Is it just me, or have you noticed that discussions about gold have been very contentious in the past few years.
Regardless of your investment philosophy on precious metals, what really concerns me is how some investors seems to become emotionally attached to gold, where criticism treads on the border of blasphemy. Thoughts?
Why do you think gold bugs get so irate? Because they really do come out. If you go on CNBC and say that bonds are kind of a poor investment, people don’t get mad at you. You don’t hear from the Treasury. You can knock almost any investment and nothing happens. But when you talk about gold it’s different. Of course that says something about their motivation for ownership. They want people to agree with them. They want everybody to get so scared they run to a cave with gold. Caves might be a better investment than gold. At least they’re not producing more caves all the time. So they want people to be as afraid as they are. Incidentally, they’re right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money. But where they run to is the mistake.-Warren Buffett
I think gold investors may get more irritated / defensive because the media calls anyone who invests in gold a gold bug or a conspiracy theorist. This is not surprising given that the mass media is controlled by the same government and Federal Reserve interests that want you to put your trust in the USD and the stock market...
http://www.youtube.com/embed/-HaqwFJj4ZY
I've been saying this for months, Warren Buffet hits the nail on the head.
Buffet is a bafoon when it comes to gold. He obviously didn't learn much from his father.
Fuck Gold
It's all about Silver
"The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us."
David Einhorn's Q1 2012 Fund Letter- This bit was in response to an interview in which Mr. Buffett dismissed gold.
I think there's a misconception here. Warren Buffett is not for cash. Any novice investor, let alone Buffett, will know that cash depreciates with inflation. There's no debate that cash is any good. He just believes productive assets are superior in investment merit than gold which is up for debate. This post wasn't even supposed to be about whether gold is a good investment or not. I'm merely stating the defensive nature that gold investors are becoming, relative to say, bond investors. Trash bonds, bills, stocks, commodities etc. all you want, and people don't get nearly as worked up for gold. I thought that was interesting.
Simple answer: Like you said, gold investment has been contentious for decades. People involved in this market are naturally used to heated debate and contention. Imagine the media attacking your investment strategy every day - especially an investment strategy that has undeniably proven its worth as of late. Wouldn't you get a little pissed? A little defensive? A little hot-headed?
50% of the TSX is made up of mining stocks (most of which are gold), the largest and most profitable coverage group in nearly every investment bank is mining (most of which is gold), the largest company in Canada by market cap is Barrick Gold, the richest Canadian is the CEO of Barrick Gold, I could go on, but to act like gold investors have been marginalized, at least in Canada, is (pardon my language) fucking retarded.
That's my point. I believe Warren Buffet is making a mistake of category as are most people here on this thread. Gold is not an investment in the same way a bank account is not an investment. To compare the two is folly. An investment in a firm or asset can go awry- it can go bankrupt. But that is not something that can happen to gold. Buying gold is more akin to storing of value over time. An investment is NOT a store of value- your aim is to make a return at the risk of losing it all. A store of value (savings, etc.) is an instrument in which you deposit value now for consumption at a future date. I think Mr. Buffett understands this at a fundamental level, but is either willfully ignorant or making an elementary mistake.
1) How do you quantify the value you are storing, what is the intrinsic value of a kg of gold? How do you even go about calculating that intrinsic value or even a rough estimate?
2) The aim in investing is not always to 'make a return at the risk of losing it all' and the dichotomy you are drawing between investing and storing value is dubious. If you put money in a bank account, clearly you can lose it all depending on the bank. If you invest in the secured debt of a company with a TBV massively higher than liabilities then you may think there is effectively zero chance of you losing it all. If I had to put my money in a Greek bank account or Microsoft bonds I know which I would choose. They are two ends of a spectrum, just low risk investments and high risk investments, there is no fundamental difference between the two.
To your point, I think that quantifying the value of an investment in gold isn't really the reason you buy gold. I would think you buy physical gold simply because it has always had value throughout history. It is rare and shiny and humans have always put some sort of value on it or at least are willing to trade things for it (thus a currency). You are paying for the peace of mind that comes with store of wealth that has been such for thousands of years. It will go up and down but it is always there.
Thus, if everything goes to hell in a handbasket you will have some sort of valuable with which you can theoretically trade for things. Personally, I prefer the ammo and guns route but that goes naturally with having precious metals as well. If you are buying paper gold you are simply speculating as with anything else.
It is difficult to assign a value to gold but that's because we so rarely try to assign value to money. If I asked you to value the dollar in your pocket, it would be a perplexing question. There are things you would value more than $1 or less- or simply want to some other currency more but how much is a $1 is always a relative question. Same for gold. The question is: do I want gold or dollars as a store of value?
If you want to get technical, storing money anywhere- from your person to under your mattress, has some degree of risk of loss. However, that is not the important aspect of this argument. It is whether or not, gold can manifest a core quality of money- store of value. Storing money and investing are fundamentally two activities. Just because the risk of capital loss is low, presumably, in your example, doesn't make it not an investment. Any number of events can destroy the TBV of the company you invest in (see 2008). Also, a bond is not a dollar- try buying a bagel with a U.S. Treasury bond. They are two different categories. Furthermore, you would expect a return for lending your dollar to the company. The primary adversary for money storage is theft or confiscation.
As to your second point, we can get bogged down in technical details, if you wish, between the nature of investment and storing value. One of the better essential definitions of investment is an asset that produces a cash flow vs. a speculation which requires a buyer later to realize a profit (loss). So, yes, a bank account in most cases qualifies as an investment (deposits are technically loans in most cases. However, that is not what I meant in my example, so I apologize for the confusion. Most would argue that gold is a speculation because you need to sell it in order to realize a profit. But that was not the case for most of modern human history- and wasn't the case in the U.S. until August 1971 (for Americans, it was illegal to own physical monetary gold from 1934 to 1974). Dollars were merely bearer bonds for deposits of gold. Comparing the two was a illogical, as it would be a circular reference. In the age of fiat, dollars and gold have become separate and thus what we use is not money chosen by the market, but a government-mandated money proxy. Thus, the question of gold vs. dollars is again relevant. Given the 98% depreciation of the U.S. dollar against gold since 1913, I would say the case is fairly clear how damaging to one's wealth a fiat standard can be.
Exactly. And there's nothing wrong with your savings beating out other paper currencies over the last decade, either. For the last decade it seems like gold has been a win-win strategy (for stability as well as growth.)
In fact, for the last 100 years it seems like gold has been doing both with flying colors. People are only now figuring out that transferring their 401k to gold might be a good decision, even if only a small percent of their savings.
“To your point, I think that quantifying the value of an investment in gold isn't really the reason you buy gold. I would think you buy physical gold simply because it has always had value throughout history. It is rare and shiny and humans have always put some sort of value on it or at least are willing to trade things for it (thus a currency).”
Well if this is indeed the reason then Buffet, or indeed any value investor, should never touch it. Buying something that you don’t know the value of, generally speaking isn’t a great idea. It leaves you completely vulnerable to market sentiment, say gold drops 30% is that a temporary period of market insanity that you should ignore, or the beginning of a legitimate correction that means you should get out? If you don’t even have an idea of its intrinsic value, how can you even begin to make that call?
In terms of it ‘always having a value’ do you mean literally? If so of course it has a value, it exists, it has a value. That ‘something’ has ‘a value’ is a truism, not an investment rationale. If you are meaning more that gold has always had ‘significant value’ then okay, but the fact that something has had value in the past is only the beginning of an investment decision. As far as I am aware, people have ‘always’ (in the same sense as they have ‘always’ valued gold) believed in God, it doesn’t mean that I do – and I won’t until someone gives me a convincing and rational argument that isn’t based on ‘well we have always done it this way’.
That being said, I was playing devil’s advocate to an extent in my last post. My honest belief is that gold does have an intrinsic value that can be roughly calculated, but that the current price is so far off it will never appeal to a value investor. For example, if you took all the industry/jewellery/electronic demand for gold you could probably roughly calculate the demand and the supply side is also reasonably calculable. This would give you a rough estimate as to the intrinsic value of gold with most of the distortions from speculators removed. If one day everyone starts to think that gold is overvalued and dumps it as an asset class resulting in depressed prices and temporary over capacity in the mining sector, prices may fall below this ‘intrinsic value’ however it doesn’t look likely at the moment.
gold has a negative expected return
Gold and other precious metals are givens for an indiviuals PA.
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