http://network.nationalpost.com/np/blogs/tradingdesk/archive/2009/11/17/no-gold-for-buffett.aspx
His theory seems to be that the best protection against inflation comes by investing in companies that have the ability to pass on price increases. Hey, this sounds familiar! 
I’d say that gold is a modest protection against inflation. It tends to track it, rather than outperform it. Companies that have pricing power (viz the consumer, but also viz suppliers) can outperform inflation. However, equities don’t necessarily track inflation over the short term. Some companies may not have pricing power viz customers or their suppliers, and their profits may get hammered.
What do we think about the Exxon purchase?
“Buying Exxon is Buying America!” except its really not. its like buying a LT bond + 200 bps
Mike, interesting thought there… I’m not challenging it, but can you go through the argument for LT + 200bps?
also, very true bchad, if you believe the inflationary period will be lengthy, gold will not provide you with the same benefits as ‘powerful’ equities as the absence of growth in gold returns becomes material.
So, why is gold so expensive now anyway? Is this just dollar weakness?
bchadwick Wrote: ------------------------------------------------------- > Mike, interesting thought there… I’m not > challenging it, but can you go through the > argument for LT + 200bps? haha, why does everyone call me mike. its nothing academic. its just the idea that it will be less volatile than the SPY so it will yield less than the average equity premium over time, notwithstanding a massive bull market in the O&G commodities over the long-run. and yes, i see the confusion, calling it a bond is incorrect. a more accurate claim would be that its more like TIPS + 200bps.
Sorry Matt, I called you Mike (I have a brother named Mike that I was writing to, so I guess it slipped out). OK, I see your point, its beta to the market is low (I assume, or some other risk measurement is low), and you’re tacking 200bps it on to the LT bond (or TIPS or whatever). It’s the build-up model of returns. I’m always on the lookout for different approaches to valuation, trying to get a more complete view of stuff in foggy times.
MattLikesAnalysis Wrote: ------------------------------------------------------- calling it a bond is incorrect. a > more accurate claim would be that its more like > TIPS + 200bps. Preserved for all eternity. Classic.
http://contrarianedge.com/2009/01/04/exxon-apostasy/#more-324 http://contrarianedge.com/2009/02/14/exxon-apostasy-continued…/#more-909 A very interesting article, indeed!
“Don’t deceive yourself: XOM is just an operationally leveraged proxy for oil (and natural gas).”
Buffett doesn’t care whether equities track inflation over the short-term.
maybe hes buying to capitalize off the development in Iraq. Pretty good move because this will probably last for a while. but Exxon is in an industry where most of the top companies are all government owned. venezula, kuwait, china, russia all have oil companies with a large control of reserves. Where do multinationals fit into this picture? If any new spots are discovered on these lands exxon won’t be getting first dibs. Its almost like all the multi nationals are fighting for the remaining piece of market share that exists. perhaps this will lead to another merger? BP and exxon?
Th deal terms in Iraq are less than ideal given that they are service and not production sharing. I can’t remember the pricing but it’s pretty lackluster. Under service contracts, they can’t book reserves for that region.
How do you realistically buy gold here? I understand the inflation argument, but how do you correlate that to the price of gold and make an argument that gold is “undervalued” enough to warrant an investment? Is it just guessing? I keep hearing everywhere that people should buy gold, but what is going to cause the price to keep going up except more people buying on the hope that it will go up? The smart money bought in quantity a long time ago and will be liquidating at some point, so why would you buy it now? Anyway, I’m not arguing against it, I guess I just haven’t heard a rational explanation for why gold would make a good investment here.
I’m still in gold because I expect more abandoning the dollar as a reserve currency and a lack of alternative options. In addition, if you have small enough allocations that you aren’t worried about the market impact of your transactions, it might make sense to just ride the momentum up while using a combination of puts and stops for risk control. Stops to prevent strong backsliding, and puts as insurance against gaps.
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” - Warren Buffet
job71188 Wrote: ------------------------------------------------------- > “Gold gets dug out of the ground in Africa, or > someplace. Then we melt it down, dig another hole, > bury it again and pay people to stand around > guarding it. It has no utility. Anyone watching > from Mars would be scratching their head.” > > - Warren Buffet by far his best quote!