Warren Buffett 75% Correct About Gold

Warren Buffett 75% Correct About Gold

I have great admiration for Warren Buffett, even though I am critical of him at a number of points.  When I read the piece in Fortune where he talks about asset allocation issues, I agree with him 75%.  Where should money be invested?  Stocks.  And as for me, 75% of my net worth is there.  Nonetheless, I see value in bonds, gold, and cash, even though I don’t own any gold, aside from my wedding ring.

Gold is valuable because of its scarcity, and that it is beloved by most cultures in the world.  Gold is beautiful.  Compare it with other metals, gold stands out because it has little economic usefulness.  But that is a feature, not a bug, because it makes gold immune to economic cycles.

Review the gold medal gold model.  The price of gold reacts to real interest rates.  When they are low, the price of gold flies because the cost of carrying gold is negative.  If I could say one thing to Buffett on the topic, I would say read this article, and you will learn why the price of gold is rational and correct in this environment.  Negative real interest rates means the government does not care about the value of its currency, and thus scarce things (think of truly scarce collectibles in the 70s) appreciate in value dramatically versus the depreciating dollar.

Gold is valuable, very valuable when governments and central banks are profligate.  But what of bonds?  Those are the opposite.  They are valuable when governments get more serious about their finances, or when people are scared about the future, and buy long bonds because they want certainty of cash flows in the future.

Also, be for real, Warren.  The dominant asset class inside BRK is bonds.  You hold a lot of them in your insurance companies.

Do I believe in stocks?  Yes, if they are my stocks — the value premium of buying beaten-down companies is dependable.  It doesn’t work every year, but it works most years.

My main point is this: stocks are great, but they are not a panacea.  Gold and things like it are needed for inflation.  Bonds are needed for deflation.  Cash offers flexibility.  These are all useful to investors at the right times.

And, Warren, you have done better than most.  Your stock portfolio has beaten others over the last 40 years.  Most stock portfolios have not beaten bond portfolios, though admittedly by a smidge.

So, is this the time to buy stocks?  I am more bullish than bearish, so yes, but edge in, and be ready to adjust.



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.