||Vedant "VK" Mimani
By Vedant "VK" Mimani
Yet again, Warren Buffett has explained why he favors
equities over bonds and gold, and yet again I will point out
where the old man goes wrong. I take issue not because I like
gold at $1775 per oz (current market price), because I don't
and you can read why in my article "Gold at $1800 is a fool's bet," but because I
think market gurus ought to be called out when preaching false
Mr. Buffett's problem with what he calls
currency-based investments (money-market funds, bonds,
mortgages, bank deposits) is the long term erosion in the
purchasing power of currency (a.k.a. "inflation" tax). Yes, a
million dollars just ain't what it used to be. In spite of its
demerits, Buffett readily admits the necessity to hold such
investments because "at Berkshire the need for liquidity
occupies center stage and will never be slighted, however
inadequate rates may be."
After trashing bonds, but then accepting their role
on Berkshire's balance sheet, Buffett moves on to investment
category two, which he all but labels "greater fool"
investments; those assets that remain forever "unproductive"
and purchased in hope a buyer will pay higher in the future. It
is here where Buffett, in his mind, categorizes gold; as he
says, "if you own one ounce of gold for an eternity, you will
still own one ounce at its end." Mr. Buffett, this is the
precise value and function of gold.
Other assets have no steady state; they bloom with
care and deteriorate with neglect. Farmland must be tilled,
hogs and cattle fed, fine art maintained and corporations
managed. Without due care and maintenance (which requires
money, skill, knowledge, and effort), value is destroyed. Not
so with gold; an ounce is an ounce is an ounce, for eternity.
Gold's utility on the balance sheet is to do nothing but hold
value and hedge regress.
I know Buffett and his followers are fond of
thought exercises, so let me give one to highlight the role of
gold. Let's say you will be using your one-use time machine to
travel 500 years into the future. You want to give yourself a
head start for when you arrive to 2512 and so you bring as much
of your accumulated capital as you can. In what form should you
bring your savings?
The title deed to some farmland? Are you willing to
bet that the ruling government in 2512, including its rules and
regulations (such as water rights), fertility of land, and
relative efficiency will be the same or better? Somewhere
somehow humans will be growing crops, but that doesn't mean it
must be on your particular plot of land. Diamonds? Sorry
ladies, they may be your best friend now, but until 1938 and De
Beers' master marketing campaign, this was not the case (read
this story about the fascinating invention of
diamonds as rare and valuable). Do you really want to speculate
on the fashions, tastes and social mores of the 26th century? How about art? Yes, high art will
likely remain priceless in 2512 as it represents the epitome of
high culture, but speculating on pieces that are affordable now
is incredibly risky and finding affordable masterpieces is not
something the majority of retail investors will ever
accomplish. Unless you're already a multimillionaire or
billionaire, the Mona Lisa ain't coming with you. Buffett will
claim stocks are best for the long term, but there is close to
zero chance that shares of Egyptian Papyrus Ltd., Horse and
Buggy Corp. or Apple, Inc. will have any value in 2512. Want to
buy a piece of the Dutch East India Company? It was a good bet
in 1602, but went bankrupt a mere 196 years later.
There is one and only one asset we can be certain
will keep its value in 2512 and that asset is gold. Human
civilizations from the earliest four, Mesopotamian, Egyptian,
Indian and Chinese (c. 3100 BC to c. 1500 BC) all held gold in
esteem and we humans have done so continuously to the present day. Odds favor gold
remaining valuable from tomorrow until 2512. Of course, nothing
is preventing you from bringing a diversified portfolio of
assets. The point is you would be a fool to leave gold out of
Gold is humankind's way of transmitting its
accumulated surplus non-intellectual capital to future
generations. We transfer our knowhow and skills (intellectual
capital), our productive capacity and infrastructure (physical
stock) and our surplus/savings. Surplus bears fruit if invested
wisely, but is destroyed if misallocated. It is gold that
insures availability of surplus capital for future use.
All major asset classes play an important role in
economics and finance and to dismiss an entire category as
useless because it's said to be "unproductive" is not cold,
hard logic, but rather reflective of a flawed model of the way
the world works. But Mr. Buffet is no ignoramus and understands
the world quite well.
Mr. Buffet knows he was a beneficiary of a great
credit boom and the associated inflation in asset prices and
without continued credit growth, asset prices will fall victim
to deflation. Owning productive capacity well in excess of
needs, controlling the free cash flow (for the majority owned
enterprises), being a master capital allocator and having
access to credit markets all ensure Buffet's financial well
being. Such is not the case for the average investor whose
return on assets may not cover expenses, who has zero influence
over what management chooses to do with the excess cash, who is
not fluent in capital stewardship and is shut off from credit.
For most investors, gold is not useless, but rather guarantees
some financial wherewithal come what may.
By attacking bonds and gold, and emphasizing the
merits of stocks, Buffet attempts to make the case for why
everyone should buy shares of such corporations as Berkshire
Hathaway. Unsaid is that, in the absence of meaningful
dividends or a favorable dividend tax policy, the earnings of
the corporation do not really flow to the investor.
Shareholders too must hope a buyer will pay a higher price in
the future for the share of equity they hold today. In
addition, stock investors must also hope the suits don't
mismanage the company, squander cash in the treasury, issue too
many stock options, or commit outright fraud. In our world of
Enron, Worldcom, Tyco, Fannie Mae, AIG, Lehman Brothers,
General Motors, MF Global, Greek Sovereign Debt and future
unknowns, it is not particularly hard to fathom why investors
seek in gold the type of protection that it alone can
Vedant "VK" Mimani is the lead portfolio
manager for the
Atyant Capital Global Opportunities Fund, a macro hedge
fund in Boca Raton, Fla., focused on precious metals.