“Civilised people don’t buy gold” (May 13th 2012)

From May 13th 2012


I have been one of the thousands of people who have had enormous respect for the investment  achievements of Warren Buffett and Charlie Munger’s Berkshire Hathaway Group. Charlie Munger is now 88 and has earned the right to be listened to, because of both his age and experience, and lifetime of proven success. So it came as a bit of a shock to hear him express the view that “civilised people don’t buy gold”. In pronouncing that blunt view of what may well be the only investment class that survives our current transit from the old world to the new, he has not only categorised most of the developing world as ‘uncivilised’, but has managed to alienate entire groups of Western investors who now think that Charlie is just ‘talking his book’.

Now every investor has a right to promote their interests but opinions need to be qualified and transparent. It is clearly in Berkshire’s interests to encourage equity investing given the sprawling nature of its portfolio, but perhaps the opinion ought to be presented in the context of some evidence. Gold’s performance over the last ten or eleven years has exceeded the returns of Berkshire, as identified by Jim Slater in a recent ‘Investors Chronicle’ article:


Charlie and Warren missed it, as did Bill Gates and other luminaries of the investing and business world.

But that’s the past, what of the future?

Well here we have the problem of dealing with the question of what will preserve wealth in these uncertain times. One thing is fairly clear is that it probably will not be sovereign bonds. As the retail investor has exited the equity markets since 2008, the sovereign bond market has ballooned into bubble territory. Just as the first signs of exhaustion are appearing in the bond market, after 30 years of growth, the retail investor has switched over a trillion U.S. dollars from equities into U.S. treasuries. Europe, the U.S. and Japan are showing signs of debt stress and the U.S. is almost certain to face some form of deficit driven crisis at least once a year for the foreseeable future. At some point in the fairly soon Western central banks will lose their grip on debt management, and interest rates will start to rise. The personal investment effect on anyone holding bonds in a bubble zone could be catastrophic.

So should you weight your portfolio into equities?

There is always an argument to ‘stock-pick’. The problem of course is which stocks to pick. Which sector should you follow? Which stocks within the sector should to select? Therein lies the rub. Can we rely on continuing Keynesian money printing to kick-start our broken economies? Will the U.S. Europe and U.K. experience something similar to Japan’s 23 year long ‘lost decade’. Answering those questions will provide something of a steer on whether investments in equities are a good idea in principle.

At its most basic level, whatever the economic condition, people have to eat, use transport, and consume utility supplies. There must always be a market for the ‘basics’ and companies providing goods and services in these sectors must be worth considering.

But can you actually make some money out of the financial crisis?

There are no guarantees of a financial return but precious metals must be a contrary bet, as they have been for the last few thousand years. In times of crisis when debt has driven countries and cultures to the brink, ordinary people have resorted to gold. After all as JP Morgan suggests: “gold is money, everything else is credit”. Charlie and Warren may contend that its a dead asset, earning no interest or dividends, but that’s not what it is really about. In times of uncertainty it’s that insurance policy from the ravages of the crony capitalists and insanity of politicians trying to cling on to the vestiges of a system that can be no longer. Gold and silver are hard assets. They don’t ‘do’ anything but then again they can’t be depreciated to zero as is the eternal fate of all fiat currencies. They are a port in a stormy sea of excessive digital paper ‘money’, and for the most part they will still be here long after the mistakes of our current political class have been consigned to entertaining case studies of how not to run a financial system.

Perhaps it is better to be considered ‘uncivilised’ than to continue worshipping at the alter of a failing paper based illusion.

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