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Warren Buffett’s Latest Insurance Con (GLD, SLV, IAU, UUP, UDN)

February 15th, 2012

Dominique de Kevelioc de Bailleul:  In an article authored by famed investor Warren Buffett, titled, Warren  Buffett: Why stocks beat gold and bonds, he attempts to dissuade  investors from accumulating gold (again) as insurance during the ongoing financial crisis.

Cleverly riddled throughout his ‘sales pitch’ for keeping with paper assets  at this time, essentially, Buffett deploys the old “Feel, Felt, Found” technique  of persuasion on his readers, in the hopes of instilling confidence  through his past performance, aided by his Lt. Columbo-like charm and  icon status.  Get my next ALERT 100% FREE

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Buffett begins his pitch against the yellow metal with, “ . . .  gold . . .  currently a huge favorite of investors who fear almost all other assets,  especially paper money (of whose value, as noted, they are right to be  fearful).” [Related: iShares Silver Trust (NYSEArca:SLV), SPDR Gold Trust (NYSEArca:GLD)]

You see, Buffett wants you to know that he knows how you feel.   He validates your fear.  But . . . now for the ‘but’.

“True, gold has some industrial and decorative utility, but the demand for these  purposes is both limited and incapable of soaking up new  production,” he continued.  “Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.” Emphasis added.

He continued his article by guiding the reader to his understanding that  others felt the same way about gold, but after they found that  the Berkshire method of investing outperformed very well throughout 46 years,  they turned to him, Warren Buffett, the prudential ‘oracle’, the ‘you’re in good  hands’ master of money.

In the above quote, Buffett demonstrates that he doesn’t really know how  investors feel about the U.S. government and Fed, or he dismisses the fear  altogether, as it is the threat to his dollar-based empire.  Does he want to end the Fed and stop the madness, which is the very root of investor  fear?

Polls show that the American people don’t trust the Fed, or the U.S.  government.  So, Buffett asks you to trust him.

Moreover, he neglects to point out that other billionaires, central banks and ‘smart’ money don’t hold gold for its industrial and decorative utility; they feel that they should own gold because it can be used as money, whose  demand for it, while currencies are actively debased, doesn’t have a limit, just as there is no limit to governments debasing  currencies.  Why, then, does the Fed store 8,150 tons of gold for the U.S. Treasury?  Why did the EU ask Germany to back the EFSF with German gold?  Aren’t they listening to Warren Buffett?

Though Buffett states earlier in his article, “the dollar has fallen a  staggering 86% in value since 1965, when I took over management of Berkshire. It  takes no less than $7 today to buy what $1 did at that time,” he fails to alert the reader to the connection between the gold price and the dollar’s drop in value during the last 46 years.

Sure, the correlation is no where near a lock-step rise in the gold price as the dollar dropped in value, but gold investors understand the  myriad of reasons for that—which includes central bank collusion to ‘manage’ its  rise, as former Fed Chairman Paul Volker (1979-1987) laments his remissness  during the dollar crisis of the 1970s. [Related: Bullish Dollar ETF (NYSEArca:UUP), Bearish Dollar ETF (NYSEArca:UDN)]

Regarding the dollar’s 86 percent decline in value since 1965, hasn’t Buffett  seen massive balance sheet expansions of the Fed, BOE, BOJ, ECB, PRC’s central bank and the SNB since the beginning of the financial crisis?  Hasn’t the  Fed indicated that ZIRP could be extended into the year 2014?  What will be  the extent of the latest dollar devaluation during this decade against the value  of the dollar of 1965?

In essence, Buffett provides the reader with the bum’s rush into having you  believe that he knows how you feel, when, in fact, he doesn’t know—or doesn’t  want to address the more salient point for owning gold.  Maybe, along with  the Fed, he too, is in fear of opening a can of worms to his own argument  against holding the yellow metal.

His fortunes are tied to the Fed’s continuation of the dollar-debasement scheme, an old scheme from which he has profited smartly, along with the money  center banks—at the public’s expense, not at his expense.

And speaking of eternity (in reference to the above Buffett quote), no one  has suggested that gold accumulators hold the precious metal longer than they  deem necessary, so why the talk of the long run?  Some investors will hold some gold for eternity (and should), but the point of long-term  investing is a specious one for many old hands and newcomers alike to the gold  market.

Moreover, gold’s track record of preserving wealth is a bit longer than  Buffett’s 46 years of performance, by approximately 3,000 years.

Isn’t gold really an insurance against Buffett’s paper insurance empire, which, by the way, had to be bailed out by the  taxpayer?  Gold investors didn’t need a bailout; they’re not connected to  Washington.  That’s why they hold gold. [Related: iShares Gold Trust (NYSEArca:IAU)]

Shouldn’t Buffett know his audience (customer), an audience of many  politically and financially repressed retirees who don’t have time for the long run?

Investors have been, as Jim Rogers has recently said, “forced to own real  assets” while the Fed deprives retirees, especially, of a market-clearing  interest rate for their savings.  Can Buffett still imagine what it must be  like to live like Jim Rogers, telling it like it is, instead of pitching  nonsense for his own self-centered survival and legacy?  His entire  identity was saved by taxpayers, and he’s still talking the same game.

Buffett may have forgotten that it was the taxpayer who took on the roll of AIG’s reinsurance policy, not the other way around, giving true meaning to  The Black Swan author Nassim Taleb’s statement, “We’re all blind to rare  events and routinely fool ourselves into believing we can predict risks and  rewards.”  Touché.  Buffett grossly under-priced risk, and that’s his  job.

“I don’t want to spend too much time on Buffett. George Soros has 2 million  times more statistical evidence that his results are not chance than Buffett  does. Soros is vastly more robust,” said Taleb, in response to a question  regarding Buffett’s investing performance.  “I am not saying Buffett  doesn’t have skill—I’m just saying we don’t have enough evidence to say Buffett  isn’t doing it by chance.”

A snapshot of financial history, between 1946 and 2008, or 62 years, could  easily suggest to a statistician that Fed money creation during that period, as  well as the demographic trends associated with baby boomers living out their  lives staring in 1946 (through 1960), may have more to do with Buffett’s  savant-ish buy-smart-and-hold investment strategy than his brilliance for  assessing and quantifying ALL risk throughout his various long-term holding  periods, as Taleb implies.

In his book, The Black Swan, Taleb reminds readers of the story of  Long Term Capital Management (LTCM) and its demise due to the unforeseen event  of a crisis in the Thai baht in 1997.  The collapse of LTCM prompted the  Fed to quickly bailout the financial system before a Lehman-like event  occurred.

At the helm of LTCM were two Nobel Prize laureates who are quite familiar  with the Black Swan.  In contrast, Buffett, not only ignores gold’s vital  role within the financial system, he ignores his own shortcomings.  Pure  hubris.

In a somewhat similar manner, Buffett’s empire was saved by TARP, and now he  has the nerve to advise investors to roll the dice again on his paper  promises—and just in time, too, for the European crisis to spread to the U.S. in  the not-so-distant future.  Holders of gold are betting Buffett will need  another bailout, but he doesn’t see that, just as he didn’t see the crisis that  necessitated the first one.

“The inability to predict outliers implies the inability to predict the  course of history,” Taleb wrote.  At 81-years, Buffett may not be around to  pay off on his bets.  It’s been quipped, “The goal in life is to pass on  while the last check you write bounces.”  Is that the Buffett personal  endgame to the endgame.

“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,” concluded Buffett.   “In the future the U.S. population will  move more goods, consume more food, and require more living space than it does  now. People will forever exchange what they produce for what  others produce.”  Emphasis added.

Correct, Mr. Oracle.  It’s that little bit about “exchange” that has  people worried. With what?  Your Berkshire shares denominated in dollars,  or See’s peanut brittle?  Please don’t pass off the obvious as some kind of  profound wisdom.  Isn’t Buffett making the case for gold with his cute ‘See’s peanut brittle’ remark?

But the one-trick buy-and-hold aged pony doesn’t see that either, or has  Buffett made his latest installment to the cabal with his latest ‘advice’ in  return for a tip about the kibosh of the Keystone Pipeline?  His railroad  looks like a mighty fine investment right now.

Maybe Taleb is right.  Buffett sure is one lucky guy.

By Dominique de Kevelioc de Bailleul From Beacon Equity Research

BeaconEquity.com is committed to producing the highest-quality insight and analysis of small-cap  stocks, emerging technology stocks, hot penny stocks and helping investors make informed decisions. Our focus is primarily OTC stocks in the stock  market today, which have traditionally been shunned by Wall Street.  We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock  opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.

 


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Comments



  1. JoeJoeBubbaJr
    July 14th, 2012 at 15:05 | #1

    Wow, this guy is really an idiot. Buffett has two fundamental points:

    1) Fiat currency has no durable value, and the Fed has done a lousy job at its mandate to maintain price stability.

    2) Gold offers no economic return, so it is a lousy investment, especially at these prices, compared to assets (like businesses) that offer both durable value and economic return.

    As Jack says above, how does Dominique’s record compare to Buffett’s? The question obviously answers itself.

    Someone said years ago that paying attention to Warren Buffett is an ongoing intelligence test for every investor. One that de Bailleul clearly fails.

    JoeJoe

  2. Carl
    February 16th, 2012 at 17:03 | #2

    @Jack Bittner
    “It’s cost of acquiring will go up and down but you will only own exactly what you buy.”

    Precisely.

  3. Jack Bittner
    February 15th, 2012 at 22:49 | #3

    Dominique – 2 things
    1 – How does your record compare to his?
    2 – He was the one lending $$ to those companies getting TARP money (GE, Goldman) and making money off of them.

    Read his article in FULL. The money you in gold will not return or grow. It will only own that particular amount of gold. Never more, never less. It’s cost of acquiring will go up and down but you will only own exactly what you buy.

  4. R.Drake
    February 15th, 2012 at 18:07 | #4

    While I see the reason in criticizing “paper promises”, I am doubting that “paper gold” such as GLD is any different. Recently, there have been increasing discussion on the sketchy insurance of GLD. In their FAQ about insurance, there is no mention about the lack of insurance. Not only that, the writing in their FAQ is written in such a way that it could mistakenly lead investors to believe that their gold is insured. Why such a lack of liability and why are they afraid of insurers taking a closer look at their physical assets? Why hide this issue in this shady fashion? This missing layer of credibility raises red flags that are compounded with the bank fraud news we unfortunately hear too often about during this financial crisis. I do not feel “paper gold” is immune to fear either. The quote below describes a way to verify this issue for anyone interested:

    “Has anyone tried contacting State Street Global Advisors (the manager of GLD) and asking if their underlying physical assets are insured? I contacted them at 866-320-4053 to ask if the physical gold bars are insured but they just side stepped the question and said HSBC bank has “some sort” of insurance on their holdings. They won’t say directly that the GLD physical gold bars are insured but yet they also won’t say they are not insured too.

    One other question that SSgA dodged was when I asked them when they plan to readjust the GLD price to reflect the actual amount of physical gold in the HSBC vault. They sell off a portion of the physical gold to pay off expenses so as time goes on, the GLD price becomes less and less accurate in tracking the actual gold price.

    With all this lack of transparency, one has to wonder why not just own physical gold yourself? At the very least you would stay away from GLD’s hemorrhaging storage fees.”

    I otherwise acknowledge the valid criticisms of Buffet’s “paper empire” compared to the strengths of physical gold. Yes, there have been numerous signs complementing the stability of gold which is why I believe physical gold’s future value can only climb.

  5. Noah zeiler
    February 15th, 2012 at 14:14 | #5

    Silver is the most manipulated market in the world……..SELL WHILE YOU CAN!!!!!!!!!!!!!!

  6. February 15th, 2012 at 14:13 | #6

    Silver in particular is soo OVER PRICED….it costs less than $8.00 US to mine an OZ @ today’s cost.

  7. February 15th, 2012 at 14:11 | #7

    Dont fall for it…..SELL YOUR GOLD AND SILVER NOW!!!!!!!!!!!!!!!!

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