We discussed Warren Buffett's illogical
opinions about gold in our 15th February 2012 report under the heading
"Buffett's Blind Spot". Today we are going to take a quick look at
Buffett's personal war against gold from a different angle and arrive at
conclusions that might surprise you.
Some gold bulls have cited the performance of
Berkshire Hathaway (NYSE: BRK/B) relative to gold as proof of Buffett's
cluelessness about gold. They have underlined their point using charts such
as the one displayed below.
A chart like this says that it was right to be
bullish on gold versus BRK ten years ago, but what does it say right now?
After all, didn't eager participants in the NASDAQ bubble use similar
charts/reasoning in 1999-2000 to 'prove' that Buffett was out of touch?
With regard to the correct positioning right
now, the chart says either nothing at all or that BRK is now cheap relative
to gold and will likely outperform in the future. What it absolutely does not
say is that this is a good time to favour gold over
In general terms, great past performance by
any investment is NEVER a good reason to buy that investment in the present.
It could, however, be a good reason to sell. Additionally, when bears cite a
long-term historical decline or bulls cite a long-term historical rise to
justify their current stance, a major trend reversal could be just around the
next corner. Always keep in mind that the last cycle's big loser stands a
good chance of being the next cycle's big winner, and that one of the surest
ways to generate bad investment performance is to apply during the current
cycle the approach that worked the best during the preceding cycle.
Further to the above, we confess that when we
see gold bulls citing gold's terrific past performance against Buffett's BRK
or against anything else as a reason to be bullish on gold today, our inner
contrarian gets a little nervous. It's almost a 180-degree turn from the
late-1990s and early-2000s when many commentators would cite gold's lousy
20-year record as a reason to be bearish about the metal's future prospects.
It didn't occur to them that lousy performance over the preceding 20 years
was a large part of what made gold a wonderful long-term investment
opportunity in the present. And it doesn't seem to occur to many gold bulls
today that great performance over the past 10 years is, if anything, a reason
to be circumspect when considering gold's likely future performance.
In addition to the BRK/gold comparison
displayed above, we've looked at many long-term charts showing how gold has
performed relative to other items. For example, we've looked at charts
showing how gold has performed relative to industrial and agricultural
commodities, stock market indices, houses, and the average hourly earnings of
the labour force. These charts all suggest that on
a scale that goes from dirt cheap at the far left to incredibly expensive at
the far right, gold is now well to the right of centre.
Thanks to a long period of substantial relative strength, gold is not the
value proposition it once was.
That being said, there is no evidence that
gold's long-term bull market has gone through a mania phase characterised by massive enthusiasm on the part of the
general public. It seems to us that the public has dipped its toe into the
gold pool, but hasn't yet jumped in.
It would be extremely unusual and perhaps even
unprecedented for a long-term bull market in an investment to end before the
general public fell in love with that investment, so gold is probably going
to become a lot more expensive over the years ahead. This is especially so
considering that the monetary and fiscal recklessness that is driving the
bull market shows no sign of abating. However, don't be fooled into believing
that gold is still cheap.
This is an excerpt from a commentary originally posted
at www.speculative-investor.com on 14th June 2012.