In his latest annual letter Warren Buffett compares the recent surge in the gold price to the internet mania of the millennium and the Dutch tulip bubble of the seventeenth century.
Needless to say, the goldbugs are not amused by this outright dissing of their financial acumen. They believe they are wisely insuring themselves against currency debasement, banking collapses and other potential catastrophes.
Interestingly , the 81 year old Buffett expresses his case against gold in sexual terms.
Gold, he writes, is not “procreative.”
You could buy all the world’s gold and turn it into a gigantic cube, but “if you fondle the cube, it will not respond.”
Likewise he bases his optimism about the US housing industry on the certainty that “eventually hormones take over” and household formation increases.
It is apparent from Snowball, Alice Schroeder’s superb biography, that Buffett has a great love of women and a more complicated private life than his folksy, burger-chomping persona would suggest.
The eroticism of investment is a recurrent theme. Schroeder recounts his excitement at the discovery of cheap stocks in Korea –
“It’s like finding a new girl to me…”
And half of the Korean companies “have names that sound like a porno movie.”
Also the importance of results, rather than reputation – “Would you rather be the world’s best lover, but have everyone think you’re the world’s worst? Or would you rather be the world’s worst lover, but have everyone think you’re the best? That’s a very interesting question.”
Then in the midst of the credit crisis , when he’s buying bonds at super-cheap, distressed prices – “if you’d told me ten weeks ago I’d be doing this, I’d have said that’s about as likely as me becoming a male stripper.”
Describing investments that turn out to be mistakes, he quotes a country & western song – “I’ve never been to bed with an ugly woman, but I’ve sure woken up with a few.”
Hormones/sexuality/procreation/growth are key to Buffett’s optimistic investment philosophy. Again, from the recent annual letter – “In the future the US population will move more goods, consume more food and require more living space than it does now. People will forever exchange what they produce for what others produce. “
All you need to do is find the right “little beauties” to invest in.
The snowball is Buffett’s own metaphor for his career. The way his investment profits have compounded up over the years is like a snowball rolling down a hillside. Over six decades the ball kept on rolling, accumulating more and more snow, getting larger and larger, until it eventually made him the world’s richest man.
In contrast, “if you own one ounce of a gold for an eternity, you will still own one ounce at its end.” No compounding, no new wealth, no organic growth in business and society.
Obviously the buyers of gold are not optimists. They are preparing for the worst and hoping to benefit from it. The only way they can is by selling to someone else at a higher price – a.k.a. “the bigger fool theory.” Their bet – the opposite of Buffett’s – is that economic conditions will continue to deteriorate and the number of pessimists will grow and grow, giving them more people to sell to.
Gold’s sterility – it is never consumed and generates no income – is what makes it an eternal store of value. It also makes it impossible to value. The exact same argument (gold as protection against economic disaster) can be made at any price – $1,000 per ounce, $3,000, $10,000.
Common sense tells us it is better to buy low than high, but “the madness of crowds” causes higher prices to generate more and more confidence, creating a kind of psychological snowball – or rather, a bubble masquerading as a snowball.
All we can do is look at historical trends for guidance. What they say now is that the real price of gold – adjusted for US consumer price inflation – is at levels that have previously led to a long bear market that delivered losses of 80% to investors. And through at least half of this twenty year period, inflation was a significant problem.
When the next bear market starts, the world’s goldfingers will have to content themselves with stroking their ingots for a long time to come.
