Thursday, April 18, 2013

Warren Buffett as a Crony Gold Hater

Jeff Reeves at Market Watch details the sad comments about gold that Warren Buffett has made over the years:

 Warren Buffett, the iconic investor behind Berkshire Hathaway [...] delivered [comments] at Harvard in 1998, [...] something like this:
"(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
More recently, in 2009, he echoed these thoughts in a CNBC interview. He was asked, "Where do you think gold will be in five years and should that be a part of value investing?
I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money, and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.

[I]n October 2010, [...] he told Ben Stein:
You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?
What's the problem with Buffett's thinking? In a highly industrialized society, a very liquid medium of exchange   is necessary. Such a complex society could never survive on barter. Buffett made his billions because there is a medium of exchange. Imagine no medium of exchange. How would Buffett be able to accumulate his positions in Coca-Cola and Exxon Mobil? Without a medium of exchange, he would have to  find owners in Coca-Cola and Exxon-Mobil, who would want some product or service he had. How crazy would that get? Before he was a famous investor, the best service he could probably offer would be as a stand-up comedian with his bad jokes or perhaps he could perform with his ukulele for shares in Coke and Exxon. Without a medium of exchange, that is, cold hard cash, he wouldn't be able to accumulate much stock in anything (assuming there would even be a stock market and corporations under such conditions).

So it is pretty clear that a medium of exchange is necessary to keep an economy going. Now, for the most part, the dollar is currently the medium of exchange in the U.S. (with gold as a back of medium held by the wise) But, what Buffett said about gold, can also be said about dollars:
I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you.
That's what a medium of exchange does. On some level Buffett must understand there is value in these things that "look at you." After all, Buffett owns a big chunk of Wells Fargo stock. The banks spends a lot of time stacking and moving around the medium of exchange.

So when he attacks gold on the grounds it is "only" a medium of exchange, don't be too impressed. Smart guy that he is, he still, apparently, doesn't get the need for a medium of exchange for any society beyond that operates at more than a mere subsistence level.  Buffett to on a theoretical level diss the concept of a medium of exchange but  has special hatred for gold:
(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.
Buffett again misses the utility value of a medium of exchange. He is simply wrong when he says gold has no utility. But, as important as the above comment is, as a display of Buffetts' lack of understanding of utility  of a medium of exchange, the comment also misses why gold is a much better medium of exchange than paper dollars. Buffett sneers at the fact that you have to dig gold out of the ground, but this is an important limit as to how much new supply of gold that can enter into an economy. The government can't create gold at will to bail out its crony friends. On the other hand, paper dollars can be printed up at will.

Thus, with gold as the primary medium of exchange you would have never been able to have Buffett buy into Goldman Sachs, as a crony, just days before the Treasury announced that it would pump billions into GS. Billions that were simply printed up by the Fed.

So maybe Buffett really does get it and just knows that without paper money, his crony operations would never take place.

Bottom line: Never trust the views of a man on gold, when he sneers at gold and is at the same time cutting crony deals with paper money.

1 comment:

  1. he doesnt want a medium of exchange, he wants an instrument or a tool, something of use to him and screw anybody else.

    ReplyDelete