eat brains And I definitely don’t consider it to be a good thing.”
A (somewhat) stealthy recap of the US banking system is absolutely necessary. If you’re quoting Reinhart and Rogoff then you presumably read Zero Hedge and know about the derivatives problem. That’s what I mean by “fix”, and that part is definitely a good thing. The govt has had to hold its nose and pump money into the banks, but I don’t believe for a minute that there isn’t a plan to take it back again when health is restored. (And if there isn’t such a plan now, there will be once the economy gets bad enough.)
“we didn’t have the massive social security and medicare unfunded liabilities overhanging us”
There is no such thing as an “unfunded liability” for a currency issuer. The real question is: what proportion of our real output (goods and services produced) do we want to set aside for our old and our sick? Once you decide that then the quantity of money required follows automatically, and we can afford it by definition. What the Boomers think they’re getting (due to promises they made to themselves — and then broke) and what they’ll actually get are two different things. The reason there’s such a storm over SS etc. in Congress is because the Boomers are still in charge. That will change.
I’ve read “This Time is Different” by Reinhart and Rogoff (it was the very first book on macro that I read, actually). It’s an excellent history of economic crises, but I’m not convinced their argument holds for currency issuers in a floating exchange rate system, because I don’t know how many of the crises they examined happened under such conditions. I’d have to re-read it now that I’ve grokked MMT/MMR, but until I do I’m suspicious of using any one ratio (e.g. govt debt/GDP) as a predictor of economic disaster. The world’s economy is a massively complex dynamic system and it can’t be reduced down to a static ratio (well, except in mainstream economists’ heads).
“The dollar can be strong without deflation”
A strengthening dollar *is* deflation, at least inside the US. Other prices drop relative to the currency.
“It’s quite an assumption to say one industry disappearing will automatically result in another appearing. I offer Detroit as an example.”
Renters in Detroit will move elsewhere once the govt stops propping up failed industries. Capitalism works, you just have to give it time.
Great discussion! Thanks for being polite and respectful even though you don’t agree with MMT/MMR. Quite a different experience from ZH, though that can be fun too
I’ve enjoyed the debate as well! I definitely enjoy the challenge of defending my position, and even though I don’t agree with everything you say I think you say it well and support it well.
I read ZH regularly, but rarely read the comments as they generally seem to be completely worthless… but yes, sometimes entertaining!
Let the debate continue…
“A (somewhat) stealthy recap of the US banking system is absolutely necessary. If you’re quoting Reinhart and Rogoff then you presumably read Zero Hedge and know about the derivatives problem. That’s what I mean by ‘fix’, and that part is definitely a good thing.”
Here’s an area where we strongly disagree. I don’t believe the government fixed anything, in fact I think it made things worse. The TBTF banks are bigger, they got away with institutionalized fraud, and were basically rewarded for it. They have basically been told they can break laws and take risky gambles and there will be no repurcussions. what happened in 2007 – 2008 will happen again, and it will be bigger than the last time. I believe what Iceland did was appropriate, and it now appears to be the most healthy in Europe, it’s certainly too early to make any conclusions, but bailing out failed businesses creates a pretty clear moral hazard. I agree a certain amount of intervention was needed at that point, but the intervention was done incorrectly, and has gone on for far too long.
“I don’t believe for a minute that there isn’t a plan to take it back again when health is restored. (And if there isn’t such a plan now, there will be once the economy gets bad enough.)”
I don’t believe that they have any plan. They are kicking the can down the road hoping for miracles. They definitely can’t take the money out if the economy turns bad since they are pumping it in to keep it from getting worse. When the economy turns down again, they will only increase the stimulation. Keynesianism can work, but not in the long term, and not with high levels of debt.
“There is no such thing as an ‘unfunded liability’ for a currency issuer. The real question is: what proportion of our real output (goods and services produced) do we want to set aside for our old and our sick? Once you decide that then the quantity of money required follows automatically, and we can afford it by definition. What the Boomers think they’re getting (due to promises they made to themselves – and then broke) and what they’ll actually get are two different things. The reason there’s such a storm over SS etc. in Congress is because the Boomers are still in charge. That will change.”
I think our difference here is merely semantic. I consider it a promise that is unfunded. People have been promised (or promised themselves) a retirement income and medical care, but those are unfunded, in that there is no identified source of funding. Given that, there are only 2 options: break the promise, or fund it (or a combination thereof, which is the most likely scenario). I believe social security & medicare benefits will be reduced over time, but not enough to close the gap, so additional funding will need to be found. There are many options on how to fund it, but as far as I can tell all of them will be a long term drag on our economy. That’s why I don’t think our debt situation is nearly as solveable as it was last time around
“I’ve read ‘This Time is Different’ by Reinhart and Rogoff (it was the very first book on macro that I read, actually). It’s an excellent history of economic crises, but I’m not convinced their argument holds for currency issuers in a floating exchange rate system, because I don’t know how many of the crises they examined happened under such conditions. I’d have to re-read it now that I’ve grokked MMT/MMR, but until I do I’m suspicious of using any one ratio (e.g. govt debt/GDP) as a predictor of economic disaster. The world’s economy is a massively complex dynamic system and it can’t be reduced down to a static ratio (well, except in mainstream economists’ heads).”
I haven’t read it, I’ve only read the summaries, but I’m pretty sure the point is not that a static ratio guarantees anything. They had to pick a cuttoff in order to have something to study, it could have been 80%, or 100%, or any other arbitrary cutoff. I believe the point of the study is that high debt levels generally lead to reduced growth. Debt must be serviced, and at a certain level of debt the amount of service will increase to consume all revenue, at that point it’s game over (probably before that point). Yes it’s complex and there’s no fixed level of debt that’s too much as it’s different for each scenario, but there’s definitely a point at which it becomes too much. Debt is not inherently bad, but too much debt is. I personally believe the point that it becomes bad is when the benefit to the economy becomes lower than the amount of new debt taken on.
“A strengthening dollar *is* deflation, at least inside the US. Other prices drop relative to the currency.”
There’s two types of strengthening, relative and absolute. The dollar can strengthen relative to other currencies, while still weakening in real terms.
“Renters in Detroit will move elsewhere once the govt stops propping up failed industries.”
Yes, but that’s exactly my point. Businesses lost will not necessarily be replaced by businesses in the same place. Tourism is the perfect example, if people start traveling more to foreign countries, tourism jobs will be lost in the U.S. and created in other countries.
“Capitalism works, you just have to give it time.”
I definitely agree with that, but sadly I don’t believe we have a capitalist society anymore. The banking crisis and how it was handled is a perfect example. Capitalism requires those banks to fail and be replaced with more competitive entities, but that didn’t happen. What we have today is crony capitalism which is much closer to fascism.
When I said the govt “fixed” the problem, I meant they did wht they had to do to avoid an economic catastrophe. If you read about what was going on behind the scenes during 2008 (Sorkin etc.) it’s clear that Paulson was frantically worried about moral hazard, which is why he let Lehman Brothers fail. The market reaction convinced him of the need to rescue AIG, and it went from there.
I don’t mean they’ve done anything to fix the underlying structural issues, such as massive trade imbalances, disgusting levels of inequality, rampant fraud and overly consumerist behavior. All these things need to be fixed, but they can only be fixed with a functional banking system. Yes, the big banks are bigger, but people will only take so much of this before they start clawing back the countless billions in bonuses that Wall St has stolen from the public. Once the situation deteriorates enough, big changes will come. Cf. Glass-Steagall.
Iceland is a tiny country and thus their allowing the banking system to fail was insignificant on global terms (it was hellish for the locals, of course). Financial debt in Iceland hit 300% of GDP — there was no way they could hide it even if they wanted to. It took a peaceful (typically Icelandic) revolution there to oust the elites. The US absolutely could not do the same thing. Their only option was to lie about the situation and do what they could to keep the music playing. The Bush administration was on its way out and had no plan (apparently the Obama administration was astonished to discover this). I don’t believe Obama is the kind of person to be complacent about something so serious, but that’s just conjecture.
The thing about healthcare is that it’s also in a bubble (see http://www.thebubblebubble.com/), and costs must come down. That will ease the difficulties facing Medicare. And the thing about Social Security is that according to a recent poll, the average American expects to be able to retire age 80. Unfortunately the lifespan of the average American is 78. So the average American will work until he or she dies, assuming no great increase in average net worth or income. I believe the “unfunded liabilities” problem is overstated for these reasons. We need to stop linearly extrapolating indefinitely into the future
I agree that debt affects society and the economy in very complex ways. We’re only really starting to figure it out. Look into Steve Keen’s work on debt and money if you’re interested in a very promising new approach to modeling the economy using (gasp!) dynamic models rather than the neoclassicals’ ridiculous plots of intersecting lines with no numbers on the axes. Neoclassical economics is completely wrong, and you’ll understand how debt works much more clearly if you spend some time with Keen. The math is a bit hairy (which is why economists don’t do it: they don’t learn differential equations in school!) but the concepts are pretty simple if you spend enough time starting at it.
“There’s two types of strengthening, relative and absolute. The dollar can strengthen relative to other currencies, while still weakening in real terms.”
Very true. But weakening in real terms versus what? I’m having a difficult time identifying cheap non-financial assets at the moment. In my opinion long-dated US Treasuries and Canadian real-return bonds are the cheapest things out there given what I believe is happening in China. But I’m ready to change positions very quickly because so does the world…
And you’re right about our current version of capitalism. We have failed to maintain a healthy financial system and the media is very largely to blame, in my opinion. They have almost entirely abdicated their responsibilities as societal watchdogs and will be held accountable by going out of business. I believe the best way to ensure *proper*, stable capitalism is through a correct understanding of credit and absolute transparency so that the blogosphere can take over the traditional media’s job of watching the bankers and CEOs and so on. The Internet is the solution to many of our problems — we just need to figure out how to leverage all those eyeballs.
“the concepts are pretty simple if you spend enough time starting at it.”
That should be “staring”. But I started at it several times too
I agree it stopped an economic catastrophe, but I don’t believe it was the best thing, or even close to the best of the options. But I’m actually OK with what happened during the peak of the crisis, as it was a crisis, but I’m not happy with what has happened since then, and I’m not happy that they refuse to recognize the causes of the crisis.
Iceland is a tiny country and thus their allowing the banking system to fail was insignificant on global terms (it was hellish for the locals, of course). Financial debt in Iceland hit 300% of GDP – there was no way they could hide it even if they wanted to. It took a peaceful (typically Icelandic) revolution there to oust the elites. The US absolutely could not do the same thing. Their only option was to lie about the situation and do what they could to keep the music playing. The Bush administration was on its way out and had no plan (apparently the Obama administration was astonished to discover this). I don’t believe Obama is the kind of person to be complacent about something so serious, but that’s just conjecture.
I agree Iceland is apples and oranges when compared to the U.S., but all fruits rot when left out too long
But seriously, I believe if Iceland had not done what it did there would be another ‘I’ in PIIGS. It’s true that Iceland had no other option, but if doing what they did was worse than what we did, given the size of their problem don’t you think they would be in worse condition today than we are, rather than showing signs of strong growth?
I don’t see why the U.S. couldn’t have let the banks fail, taken them over and spun off the functioning portions. Yeah, things would have sucked bad for a while, but I believe we’d already be past the bad times and back to true growth based on sound fundamentals rather than the mess we are in today. Banks fail all the time, and they are going to fail again, but next time I doubt the U.S. will be able to do anything about it since they’ve gotten bigger and we don’t have the resources to even do what was done the first time around. The real mistake was lettig them get as big and interconnected as they were, basically ending Glass-Steagall was the error, and it should have been re-instituted immediately once the worst of the crisis was over.
I don’t yet have time to read your link (but I will soon!). But I don’t see healthcare as a bubble. Costs are rising for a few real reasons, and a few that are somewhat contrived, but still are real. Obviously costs can’t grow at the rate they are forever, but that doesn’t mean they will be coming down anytime soon. The first and probably most important reason is that people are living longer, but at the same time are less healthy. This will be very difficult to change as it requires changing American habits, people will have to start eating healthy and exercising. The next is technology can now cure diseases that we couldn’t before but are very expensive. Fixing that would mean allowing insurers to reject treatments that could save lives based on cost, not very likely. There are other reasons it will be very difficult to get costs under control in a timely manner. I suspect the medicare problem is actually bigger than reported, as I haven’t seen the government miscalculate a number that when corrected made the problem smaller than we all thought.
Just because somebody thinks they’ll retire at 80 doesn’t mean they won’t collect social security when the time comes. And the most problematic people are the ones closest to collecting it. As a genXer I don’t believe I’ll ever receive social security, so my plans don’t include it, but the person who is retiring tomorrow’s plans most likely are based very much around SS. Social security is more easily solvable than Medicare, but it’s a much smaller problem by far.
I agree that debt affects society and the economy in very complex ways. We’re only really starting to figure it out. Look into Steve Keen’s work on debt and money if you’re interested in a very promising new approach to modeling the economy using (gasp!) dynamic models rather than the neoclassicals’ ridiculous plots of intersecting lines with no numbers on the axes. Neoclassical economics is completely wrong, and you’ll understand how debt works much more clearly if you spend some time with Keen. The math is a bit hairy (which is why economists don’t do it: they don’t learn differential equations in school!) but the concepts are pretty simple if you spend enough time starting at it.
“But weakening in real terms versus what?”
A basket of real goods that people want and need. Basically what I’m saying is that inflation can exist (dollar weakening in real terms) while strengthening against other currencies (AKA higher inflation everywhere else).
I can’t help with finding good investing opportunities as I’m in the same boat. Although I think China’s problems are a bit of a ways off from turning into anything that will affect markets. I think we will find them able to postpone things for quite a while, so I guess it depends on your time horizon. I don’t follow bonds as I don’t understand them all that well. I don’t really understand how bonds can be cheap when yields are so low but that could easily just be my ignorance.
I believe WE are all to blame. I agree that journalism is basically non-existent anywhere but in the blogosphere and internet, and hopefully people will start paying more attention to sites like this than the talking heads on TV. But ultimately we allowed journalism to die, and this is a democracy; we get the leadership we deserve. As long as the two party system (which is really just one party as far as I’m concerned) exists we will not have real capitalism, or a government that works in our interest. I for one will not vote Democrat or Republican again.
All good points. I don’t know how it’s all going to turn out, but if there’s one thing you can count on is that it’ll probably be in ways no-one expects. I’ve always been bullish on America; I believe it’ll be the first country to leave the crisis behind, and China may be the last.
Speaking of outstanding journalism, check out this staggering ineptitude, negligence, misrepresentation, and historical revisionism I encountered at NASDAQ.com today:
http://www.scribd.com/doc/93074034/Epic-fail-at-nasdaq-com
http://www.scribd.com/doc/93075813/Epic-fail-at-nasdaq-com-2
“I believe the point of the study is that high debt levels generally lead to reduced growth”
I don’t think they proved anything other than correlation. When a country has a high debt-load there are many other things going on that could be the real cause of both the high debt and the subsequent crisis/stagnation. Also, if govts lie about their debt levels now you can bet they lied in the centuries past too.
Post hoc ergo propter hoc…
I agree it’s not proof, but correlation is still useful.
First even if debt levels are not the cause, they are a very strong indicator, so if one sees debt growing near the critical level it tells one that something should be changed.
Second, once you reach the level, it tells you what to expect: about 2 decades of sub-par growth.
Very good points. Many people don’t realize that credit was invented first, and commodity money came later. Somehow the goldbugs have persuaded people that gold and silver are the “original” forms of money, which is not true. Credit is and always has been the lifeblood of every economy.
(That said, you *can* earn an income from gold if you’re a central bank or a bullion bank and can lease out your stock.)
I don’t think gold or silver are the original money, just that they are the most successful. Silver has fallen in stature as money since it now has many industrial uses.
Credit is not money, but it certainly plays a role in money’s history. I’m not sure that it’s possible to know that credit came first, I’d certainly be interested in learning more if there are historical records.
Credit is absolutely money. Loans (credit) create deposits (money). M2 leads M0, not the other way around.
I don’t see how credit is money. I definitely see a close relationship between the two, but don’t see them as one and the same, do you have any references you could point me at?
Credit is really just a promise to deliver something of equal or greater value in an exchange (this promise can be something physical and it can even be something intangible – you might have heard some people use the term “my word is my bond”). If you have good credit you will deliver on this promise. If you have a gold bar and someone is willing to exchange this immediately for a month’s rent then the “moneyness” of this gold is high. But the gold still represents a certain “faith” or credere (the latin) or credit in that the two parties have faith in one another that one party is actually getting a gold bar and the other will actually get a place to live for one month. Credit or faith is involved in every exchange we make in an economy. In this regard, credit is always “money” even if it’s just a promise. Ultimately, fiat is backed by laws that protect paper money. So fiat money is seen as having very high “moneyness” because it is backed by a powerful entity that can literally force people to become good on promises.
Credit exists without money, therefore credit and money cannot be the same thing.
I can owe somebody 3 chickens or twelve hours of labor. Money can be used to extinguish a credit/debt relationship, just as delivering the 3 chickens or performing the 12 hours of labor can, but that does not make money and credit the same thing.
You’re missing my point. Money is not just a physical thing like a piece of paper or a gold bar. Money IS credit. And credit IS the promise. Money exists in primitive species entirely in the form of unspoken bonds – promises. All human beings did was start using physical things to represent “money”. Modern fiat money is just a tool to deliver on promises. So yes, money (as in the physical kind) can exist without credit. It exists every day. “Will you hand me the salt?” “Will you take the dog out this morning?” “Can you promise to keep a secret?” Etc. We don’t need the physical thing to have credit. But we use it to make our lives easier.
Good Points! The unit of account function of money predates either the medium of exchange or means of payment function. The earliest form of economic exchange were forward contracts and units of measurement only came later (first wheat, then barley, and eventually stamped metals). Its important to distinguish “money” and “assets denominated in the money of account”.
I know money is not a physical thing, it’s a social construct, just as credit is a social construct. They fill a need in human society. In some regards it’s a matter of definition, and if you define money to be credit then it is, but I don’t believe that to be the standard or common definition of money.
Credit is the trust, or understanding, between two people that somebody will fulfill their obligation, and the faith that they will do so. Money is a means of extinguising the need for that trust, but it is not the only means, and it is not the same as trust. The credit can be extinguished by the creditor merely deciding they no longer want it to be fulfilled, no money need be exchanged.
Thus credit can exist without the concept of money, but money cannot without the concept of credit (as there is no need for money) and therefore money and credit are not the same.
Yes very few people understand money in the slightest, but that doesn’t mean the standard definition is invalid. I agree money does not have to be a physical object, anything can be money. I think it’s very difficult for even most physical objects to be a good money, much less intangibles. The reason gold has been the most successful money in history is because of it’s fairly unique nature.
It’s indestructible, it’s highly divisible, it’s easy to distinguish from other objects, it can’t be artificially created, it’s easy to work, and it’s rare. Gold has such a long history as money because it is most suited to what humans subconsciously desire in money.
For example I do not consider the U.S. dollar to be money, or at least not a good one, as it does not hold it’s value for more than a few years, while under the standard definition it must be a store of value. The U.S. dollar is a fine currency, but not a very good money.
That seems contradictory, how can one thing be required to create itself? I understand the idea that credit comes first as there’s no need for money if nobody owes anybody anything, but I don’t think they are the same.
I recommend “Debt: The First 5,000 Years” by anthropologist David Graeber. He looks at actual historical evidence and comes up with some surprising conclusions.
http://en.wikipedia.org/wiki/Debt:_the_first_5,000_years
Thanks for that link, I’ll definitely take a look at that book!
Microsoft paid no dividends until 2003, does that mean it was not an investment? There are many investment possibilities that pay nothing out for long periods. Plus, there are places today where you can put your gold in a bank, and they will pay you interest on it as they will then lend it out, so it can provide income.
A commodity derives it’s value from industrial utility. Gold, while technically a commodity, is unique in that it’s value has nothing to do with it’s industrial utility, and never has.
Buying at 1200 and selling at 1800 is speculation, and congratulations on your success! I’m not good at speculating. I try it with a small portion of in order to try to improve my skills, but like most people I’m more likely to lose money than gain when speculating.
But generally I agree that gold is not a good investment vehicle. But it’s a great savings vehicle, which has been my point all along with regards to gold. It’s a long term hold and provides insurance against declining currency. Theres definitely short to medium term volitility, but there’s nothing that comes remotely close to a simple and relatively safe asset that anybody can acquire and will hold it’s value through generations.
According to the World Gold Council, about 12% of gold demand is industrial (). I admit that’s not a lot, but look at the “investment” category: 32%! Who do you think is doing all that buying? If you’ve been reading Sprott you’ll know that Chinese investment demand has been skyrocketing over the last decade. I don’t want to own anything the Chinese have been buying for speculative purposes.
http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/
Thanks for that link, I’ll definitely take a look at that book!
Gold is a commodity. It is not money. Money is money.
Get a clue.
Patrick and Ross:
Thanks for a healthy, thorough and civil debate. Stuff like this keeps this site continually rewarding to visit.
I’m giving the slightest nod to Ross (probably bias confirmation!).
Ross, you said
“according to a recent poll, the average American expects to be able to retire age 80″
Wha? Source?
I think I’m the average American, and I expect/hope to retire at 70. Not sure I’ll be putting on my own diapers by 80…
I had to sell out of a gold mining position today…I don’t like that I lost money, but I’m more mad at myself for not being more disciplined practicing my stop loss policy at 25%, and let it slip to 45%. Education IS expensive!
Thanks for the nod! As for the source, I’m afraid my memory failed me this time. It’s actually 25% of Americans, not “the average”:
http://money.cnn.com/2011/11/16/retirement/age/index.htm
Sorry about that. Still, I expect that number to creep up as Boomers realize they’re not as rich as they think. Especially if China slows as much as I think it will.
I was lucky to dump almost all my gold at $1630 after many 18-hour days of research. That was a tough decision but I’m glad I did. I’ll be picking up more when I think it’s cheap, of course
No worries about the error, I think the point is still valid, and I definitely agree that number is going to go up.
Congrats on getting out before the drop, I hope it was a successful trade for you. I’m not too good at the short term moves I don’t spend enough time studying… I like to follow the technical charts, but my understanding of them is pretty weak, so I’m rarely able to take action in time. Example: I held gold through the run up to 1900, even though I thought it was going to turn, but it turned before I was able to convince myself and I missed the opportunity. So I generally try to focus on the medium and long term.
I don’t think gold is cheap right now, but I also don’t think it’s too expensive either. I think it’s around the right price, although it could move lower. I think it’s obvious I’m bullish on gold, so my long term view is that it will be going up for years to come, but there will definitely be continued volatility.
Short-term is hard and I try not to do it. I just had too big a position for the risk I saw around me — I take a macro-focused asset-allocation approach, and it was time to shift to bonds. I’m basically betting on inflation in Canada and deflation in the US, so I hope I’m right
I sailed right through the $1,900 as well, but managed to ride silver from $20 to $35. That was pure luck! I don’t mind admitting it. But I’ve done a lot of research since then and all the signs point to a very, very hard landing in China. I believe central banks were today (and may still be) propping up the CAD, AUD and EUR by selling JPY and USD. Maybe I’m just reading too much into it, but seeing huge AUD strength against all major currencies when China just announced zero imports growth is a little too implausible for my taste.
Thanks for the link.
I hope BOTH of you guys stick around and become regulars!
I found these charts at the end of a link to a Jeff Gundlach article. It shows the only group making gains in the labor participation rate are 55+, the 16-19 yo bracket is cliffdiving.
http://www.thereformedbroker.com/2012/04/29/notes-from-the-doubleline-lunch-with-jeffrey-gundlach-spring-2012/
The whole thing is a good read, but go to the end and download the charts that
went with the presentation.
I’m already kind of a regular, I just don’t comment that often. I’ve been a fan of Cullen’s work for a couple of years. He has been extremely influential wrt my current view of the monetary system. So I hope he’s right!
Luckily, I’m pretty sure he is. My hope is that one day we (meaning the blogosphere, I guess) can bring Steve Keen’s version of Horizontalism and behavioral economics together with “MMS”* to produce Diagonalism (but hopefully with a much better name). I think it would produce very powerful models and very good social outcomes.
*Halfway between MMR and MMT.
Hi Roger, glad you enjoyed the discussion, I certainly have! I wish I had received the nod, but I understand, Ross has done an excellent job of defending his position. I have not switched sides, but I definitely understand the position.
I don’t like the miners in general, as they don’t seem to benefit much when the price of gold goes up, but are hurt when it drops and I don’t understand why, so I stay away.
This was one of the more informative and gentlemanly debates on this topic I’ve ever seen. Thanks!
Hey, thanks, Cullen! That means a lot coming from you.
Yes, I greatly appreciate the compliment as well! It’s been the most enjoyable and thought provoking conversation I’ve had online in quite a while.
regarding Berkshire vs Gold you can choose the timeframe you like, since inception of berkshire an investment compared to gold’s return, it look ridiculous for Gold!!
I would always go for stocks and I would be wrong for the last 10yrs. Looking forward from now on I would choose the same. Look at the numberof comments above! the perception of value of the gold is extremely different from each investor, that shows that owning gold is much riskier than buffet’s investments.