Tuesday, March 22, 2011

Gold buyers are jerks !

Yes, Warren Buffet's second in command thinks so, according to this article:
http://blogs.wsj.com/marketbeat/2011/01/12/warren-buffett-bud-charlie-munger-to-goldbugs-youre-a-jerk/


Warren has of course voiced his distaste for gold previously.
But if you simply decide to adopt gold as your currency, you would have to 
evaluate any investment opportunity offered to you in terms of: "Does this offer 
me a positive return ?" Does the offered investment even promise to give you 
your money back to begin with ?

The long term money creation of the Fed amounts to a compound 7.5% per year for 
the last 40 years or so. The current rate appears to even vastly exceed that 
average. 
So, if you buy a 10 year obligation that promises you a return of 3.5%, do you 
even have any kind of chance to ever get your money back in real terms ?
What if you buy stocks that sport an earnings yield of 5% ?
The definition of a bubble is that people buy assets that will never allow them 
to make a profit, except for finding a greater fool !
Now, is there a bubble in gold ? Or is there a bubble in the Dollar ? (and the 
bond market and the stock market ?)

Interesting to note that Warren is just talking his book: When he bought for 
instance into Goldman Sachs 2 years ago, he was given preferred shares with a 
yield of 10% plus warrants (options) to purchase 5 million shares at about the 
then market price.

He then promoted the shares that paid nothing to everyone else. As he himself 
admitted, the 700 billion TARP program was crucial for the survival of Goldman.
He is a very clever investor and knows which side his bread is buttered on !

In summary: I totally buy his argument that it's better to buy productive assets 
than hold cash.
But, if the investments offered do not even promise me to pay my money back from 
the outset, I'd rather hold cash.

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