If you try to value gold objectively (its industrial and possibly jewelry use), its price should be significantly lower than what it is today. Speculation and paranoia have driven its price to amazing heights. A value investor can't touch gold with a 10 foot pole.
I know Hacker News has its share of gold bugs and libertarian survivalists preparing for the fall of the US government. My only recommendation for you all is to remember to leave a map to your buried gold in case you die unexpectedly.
For those who don't think the fall of civilization will come within their lifetime (which I hope is the majority of you), trying to match the market with a heavy diversification of stocks/ETFs and bonds (notably US government bonds), a long time horizon and a yearly re-balancing is probably a better bet.
I think you might be misunderstanding what gives things value. The $20 bill in my pocket has little objective value by your definition. Sure, I could use it as a building material by papering a small piece of my wall with it or I could make an origami ring out of it, but the object's value is not determined by what can be made out of it.
Value is subjective to people's desires and beliefs about what is worth trading for. Gold has value because (almost) everyone anywhere on the planet will accept it in trade.
Gold is priced in dollars and when dollars are flying off of the printing press, but very little new gold is being produced, it follows that the price of gold would increase in terms of dollars. It is inflation that is mostly responsible for driving the price of gold up, not fear.
I'm not suggesting that everyone should be 100% into gold, I merely think that people looking for real value, would find gold very attractive as a reliable way to preserve it.
You had better stick to talking about exchange value, because once you get into nebulous discussion of "real" value it becomes immediately relevant that gold is nonproductive at best and prone to fluctuations and bubbles in reality.
If you define the discussion of value as being limited to immediate short term exchange, then it's no surprise that you end up concluding that the only things of "real" value are whatever gives you liquidity. That is a part of the story, after all Berkshire keeps $20-$30 billion liquid as a matter of policy.
But that doesn't tell you anything about future returns or opportunity costs, and it is not the whole story. The idea that gold's value is "real" because others think it is real (or better, have long thought that it is real) is just as viciously circular as saying that currency's value is real because others believe it is real.
He doesn't mince words, does he?
Treasury bonds have exchange value, not because they are paper, but because people will accept them, for the right they reliably represent; because the government is good for that debt. Gold, too, has exchange value NOT because of its chemical composition - only because people will accept it, and they accept it because they believe they will be able to trade it in the same way. If it loses half its value due to a bubble popping or the global supply increasing over time, it's no better than a currency which lost half its value due to government policy. There is always something around of value, and if the post-apocalyptic situation is bad enough then gold will be worth only a little at best, if you can even find someone selling whatever you need.
Land is an example of something which can produce, as is stock in a company which sells things that are always in demand. This was the contrast being made against the block of gold, not paper
Dog food would also be quite useful. And of course the wet kind would be better served warm, which would add to the desirability of paper.
You could probably find uses for gold. But you'd have to waste a lot of paper to melt it down, so the most common ones would be things like 'doorstop' and 'blunt weapon'.
I'd recommend you read some FOFOA
(and all the rest.) If nothing else it will help you see the money system in a different light.
It's not paranoia or speculation primarily driving the price increase, but the objective destruction of value represented in what a dollar can buy today versus, say, 12 years ago.
Further, if it were true then in 2009 when oil plunged from $140 to $50 a barrel, the value of the dollar should have shot up significantly. When gold dropped 20% last year, there wasn't a corresponding increase in the purchasing power of my dollar.
You only have to look as far as the sleazy companies selling gold to old people on tv and charging 20-30% markups to know that speculation is driving this market.
I'm heavily invested in my self. I own a business.
Which is also why in one of my posts, I said the best investment you can ever make is: you.
Tracking lines on oil and gold requires that you do so over an actual duration, not on select spot prices. Over time, oil and gold have tracked each other extraordinarily well.
Ultimately the point is really simple: check out a graph on oil and gold prices since 1970. To the moon. Why? They're priced in junk dollars.
There are literally thousands of charts and graphs that you could find a reasonable correlation with gold, but oil is not one of them.
I don't know where you got the idea that they tracked each other, but it is simply wrong. Gold does not track oil, CPI-U does include food and energy and inflation is not anywhere near where you think it is.
you're just wrong. here's prices over the last 6 years: http://imgur.com/a2mMZ (CLH is crude oil)
>> They're priced in junk dollars.
you're confusing real and nominal prices. if your point is that inflation exists, i don't think you will find anyone that disagrees with you. if your point is that real prices of oil and gold are driven primarily by inflation, you're absolutely wrong.
That's why the average US wage and minimum wage has also tripled over the same time period, right? Or have we become less efficient and our hour of labour is "worth" a third less?
The price of labor eclipses the price of commodities in most of the economy, which is the true value of your dollar.
I dare you to spec out the price of a basket of 10 to 15 commodities from a decade ago compared to where they're at now.
2001 $12K (family of three)
2011 $17K (family of five)
I was surprised when I compared these two numbers first time. Gut feeling was that food prices went up a lot.
2001 $10800 (aparment, rent)
2011 $14800 (house, PITI)
say you do a simple, stupid analysis - 12k / 3 = $4k/person/year, which is greater than 17k/5 =$3.4k/person/year
of course, that's not entirely fair, since children eat less than adults, right?
if you ballpark daily caloric intake, the family of 3 eats (2500+2000+1000)365 calories a year, for 4.4 cents/Cal.
The family of 5 maybe eats (2200 + 1800 + 1800+1600+1000) 365, for 5.5 cents a Cal (I'm assuming the aging adults moderate their diet for their decreased metabolism)
yes, that's a 20% increase, but given other factors (possibly more dining out, errors in the ballparking, etc.), it's really not a huge jump in food prices.
> It's not paranoia or speculation primarily driving the price increase
the price of oil is driven by supply and demand. the useful of oil has gone up, but the amount of oil we extract has not kept up. that's why the price has moved.
The price for oil is affected by supply and demand but also by speculation. People invest in oil, and people speculate in oil. More so, the price for oil includes a substantial degree of risk assessment. If buyers and sellers both agree that the future of oil production (due to geopolitical instability, for example) is at risk and could lead to oil shortages tomorrow then they will settle on higher oil prices today.
The same sort of effects don't enter into the price of, say, Aluminum which is much less entertwined in complex geopolitical situations.
And he glosses over a basic point that I've seen many commenters miss. An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble.
But expanding the supply of gold available for trade by more than a couple percent a year simply isn't feasible. This is precisely why markets have repeatedly chosen it as a form of money.
Of course this means the market for gold is driven purely by demand sentiment, and of course demand could crash. But this is true of every currency -- it's only valuable because it's valuable.
The number of new home sales at the top of the bubble was about 1.4 million/year vs. existing housing stock of over 70 million. That's less than a 2% increase per year, not counting the thousands of home that are demolished each year. Vast new production isn't required for a bubble.
This depends on how high you set the bar. If you're trying to be Warren Buffet then buying a broad index obviously won't get you there. With the bar set somewhere in the neighborhood of "I'd like to protect and increase the buying power of my money" then buying something like SPY starts looking a lot better, even with taxes and inflation taken into account.
A coup d'etat may result in seizure of private companies, rendering your stock worthless, but not touching the value of gold.
It would be speculating to put all your assets into gold, but a small amount is like an insurance policy.
Government expropriation of private industry has been a
key policy of Chávez's regime.
More than 450 companies have been expropriated this year
alone. ExxonMobil, which had its assets seized in 2007, is
still fighting the Venezuelan government for $7 billion in
compensation it believes it is owed.
What investor cares about millennia? Centuries is already too much, unless you're vastly more concerned about your great great great grandchildren than most people. 100 years is probably the absolute largest possible upper limit for a real investor to care about, and typically it's much less still.
Admittedly that's a pretty unlikely scenario.
It makes a lot of sense to try and carry as much value with you as possible. Conditions during the course of your escape are likely to be difficult and the ability to pay for thing (=bribe your way out of trouble) is likely to be much more useful than knowledge of advanced mathematics or Python minutea.
(Of course, the most useful way to carry value in an escape scenario is gemstones, not gold, since it is much easier to hide during transport).
Buy a diamond today and sell it tomorrow, and you'll make a loss of 30% or more.
I'd note that Wikipedia says:
A high quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency funding. People and populations displaced by war or extreme upheaval have utilised this portable asset successfully.
 http://en.wikipedia.org/wiki/Diamonds_as_an_investment (yes, it says citation needed, but nevertheless it did work in WW2.)
(Granted, many people simply shipped their gold to another country, but still...)
My point is that looking at the last 100 years, by definition, will overlook times of revolution and change that certainly have happened and will likely continue to happen.
It's a different kind of value.
The context of this subthread is SHTF situations, where all that matters is inherent value determined by the laws of nature. What good is your gold if nobody wants to take it for even a tuna sandwich or if you have a loaded gun pointed at you?
Hedging against the apocalypse is a silly reason to own "gold." Hedging against market volatility is a slightly better reason. It is important that we don't conflate the two strategies, as popular perception seems to.
In the last 100 years alone there were at least 2 such "apocalyptic" events: the Russian revolution and the communists' grab of power in China. Granted, there were a couple of lucky stock-owners that didn't see their holdings going to zero (http://en.wikipedia.org/wiki/American_International_Group#Hi...), but generally speaking it would have been much better for a "White" Russian to be carrying gold or jewelry on his way to Paris in the 1920s than to carry worthless Tsarist stocks.
As for owning gold rather than "gold", I find appeal in being able to put $30k in my pocket in the event that credit cards or ATMs are temporarily out of service, which could happen well short of an "apocalypse."
There are a whole lot of things that have to go seriously wrong before we revert back to a gold-based currency. Even if we did, all the gold in the world won't help with the food shortages resulting from the collapse of companies like Monsanto.
Most of the grain we use has to be chemically activated to grow. If the country falls apart to the point where those chemicals are not available, there is no amount of gold that will buy a loaf of bread.
Without some sort of neutral respected authority to assay and say "yup, it's gold", you just have shiny pebbles and/or dust. And when everything around you has collapsed, reliable access to a trusted assayer may not be so... reliable.
The article is about "why stocks beat gold and bonds" not "why you should own only stocks and never own any gold or bonds".
If you've got a government that is willing to plunder like that, there's no great way to keep your wealth safe except to get yourself and your wealth out of the country.
Except for the bit where he, y'know, paid for it at the then-prevailing rate. (Which was defined by law, since at that point the US dollar was still on the gold standard.)
While "stealing the gold" is not technically correct, eliminating 50% of the value of everyone's saving IS, and the confiscation of gold was done to eliminate the best (and popular) store of value.
Of course, it was all legal -- but when the government makes the laws, that statement is completely moot.
'Best' no, 'popular' yes and that was crippling the economy.
Umm no. What happened was people took their money out of the bank to hoard gold which crippled the money supply and credit markets. Which is exactly what would happen if Gates et al. decided to hold their money under the mattress instead of in the bank.
Gate's and Buffet's "money" is stored in stock in companies, which add value to the economy - ie, their money is active and productive. That's the opposite to storing value in gold.
What makes an exchange stealing is the involuntary aspect.
Stunning circular logic there.
"Someone" =/= "democratically elected government with clearly enumerated power".
We agreed on the Constitution and it says the government can take stuff as long as it pays you. Those are rules we agreed to.
If we all agreed on a Constitution that said the President could have relations with whoever he wanted and then people chose to stay in this country and then the President chose to have relations with them we might question whether that still qualifies as rape.
Not that I'm a gold-bug, but, it was pretty rude.
- Bonds: Heads, you gain 1%. Tails, you gain 1%. If it lands on it's side, you lose everything (government default)
- Stocks: Heads, you gain 15%. Tails, you lose 10%. A lot more risk here, but the expected value of flipping the coin is higher.
Some people would rather flip the bonds coin, some would rather flip the stocks coin, and it depends on the individuals' risk tolerance.
Gold doesn't fit the model, because buying gold is speculation rather than an investment.
> Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
He goes on to describe what sorts of investments he thinks are worthwhile. Namely investments in assets that will continue to be productive in the long term.
> Investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.
Again, this isn't framed in terms of risk. Probably because with a diversified portfolio the risk is not at all analogous to flipping a coin (there is obviously still risk, but it's not that simple). Instead, it's framed as current versus future consumption.
As for gold, I don't think he frames it in terms of speculation versus investment at all. Buffett recognizes that gold will probably continue to hold value. Instead, he decides to frame the question in terms of whether gold is a productive asset. It isn't. It will just sit there.
> You can fondle the cube, but it will not respond.
It 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.
Gold may have some utility and practical applications but that does not seem to account for all of it's perceived value.
Friend: "Hey man, you gotta get in on this— this stock has gone up 30% in the last year! Nowhere to go but up!"
You: "Wow, that's amazing! What does it do?"
Friend: "Um... it doesn't corrode?"
Friend: "Hey man, you gotta get in on this— this stock has gone down 30% in the last year! Nowhere to go but down!"
And it's only 3% in the last year if you aren't trying to compare it to something mid-bubble. The USD is totally going down with respect to tech stocks, guys!
Holding USD is rarely an investment. You put money in your checking account(as opposed to a savings account/CD, which is an investment in the bank) because you expect to spend it(you know, what money is for?) soon. Only banks hold large amounts of USD and they almost immediately loan it out.
And you're right, it's unfair to compare gold to Bitcoin. There are people actually using Bitcoin as a currency, whereas gold is almost exclusively exchanged for actual currencies, which are then exchanged for goods and services.
And the failure of the Zim dollar is the reason they recently returned to the gold standard. Oh wait, no, they switched to USD.
I know this is nothing new, but investing in yourself through education is far and away the best investment out there. Governments, thieves, natural disasters and who knows what else can seize or destroy your stocks, bonds, gold, and land, but they can never touch your knowledge and experience. Even if you loose all of your possessions, you can use what you know to reacquire them. If the goal is "preserve AND grow" wealth, educating yourself is the best investment.
He absolutely prefers actual production over mere investment in trends. "More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date." This whole philosophy is at the heart of nearly all of his letters to investors and other writings.
Investing in stocks however buys a piece of a growing entity. You buy stock now and the company buys a tractor, a truck, a robotic assembly line, researches some new polymer, hires staff, invests in its own growth and actually produces goods. As time goes on the company is always trading in current dollars.
Of course there is risk, but If I buy gold now I'm only ever going to own that much gold in the future and the price is entirely based on some other gold-buyer willing to buy a hunk of metal to sit on himself.
Buffet says it better right in the article though which I think people here failed to address. "Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk."
(Precious metals are typically measured in Troy ounces; there are 12 Troy ounces to the Troy pound.)
Which I learned about thanks to Wiki University.
As Buffett notes, gold demand is an index of fear. And yes, generally returns on gold reflect the extent of fear. Were this the only return case, the whole thing would be subject to tautological collapse.
But it's not the only return case. Sometimes fears come true. Governments debase or revalue currencies, regimes collapse entirely, equity assets are appropriated. (Anyone care to guess what happens if foreign investor interests in the Chinese stock market collide seriously with vital state interests?) In these edge cases, gold is one of the few assets that carries value across the transition.
To which comes the reply, if the U.S. government falls you'll have worse problems than asset preservation. Certainly true. But when those problems get resolved, asset preservation will work its way back up the priorities.
It strikes me as lousy investment vehicle -- but I think it's a mistake to dismiss its political and economic importance entirely because it doesn't make sense in our particular context. The whole point of its importance is its commentary on that context.
Shit's just too shiny.
But how many companies have ever survived for centuries?
Yes, centuries from now there still will be companies producing goods and services, but they are highly unlikely to be the same companies you put your money in.
'The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University.'
'Professor Foster estimates that by 2020, more than three-quarters of the S&P 500 will be companies that we have not heard of yet.'
That's because all of these asset classes are subject to 'animal spirits.' Stocks went through the tech bubble. At various times bond yields have been too low when judged against the real risk that you do not get your principal back in full. Bond yields are pretty darn low right now. Gold may seem invincible now and it may seem that the world is only going to continue falling apart and Helicopter Ben is only going to keep running the presses, but don't you remember a time when stocks did nothing but go up? Or when people thought that house prices would never go backward?
All of these asset classes are also subject to the 'invisible tax' of inflation. As the money supply increases, all currency is devalued and everything that's denominated purely in currency loses value as well.
To preserve and grow wealth, you must first beat inflation. Stack the assets up against each other on these merits and I think that's where his logic lies. Let's remove 'animal spirits' for now. Look at these asset classes dispassionately for what they represent. Ignore prices, what they've done in the past, where they are now.
Bonds are contracts for loaning currency. You as the lender demand repayment of your principal and interest payments concordant with the risks you take that the money does not come back to you. Most bonds as structured do not protect you from inflation unless your nominal payout is explicitly pegged in the contract (as with TIPS). You pay today's currency for a fixed amount of tomorrow's currency and if that currency is worth less (as it probably will be) you're out of luck.
Gold is a real good. It's a particularly nice real good in that it's malleable and somewhat plentiful but both difficult to destroy and difficult to make more of. Oh and it's shiny. Everybody agrees that gold is an excellent real good in that way. Those factors, particularly that it's difficult to make more of, protect you from inflation. The real value should stay the same so the price of gold increases as inflation brings currency down around it. Gold beats inflation for sure (except maybe for the bit of mining and new discoveries that get done).
Stocks represent ownership in companies. A company is a group of people operating capital assembled to provide a good or service to others in exchange for value commensurate to the good or service tendered. A good company can protect you when inflation attacks by raising the prices of its goods or services so that it receives the same value as it did before. The well-known example is a candy bar that costs a dollar today cost a nickel in the 1950s. A great company can grow over time, providing more goods and services to the world for more value. Ownership in a good company is an opportunity to both protect against and even beat inflation. That is the key and that is why over time it is a better idea to own stocks than gold. Here's something of a common-sense test: name a family fortune and you'll usually find a company behind it. Now name me a gold-hoarder in the Forbes 400.
Warren glosses over the bad here, that you could buy a stock representing ownership in a poorly managed or even fraudulent company. You could buy a chunk of fool's gold, but you wouldn't be a fool for long. People held onto Enron stock for ten years after Fastow started his shenanigans.
Certainly the bad or fraudulent companies detract from stock performance in the aggregate. But a major index does a pretty good job of protecting you against this precisely because of survivorship bias. A company does not become one of the top 500 largest in the US by being poorly run or providing no value to its customers. A few frauds make it but there's so much scrutiny at the top, they don't (or shouldn't) last long. The S&P 500 is a pretty good proxy for the creme de la creme of businesses and that's why it's such a successful measure. Owning it also offers you the opportunity to grow your wealth with the expanding real value of the economy, beyond the level of inflation.
Now if we turn back on the animal spirits, timing matters. Buffet knows this. He's one of the best market-timers out there. Buffett would not have written this article in 1999 even if the precepts were all the same because he knew that it was a bad time to buy stocks and he would get blamed for the people that misunderstood his advice. He wouldn't write this article in 2008 either because he knew then that bonds were actually a great deal (as he points out). He's publishing this article now (even though it's somewhat of a timeless truth) because he thinks stocks are pretty cheap and the alternatives are terrible.
This is a gross oversimplification. The monetary supply can increase without inflationary effects as long as there is a corresponding increase in the production of value in an economy.
Well, in the real world in the short term people tend to be upset by the idea of the amount of money they receive for a good or product decreasing, so prices and wages tend not to decrease as fast as you might expect in a theoretical perfectly efficient market. This is called nominal downwards price rigidity by economists and nominal loss aversion by psychologists. This is the simplest of the mechanisms by which inflation and deflation can effect the state of the real economy.
* Relatively stable, predictable supply over time
* Not controlled or regulated by any institution or central authority (government or otherwise)
* Value determined entirely by market
* Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged
* Value not tied to the utility of an underlying asset
The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time.
For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments.
 Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.
I'm not so sure that works.
With gold, it was not the case that everyone just "agreed to agree" that it was valuable.
Rather, gold was valued independently of its "investment value" due to its use as a status symbol/decoration/jewelry.
Likewise, because of that, there's no risk of everyone suddenly "disagreeing" that it's valuable, causing a huge collapse.
With bitcoin, it's unclear to me that there is a way to either bootstrap this "agreement" in the first place, or to sustain it.
So what? That's not the relevant risk. The relevant risk is that whatever you are using as a currency will DECREASE in value. Say, from the level of something highly valued as a medium of exchange accepted everywhere, to the level of a mere decoration. Or from a peak value where you bought in big during a speculative bubble, to a lower value where (yes) it's still worth something, but worth less than if you had kept it in treasury bonds or an index fund or a farm.
1) that you can only count on this over longer timeframes (15+ years)
2) his argument assumes an inflationary environments (versus a deflationary environment like Japan and Europe)
3) if you don't have the skills to read a Exxon Mobile or Coca Cola income/balance sheets once a quarter and find it fun you should invest in index ETFs.
These three things are why average investors should have a mix of stock and bond index funds in their portfolio that is based on their timeline.
Shameless plug: I'm bootstrapping a startup to help average investors manage their portfolios. If you are interested in getting started with or managing an existing index oriented asset allocation investment plan, I'd love to help you at https://azul.io (free of charge to folks signing up before I get Stripe integrated)
Edited: In fact, Warren Buffett has an interesting bet outstanding related to this, see http://longbets.org/362/
Actually you don't. The investment industry understands very well that people will naively invest based on superior historical performance, so they use that history to sell investment products. One example of a popular rating system is the Morningstar Rating which rates a fund, stock, or manager based on performance over e.g. 3, 5, 10 years. But that history is public information that most investors use already, so it cannot convey a betting advantage.
"you will make money when the person really was a smart investor"
Statistically speaking, you will run out of money long before you find this hypothetical smart investor. Also, note that the smart investor has not necessarily been "successful" in the past. He could very well have been accumulating shares or fund units while prices were falling, anticipating that they will rise in the future.
Point is, unless you know why that investor is smart, you are essentially leaving it all to chance.
The last 30 years of disinflation, stable growth were not a good time to own gold.
No, but most people aren't investors, they're just people with a small amount of money buying pieces of paper from each other to gamble over which company is most attractive.
It's probably a good idea to have some % asset allocation for this class of holdings, for the various Doomsday scenarios.
That... and a cellar stocked with lots of tinned food.
The second major category of investments involves assets that will never produce anything, [...] Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
Tulips actually produce something - more tulips. It's actually quite possible that the bulb of a rare and especially pretty tulip variety could be a sound investment for someone intending to grow tulips. And that's how the Dutch tulip mania started out (though it then did proceed to truly bizarre excesses).
When O When are reporters going to understand conflict-of-interest?
I think this is the use of discriminating among (A) resources reasonably expected to decline in value, (B) resources expected to 'hold value' modulo speculation, (C) resources expected to have ongoing returns with or without speculation.
In the first decade of our new millennium, real estate and all sorts of weird financial products somehow building on real estate were THE best way to invest money because nothing can happen, you have a house standing right there, right?? Then that bubble burst.
Now, you'd think people would have learned by now but no... sure as hell now everyone rushes to buy gold and silver because "hey what could possibly happen"??? Even one of my colleagues who has been burned both times on dotcom shares and some shady real estate thingy in east-germany, no less, now religiously swears by gold and silver because what could possibly happen?
People seem to really not be able to grasp that it is just another market.
(Unfortunately, your friend is likely to lose his pants again -- not because gold is going to lose its value, but because there is no way to invest in gold without fiat and counterparty risk which is equivalent or even worse than the equity investment risks. If you don't believe that, ask any MF Global customer who had money and gold futures worth lots of money where his money is)
There were booms and busts in the value of gold in the 70s and 80s as well.
Who is rushing to buy gold? I'd be surprised if more than 1% of households have meaningful gold exposure.
Is that the sign of an investment that keeps growing in value steadily across the ages or merely the sign of a speculative bubble about to burst? Hint: look at the late 70s as well.
Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock, Apple at the absolute bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and then hold all the way through, and then sell at the absolute top. On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes (you have to constantly shift your investment strategies for all sorts of reasons: age, family, economic conditions, and so on). Few people are skilled enough to do that well.
With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing' (to pay for entitlements, to devalue national debt, to fund deficits, and so on). There are very few things you could leave for your grandchildren that will retain their value, real estate and gold are two prime options.
If you had bought and held the stocks that make up the Dow over 60 or 70 years, you'd have gotten demolished because the Dow constantly shuffles its index. That is to say, you can't look at the Dow from 70 years ago and compare it to today, because the index is completely different, and the average investor could only easily purchase index ETFs in the last 30 or so years.
In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers).
The dollar has lost 97% of its value since the Fed came into existence. There's no way you can outrun that unless you hit homeruns in the stock market, which is what Buffett did, and which is exactly what your average investor cannot do regularly. The majority of people that invest in the stock market lose money. That's tracking since the late 1960s when the US went off the gold standard and inflation skyrocketed (sending oil, gold, and nearly everything radically higher).
Buffett hasn't made most of his wealth in the stock market anyway (nor that of Berkshire). He has made it by using insurance company float cash to purchase other high float companies, and then rolling that ball forward. Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario.
Adjusted for inflation gold has gone up by a factor of about 4, but almost all of that has been within the last 10 years.
Anyone who thinks that gold is a dandy long-term investment is just as deluded as all of the fools who thought "this time it's different" about the last speculative real-estate bubble.
Edit: to put a finer point on it, if you would have bought gold in 1850 and sold it at any time recently except for during the speculative bubble of the late 70s or the last decade you would have lost money, around a quarter of your initial investment, or around negative 0.2 percent interest rate. If you would have bought gold at its low point in 1919 and held on to it for 80 years then sold it during some time in the 90s you would have just slightly more than doubled your money, for a whopping return of 1.2% per year.
The wild peak of gold in 1980 lasted for days, on a temporary burst higher. The average price of gold in 1980 was $615 or so. Your scenario requires that buyers of gold do not cost average over time, but rather that they only buy at very specific points in time and only sell at very specific points in time.
You could have just as easily purchased gold at $55 in 1972. Or $125 in 1977. Or in 1985 at $300. Or at $266 in 2001.
You make my point about gold: it's a wealth protector, not a vehicle for seeking big real returns. If you had bought gold in 1850 and passed it down the generations, that wealth would have been completely protected from the fiat disaster of the green back the past 90 years. You would not have grown the wealth in some spectacular fashion, because that is not what gold does.
Worse yet, gold tends to return to a constant value after speculative crashes. Compare that to property and stocks which tend to end up higher in the long term, regardless of speculation. If someone had invested their money into houses, land, or stocks in 1850 or 1919 they would have seen a vastly superior rate of return than from gold.
People who advocate buying gold right now are giving irresponsible advice that if followed will almost certainly lead to people losing money.
You could have bought in roughly 88 of the last 90 years and been perfectly well protected over time from the loss of value in the dollar.
If you're lucky enough to buy gold in the doldrums and sell it at the peak of a bubble, you make a killing. If you're unlucky enough to buy gold during a bubble and sell it during the doldrums you lose a lot of money. If you're neither lucky nor unlucky and buy and sell during the doldrums then you end up making a very paltry return on investment that is inferior to the average of other equally popular forms of investment (such as property or stocks).
Buying gold today is just as smart an investment as buying a house in 2006 or buying stock in pets.com in 1999.
I'm making the argument that the dollar is not going to increase in value over the next 10, 20, 30 years. Rather, the dollar is going to continue to lose large amounts of real purchasing power. Gold priced in dollars will rise accordingly.
Just calculating entitlement costs alone, the Fed will be required to massively devalue the dollar over the coming decades to keep a mass social panic from occurring due to defaults by the Feds on paying SS or Medicare et al.
Inflation adjusted, its closer to being up 3 fold:
Meanwhile, inflation adjusted, the S&P500 up more maybe 5 or 8 fold:
>> On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes
if you look at the gold price chart above, it's pretty clear that holding gold is not exactly smooth sailing either.
> With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing'.
this is actually also true of stocks. stocks are a real asset in that they are claims on things that aren't directly tied to the money supply. if the fed prints more dollars, dollars are less valuable, but IBM's ability to make money also goes up by the same amount.
also, fundamentally, you're missing buffet's argument:
"this type of investment [(gold)] requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce [(unlike stocks)] -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future."
The problem with stocks on the smooth sailing point, is that you can have a company that goes bankrupt, and plenty do over 30 years or more. You should look up the rather shocking numbers on how many publicly traded stocks have been vaporized in the last 30 years.
Gold does not go bankrupt, and it will not go to zero (if the last 2,000 years are any indication). Even more specifically, it won't go anywhere near zero.
With stocks you must constantly manage your holdings. With gold you do not have to manage it at all, assuming you didn't go chasing it on a bubble run (which represents less than 1% of the time duration that you could have bought gold over the last 60 years; 1980 for a few weeks for example).
There is a huge time management cost to stocks, most people simply do not have the time to focus on that. Skilled investors certainly do either have the time or the ability.
is there any evidence to back this up? is a logical reason why this would be true? i certainly can't think of any
> Gold does not go bankrupt, and it will not go to zero
yes, in this respect, stocks are riskier than gold. if minimizing investment risk is what you want, maybe you should buy gold, or maybe TIPS. however, most people also care about returns.
> There is a huge time management cost to stocks, most people simply do not have the time
this is an argument for ETFs, not an argument for gold
A quick glance at the Dow chart from 1960x to 1983x tells that story very well.
Gold did extremely well during the inflationary late 1960s and the 1970s. Stocks did horrifically terrible in the 1970s (which is where Buffett made a lot of his killing in the market, buying dirt cheap). Right up until the point where Volcker broke the back of inflation in the early 1980s, at which point stocks had a stellar run while inflation was relatively tame.
The reason this happens is: inflation hammers almost every core ingredient of an economy. It kills real savings, because the rate of return on cash can never outrun inflation. It pushes up of the price of commodities that producers need, while eroding wages capabilities for the bottom 90% (the rich can shield their wealth from inflation, poor can't shield their wages). That makes producing things more expensive, while simultaneously limiting the ability to raise prices on consumers that have less real cash to spend. So it squeezes companies, and it erodes real growth.
If you have a 5% to 10% net profit margin, and you're growing at 5% to 10% per year, which are perfectly common rates for most businesses - if you run real inflation at 5%, you're making it radically harder to survive random risk events in the course of business, you're removing critical points of profit and the ability to stick back cash for a rainy day. In effect, that hammers the stock market because it's an inter-connected economy in which IBM or Microsoft or Dell or Cisco all depend on small businesses. And so on and so forth.
There are now a lot of ETFs, you still have to pick among roughly 1,000 of them.
$1 in gold 90 years ago: $87 today (by your number anyway)
$1 in a basket of stocks that were traded to match the DOW starting 90 years ago: $174 today (from the article's numbers)
Keep in mind this includes the recent 5 year period where gold has shot up and stocks have performed miserably. If we picked different dates, gold would be even further behind.
What's really being said is that $1 in gold has gone up 8700%. Compared to the same dollar going up 17,400% in stocks.
You could not have owned the Dow index for 90 years and then left that to your children or grandchildren.
Would you like to still be holding Polaroid or Kodak? Or perhaps just bought and held the classic Dow index perpetual GM? You would have gotten wiped out in the Dow shuffling. The Dow gets to drop something like GM at its convenience, but if you had bought its stocks in a basket format (not an ETF), you'd literally be holding worthless old GM shares, and a lot of other worthless shares that they don't currently count in today's Dow numbers.
The Dow calculation is a theoretical, not an actual. 90 years ago only a very savvy investor could have owned a basket of stocks to mirror and index exactly and constantly traded in and out of the market. In 1920, an exceedingly small % of people owned or had access to equity markets.
Buffet using even 1965 as the reference point is disingenuous because of those reasons. His scenario is not a normal one: he used his father's brokerage firm to commit his first market transactions back in his early days. How many Dow tracking ETFs existed in 1965? How many people owned stocks in 1965? Today you can open an account at Scottrade or wherever, and pay a mere $7 transaction fee to buy stocks.
It also represents an average of the market, so the fact that it was hard to mirror it exactly is not particularly relevant. Mirroring it approximately, or buying any other large basket of stocks, would have led to roughly the same result.
While it's true that an investment in Gold was better than an investment in USD, it wasn't better than common stock equities. You said the only way to capture a return better than Gold was to buy a particular stock at IPO, but that's just factually incorrect.
You can't swap your dead GM shares for the shares in, say, John Deere when it's added to the index. Your money is gone.
I don't understand why this is a problem.
You seem to be arguing that if you were a person of average wealth, thinking about investment 90 years ago, gold might have been a reasonable choice.
But if I want to invest today, investing in an ETF will almost certainly give me far greater return than gold.
"Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario."
You are on to something here, and you don't recognize it.
2012 $1,750.00 (current price give or take)
Berkshire Hathaway one share
2012 $118,000.00 (current price give or take)
Which would you rather invest in?
How about well-educated and well-raised parents for said grandchildren?
Am I correct in interpreting this to mean that you believe that inflation has been 100% over the past 12 years (that what you could have gotten for $13 in 1999 would only get you half the same basket of goods today)?
You might think, for example, that real estate has gotten cheap? It's up 100% over the last 12 years in real estate disaster zones like Phoenix. How many people have seen their wages climb 100% in the last 12 years? That's pure inflation, as the historical rate of return on real estate is closer to 1% to 2% per year.
You can also blatantly track the huge inflation of the last 12 years in most commodities.
The current Fed CPI, which was altered during the early Clinton years to hide real inflation, says that inflation is around 3%x. It leaves out all sorts of fun inflationary items (because the Fed says they're volatile, har har).
So when milk goes from $1.50 to $3.60 per gallon over 20 years, they pretend that never happened.
Or when gasoline goes from $0.75 to $3.59 over 30 years, they pretend that never happened.
They pretend you don't need to eat food or drive anywhere.
Specifically, the CPI-U includes food & energy, but economic analysts and policymakers like to use the CPI-U for All Items Less Food and Energy because of the volatility of commodities.
The CPI-U however is still available and was last sitting at 3% for 2011. Again, that's with food & energy. http://www.bls.gov/news.release/cpi.nr0.htm
Not only that, but the numbers that exclude food and energy make inflation look higher than when they are included.
Inflation has been substantial the past decade. Gold would have shielded you from it.
You buy gold for the protection it offers from the devaluation in the dollar (in this case), not because you think you're going to get rich from it.
The S&P for example has had a roughly 2% average dividend yield on its basket of stocks over the past several decades. That helps, as without that dividend value the real return for stocks would be even worse the past decade.
For dividends to work in an inflationary environment, you need serious yield. AT&T and Verizon as common stocks would get you close with their 6%x yields. Most people these days of course can't get access to good yield on anything with interest rates on the floor (corporate debt and select few dividends being nearly the sole safe exceptions).
No, but if you put your money into an index fund, you'd be shuffling your money exactly when Dow did.
US Treasury Bonds (Long Term): +33%
He's exactly right about Buffet. Buffet makes all his money because Berkshire Hathaway collects all of these insurance premiums and he can use the cash flow float to make a few extra points of interest (above inflation). Do this with enough $billions for long enough and you will own all of the money in the world.
If the market is near 13k like it is today, with corporate profit margins at all time highs (cyclically impossible that they'll stay up there), I'd say you should be out of the market. Corporations are accumulating debt at the fastest pace in history (which is one of the reasons they're also hoarding cash, as an offset). When rates spike higher as they eventually must, those companies will get demolished. Far better to wait for the next plunge and be opportunistic, than to hope for a few more points on top of this already huge several year run. Buffett's mantra works very well in that case: be greedy when others are fearful, and fearful when others are greedy.
Buy gold on big drops, like when it fell from $1900x to $1530x recently; but never chase it when it runs. Keep it a modest part of your portfolio (10% to 25% depending on your particularly preferences). It's not a growth vehicle, it's a wealth protection device.
Corporate debt is a great place to get good yield right now, but again you have to know what you're buying.
It's perfectly fine to take an annual hit on inflation against liquid dollars (granted that's under, say, 10%); better to have opportunity cash available. Typically people miss big opportunities because of a lack of cash. Really big opportunities are not that rare, they come around every 3 to 5 years, and the returns you can make off of them are extraordinary. You buy the Dow at 7,000 when everybody else is writhing in pain from the ride down from 14k.
Own commodities when they're occasionally cheap. For example, when potash crashed during the global implosion a few years ago, you could have purchased stocks like POT for 80% off. When oil was $10 or $12 circa the late 1990s, the common 'wisdom' was that oil was dead, a terrible investment, and so on. In reality, cheap energy is almost never a terrible long term invest. The human desire / need for cheap energy will continue to be infinite, which ensures that prices will swing up at some point (even if it takes several years).
Right now, I'd tell most people to look around themselves and invest there. Get a strategically better education perhaps; or find a good business to purchase or invest into. Something you can directly apply your sweat equity to with multiplication potential. Shield your wealth until you find the right opportunities; people seem to often undervalue patience. You don't need lots of homeruns, you need very few.
In this environment, it's all about having liquidity to be opportunistic. The volatility in the global economy is almost guaranteed to produce wild swings over time. When people panic, be there with your cash.
Half of your thesis is that gold is great because you don't have to do anything but sit on it and hold it, unlike stocks (we'll pretend that index funds don't exist in your fairy-tale world). The amateur investor can just buy and hold, no rebalancing necessary.
And then you turn around and, as investment advice, essentially say "The trick is to, without the benefit of hindsight, figure out what each next bull market is going to be, buy it at the bottom and sell it when it's at the top."
Fantastic fucking advice. Mind if I borrow your time machine sometime?
Buffet implicitly rejects global warming here, specifically the latest projections on drought: http://earlywarn.blogspot.com/2012/01/another-terrifying-dro... and others.
Regardless of the plausibility of global warming, 400 million acres of farmland will still produce more value in crops than you could shake your investment stick at.
"Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle."
I think he's right about people, but in the statement he is also implicitly asserting that peanuts will be a cheap commodity in 100 years. That rejects our best projections regarding climate change. The much more important implicit assertion I quoted in the downvoted post (thanks guys) is that you can buy productive farmland now that will be productive in a century. That will only be generally true if climate change does not happen.
He was making a general abstract point, not a specific prediction. That's just the way he talks, and maybe it could be confusing if you are not used to it, but that still what it is.
And btw, MidAmerican Energy, a Berkshire owned utility, is the biggest investor in wind power in the US and just bought huge solar power projects.
Even so, I'm pretty sure Warren Buffett is a businessman, not a climate scientist. It's called the Appeal to False Authority, look it up.
And if we get draught, what do you think the farmers will do? irregate their fields.
WRT irrigation, we lack enough water now on a global scale.
That's not true at all. If anything the last decade has shown the data and models are woefully inadequate for prediction.