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Buffet No Likey Gold

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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.

You want a quote?  Haven’t I written enough already???

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?

You want a quote?  Haven’t I written enough already???

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.

You want a quote?  Haven’t I written enough already???

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.

“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.

ValueAddict, CFA

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.

You want a quote?  Haven’t I written enough already???

“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!

One of the traits for every asset class we have at my firm is it must have an expected return.

Can someone explain to me the expected return on Gold and where it comes from?

This is a serious question.

^^ this is what i’ve talked of.

gold’s price is based on the probability of fiat currency implosion, either with the USD or all currencies worldwide. in either scenario, we will likely not have enough gold to use it as a currency for 7 billion people anyway and so in turn, we will have to re-establish a new fiat currency. in both the worriless and a worrisome scenarios, gold’s value/utility is thereby nil. i’ll reiterate once again, goldbugs should honestly reconsider being goldbugs and consider being gun-toting apocalyptos b/c that’d be the smarter thing to do, in both the short- and long-term.

Its very simple. If you expect currency A to depreciate, you buy currency B. If you expect both currency A and B to depreciate, you buy gold. Considering just about everyone gov’t has been handing out money like candy, I think the thesis of expecting all currencies to depreciate is pretty sound.

You’re right that expected return needs to be positive. Not only positive, but also higher than the risk-free return. However, when you are talking about real purchasing power, risk free return becomes much more problematic.

In fact, the only risk-free return would be a zero-coupon inflation indexed return by a security issued by a sovereign government with seignorage (ability to print money).

Expected returns can come in the form of profitability from intelligent business management and organization, or in long-term shifts in supply and demand, or both. With commodities, you generally don’t have the business aspect, but you can make judgements on likely supply and demand dynamics.

Remember that the lower the correlation with other assets in a portfolio, the lower the expected return needs to be in order to become an attractive portfolio addition. But low correlation is never a justification for buying something with a negative expected return (unless you are using the security to hedge another one).

You want a quote?  Haven’t I written enough already???

There is a saying that if you are long gold, you are short man.

Buying gold makes you well prepared for times for which you could do the same much cheaper by buying bullets !!

When I think of the price for gold, unlike other precious metals which have some real consumed value, I think of the relationship between gold, inflation, the US$ currency value, oil price, and all kind of events/shocks that affect gold prices.

While other commodity prices are more affected by supply/demand fundamentals (prices go up when market is in deficit and vice versa) gold price is not. It is more about how much do people want to keep gold as bars/coins/jewelry and how much central bank keep gold as reserves. And I don’t think the concept of keeping gold (instead of say platinum) as an investment will change anytime soon so yes I still go for gold.

At this point it’s only gold’s demand as a safe haven that is driving its value. The correlation coefficient for gold vs risk compared to gold vs inflation shows that gold vs risk is higher. Gold is very simply put, a very poor inflation hedge. Stocks or housing, excluding the recent housing insanity, outstrip gold, by far, in their ability to provide superior returns.

I do have to laugh at people who point at any 10 year period and say “well, gold is superior to stocks in the last 10 years”, yet they forget that gold was at 872 in 1982 or so, what happens if we take those 27 years and compare gold to stocks?

Anybody who read Snowball, or any other biography of Buffet, knows that his upbringing leaned towards being a gold bug. His father and uncle were both doomsdayers. His father, a devout Republican, thought FDR and the Democrats were destroying the currency and country. His hedge against this collapse was to stock flour and sugar in the attic, as well as purchasing a farm in the boonies with the uncle. While his father didn’t retire penniless, he certainly didn’t rack up tens of billions like his son.

When it comes down to it, times aren’t great right now. That doesn’t mean it won’t get worse, but it WILL get better at some point. When it does and people seek more risk, gold will fall.

spierce Wrote:
——————————————————-
> At this point it’s only gold’s demand as a safe
> haven that is driving its value.

This is why I was asking questions above. I have the same feeling right now.

spierce Wrote:
——————————————————-
> At this point it’s only gold’s demand as a safe
> haven that is driving its value. The correlation
> coefficient for gold vs risk compared to gold vs
> inflation shows that gold vs risk is higher. Gold
> is very simply put, a very poor inflation hedge.
> Stocks or housing, excluding the recent housing
> insanity, outstrip gold, by far, in their ability
> to provide superior returns.
>
> I do have to laugh at people who point at any 10
> year period and say “well, gold is superior to
> stocks in the last 10 years”, yet they forget that
> gold was at 872 in 1982 or so, what happens if we
> take those 27 years and compare gold to stocks?
>
> Anybody who read Snowball, or any other biography
> of Buffet, knows that his upbringing leaned
> towards being a gold bug. His father and uncle
> were both doomsdayers. His father, a devout
> Republican, thought FDR and the Democrats were
> destroying the currency and country. His hedge
> against this collapse was to stock flour and sugar
> in the attic, as well as purchasing a farm in the
> boonies with the uncle. While his father didn’t
> retire penniless, he certainly didn’t rack up tens
> of billions like his son.
>
> When it comes down to it, times aren’t great right
> now. That doesn’t mean it won’t get worse, but it
> WILL get better at some point. When it does and
> people seek more risk, gold will fall.

Nice post. I agree with the sentiment.

Gold provides you with no income so it has an infinite P/E (or is that undefined?). That’s enough of a reason for me to avoid it.

I think the P/E would be undefined since it is a vertical line. Right? RIGHT????

__________

"good personality ... or he was known as Lt. Mandingo during his army days."