The arrogance on Wall Street always amazes me. I have lived through three stock market crashes, one rolling recession, near hyperinflation and what was almost an economic depression. In all those cases, Wall Street was caught unaware. People who manage financial institutions were incredulous as the events transpired.
The Street’s ignorance was on full display this month when Warren Buffett’s top investment adviser Charles Munger explained that gold is a useless relic.
On May 4, the eve of the Berkshire Hathaway annual meeting, Munger, age 88, said: “Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold, they invest in productive businesses.”
Munger thinks people should either be facing a Nazi occupation or else be as stupid as cavemen in order to purchase gold. If this reminds you of the Geico cavemen commercials, you won’t be surprised that Munger is big on investing in that company.
Munger said he loves Berkshire Hathaway’s portfolio, which includes Burlington Northern railroad, specialty chemicals firm Lubrizol and insurance giant Geico.
“We just have a wonderful portfolio in business, if you average them out,” Munger said. “By and large they’re doing productive, useful work.”
So confident are Buffett and his associates on Burlington Northern that in 2009, Berkshire Hathaway bought the company for $34 billion. This is just one example of Buffett’s showing faith in Barack Obama’s management of America’s economy.
Buffett and Munger forgot to consider that Berkshire Hathaway’s portfolio is mostly traded in U.S. dollars. Perhaps Munger slept through the past decade. Only that would explain how he missed the worst bear market ever for the U.S. dollar and one of the biggest bull markets for gold.
When I began as the editor for Outstanding Investments in the autumn of 2000, I urged subscribers to load up on gold. Bullion was then trading for less than $280 per ounce. Today, it trades at about $1,600 per ounce.
During those same years, the value of the dollar has gone to hell. The evidence in the graph below shows the greenback’s dreadful decline.
Munger doesn’t seem to understand that when the dollar declines, even against other currencies, the purchasing power of the dollar declines. Even if we accept the Federal government’s cooked books on the Consumer Price Index, what cost $100 in 2000 costs $133 today.
Burlington Northern stock has gone from $25 per share in 2000 to $100 per share now (in large part because of the spike caused by the Berkshire Hathaway purchase). But you have to discount one-third of that increase because of the declining worth of the dollar.
Another Obama Term Will Send Bullion Soaring
Munger does not understand what the dollar will face if Obama is re-elected.
In the 1970s, dollar inflation decimated Big Board stocks. The Dow Jones industrial average hit 996 in 1966. That index stood at 742 in 1980, a loss of 25 percent. If you factor in the decline of the dollar’s purchasing power, the DJIA was really 321 in 1966 dollars. Over those 14 years, the DJIA lost more than two-thirds of its value.
Uncivilized people like my father got his subscribers into gold starting in 1970 at $35 per ounce; that investment climbed to $850 by January 1980. Using the same inflation calculator, the 1980 price of that gold was $428 per ounce in 1970 dollars. So even in real terms, the price of bullion, bought by cavemen, increased twelvefold.
The Wall Street establishment wouldn’t listen to a word the “gold bugs” said. In fact, my dad, Vern, was a guest on PBS’s “Wall $treet Week with Louis Rukeyser” in the mid-1970s. Rukeyser and his panel openly laughed at my dad’s suggestions that investors should buy gold. One came right out and said such advice was un-American.
While Wall Street investors were losing their shirts, gold investors who followed people like James Dines, Harry Schultz and C.V. Myers made themselves tidy fortunes.
You would think an experienced man such as Munger would remember those times. And given the unprecedented increase in the U.S. money supply over the past three years, men like Buffett and Munger might even think it prudent to put some assets into gold.
Perhaps such men cannot think outside the box. I don’t know. What I do know is that modern money changers refuse to believe that anyone other than a caveman would even consider investing in gold.
Most people listen to the investment establishment. I have a friend who is an accountant. He knows several multimillionaires in Alberta’s oil patch. I asked him not long ago if he thought any of them owned gold. He told me he didn’t believe even one owned a single ounce. That tells me there is a lot of upside to gold prices even though bullion is undergoing a correction right now.
Unfortunately, I think Obama is going to be re-elected. After he is, he will move forward with socialist policies, which will mean even larger Federal deficits. More debt means more dollars, and that means the continued decline of the greenback. If successful people ever get a taste of stagflation (a stagnant economy and higher prices), I think investors are going to invest in precious metals. The gold market is so thin that it won’t take much buying to push the price of bullion to $2,500 per ounce.
They Thought My Mother Was Crazy
There are legions of men and women like Munger in the world. I still remember when I first met one.
It was 1970, and it was legal for Canadians to buy gold. My dad was heavily invested in gold along with his subscribers, and my mother had about $3,000 in savings. I went with her to the Bank of Nova Scotia one day.
The main branch in downtown Calgary had a trading desk. She told the man at the desk that she wanted to take the money out of her savings account and buy 1-ounce gold South African Krugerrand coins.
Gold was trading at $35 an ounce back then. Most people who worked in the financial industry believed that once the United States freed up, the price of gold would fall.
The man at the gold desk looked at my mother as if she were crazy. He tried to convince her that she was speculating with her life savings and that it would be much better if she left it in her account. When my mother insisted she wanted to buy the gold, we were escorted into the branch manager’s office. The manager urged my mother to reconsider her recklessness. When she wouldn’t, he said the bank would not accept the transaction. She then asked the manager to phone my father, who had a much more sizable account with the bank and a much more forceful personality.
I don’t know what my dad said to that bank manager that day; but after a very brief phone call, the manager was happy to help my mother purchase her gold.
I guess it is true what the kid said to me more than four decades ago on the playground: “Myers, you’re a caveman!”
Yours in good times and bad,
Editor, Myers’ Energy & Gold Report