The Bullion Report For February 15, 2012: Gold Versus Stocks

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Since: Feb 12

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#1 Feb 15, 2012
Last week this newsletter addressed the topic of re-weighting a portfolio in difficult times. It is a topic that must be on many minds as Warren Buffet decided this past week to author an article in “Fortune” magazine entitled “Why stocks beat gold and bonds.”(1) In it, the Oracle of Omaha explains why he believes equities “almost” always beat the alternatives over time. While many may agree that now is not an opportune time to assertively direct investment funds into fixed income assets like bonds, I do not concur with his incentive regarding gold. Will Warren Buffet’s article deter investors from increasing the weight in a portfolio towards precious metals? Are precious metals going to be beaten by stocks?

First consider that this piece was written by Buffet as a "preview" for his long-established annual letter to Berkshire shareholders. In it he concedes his aversion towards currency based investments, as he accepts a continued devaluation of the dollar. Buffet confirms this by saying,“I do not like currency-based investments.” Gold buyers are likely to agree. It is repeatedly suggested that gold investments are an indication of the lack of confidence in fiat currencies. This is based on the view that current aggressive fiscal monetary policies have sped up the process of currency debasement through the practice of printing more fiat money.

What is fascinating is that this latest article’s stance is eerily similar to comments attributed to him previously. And Contrary to Buffet’s view, following the publication of those negative statements gold prices have advanced. While Buffet does state that what “motivates most gold purchasers is their belief that the ranks of the fearful will grow,” he also follows with,“During the past decade that belief has proved correct.” A decade seems fairly long-term, yes? While he also mentions both housing and internet stocks as having been involved in bubbles, he makes no similar statement regarding gold.

Buffet is, and with good reason should be, admired for his investment prowess. To his credit, he has built a superior reputation for being an astute long-term investor. Therein lies the key: Buffet is speaking about investments held over the long-term. Exactly how has that changed in today’s marketplace? One need only look at the volatility investors now face to answer that question.

Today’s markets are moving at a much more rapid pace than ever before., While it is certainly prudent to structure your investment portfolio for advancement and appreciation over the long haul, with today’s instability, portfolio adjustment is no longer a once in a year proposition. Investors would be wise to monitor markets more closely and frequently, and re-weigh their portfolios appropriately. Buffet attempts to build his case by defining investing as “forgoing consumption now in order to have the ability to consume more at a later date.” How much later is never made specific. The one example he relies upon to make his point about gold is to compare two investment piles. Pile A- which contains all the gold in the world and B- all U.S. cropland plus 16 Exxon Mobils. He then poses the question:“Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” His decision to prefer pile B is not a realistic example to say the least, even for someone as well-heeled as Buffet.

So what exactly is long-term, and does he specifically denounce precious metals as an investment? Warren Buffet has previously shown an active interest in precious metals as a viable investment, though he does not mention that critical feature in this particular article. Previously, Buffet has stressed that “assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.” That phrase appears to echo the concept of physical ownership of precious metals.

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