I have great admiration for Warren Buffett, even though I am critical of him at a number of points.? When I read the piece in Fortune where he talks about asset allocation issues, I agree with him 75%.? Where should money be invested?? Stocks.? And as for me, 75% of my net worth is there.? Nonetheless, I see value in bonds, gold, and cash, even though I don’t own any gold, aside from my wedding ring.
Gold is valuable because of its scarcity, and that it is beloved by most cultures in the world.? Gold is beautiful.? Compare it with other metals, gold stands out because it has little economic usefulness.? But that is a feature, not a bug, because it makes gold immune to economic cycles.
Review the gold medal gold model.? The price of gold reacts to real interest rates.? When they are low, the price of gold flies because the cost of carrying gold is negative.? If I could say one thing to Buffett on the topic, I would say read this article, and you will learn why the price of gold is rational and correct in this environment.? Negative real interest rates means the government does not care about the value of its currency, and thus scarce things (think of truly scarce collectibles in the 70s) appreciate in value dramatically versus the depreciating dollar.
Gold is valuable, very valuable when governments and central banks are profligate.? But what of bonds?? Those are the opposite.? They are valuable when governments get more serious about their finances, or when people are scared about the future, and buy long bonds because they want certainty of cash flows in the future.
Also, be for real, Warren.? The dominant asset class inside BRK is bonds.? You hold a lot of them in your insurance companies.
Do I believe in stocks?? Yes, if they are my stocks — the value premium of buying beaten-down companies is dependable.? It doesn’t work every year, but it works most years.
My main point is this: stocks are great, but they are not a panacea.? Gold and things like it are needed for inflation.? Bonds are needed for deflation.? Cash offers flexibility.? These are all useful to investors at the right times.
And, Warren, you have done better than most.? Your stock portfolio has beaten others over the last 40 years.? Most stock portfolios have not beaten bond portfolios, though admittedly by a smidge.
So, is this the time to buy stocks?? I am more bullish than bearish, so yes, but edge in, and be ready to adjust.
Stocks make sense, but only at a price and Schiller’s CAPE ratio makes a great counter-argument to large scale exposure. High quality short term bonds lack upside, but have the virtue of Preservation of Capital and preserving opportunity risk for when the market cheapens and for that reason deserve a decent allocation. I agree on Gold and while recently I find myself disagreeing with Buffett more often than not, I think he’s correct on productive assets, whether they are farmland, timber or direct purchases of multi-family real estate.
I can’t see equities doing well for reasons beyond valuation, baby-boomers will be net-sellers of equity going forward, confidence in management to act in the best interests of shareholders is deservedly not there and business climate does not support above average growth based on what we see in Europe, china and Japan.
> I don?t own any gold
Think about the CA gold rush. Who made money? It was the shop keepers selling the pick and axe to the miners. Today we have people needing metals (copper, rare earths, …) and wanting metal (gold, …). The problem is that it is getting much more expensive (decline in ore grades, mining and environmental cost, etc.) to get sufficient product to market so the price goes up.
Yes you can hold a metal producer like FCX or AUY. Or you can buy the pick and axe makers such as JOY or CAT. You do not have to own gold to benefit from its run up.
By the way oil is in much the same place as copper with it being much more expensive to find, develop and produce the next new field. In oil the pick and axe is sold by different companies, but the economic forces are similar.
FULL DISCLOSURE – long FCX and JOY, looking to go long AUY.
“Also, be for real, Warren”
As long as we’re insisting that Warren be for real, let?s try to flesh out some glaring inconsistencies:
?Negative real interest rates means the government does not care about the value of its currency??
?…appreciate in value dramatically versus the depreciating dollar??
Assertions like these make the extremely controversial assumption that interest rates would be any different without the gov’t?s intervention. Aside from ultra-short maturities (say, 2 yrs and below), the gov’t has very little ultimate control over longer-term rates. For surely someone like you must know that Treasury holders can always buy and sell Treasuries (i.e. drive the price movements) with or without gov’t intervention. By the way, the $USD is flat to UP over the last year.
Again, to insinuate that the gov’t is responsible for low rates across the entire curve is disingenuous, IMO. This would imply that the Fed?s policy has actually had some impact. Which you have vehemently argued against in the past. You can’t have it both ways: either the gov’t intervention has effect, or it does not. If it does not, then it is internally inconsistent to attribute negative real interest rates to the gov’t.
No, interest rates are low across the curve because of massive debt deflation across the domestic economy?s private sector. Plain and simply. In other words, it is a market-driven phenomenon. And it is a large enough force that it will completely manifest itself eventually, regardless of the Fed?s (or any other intervening force) level involvement.
“Gold is valuable, very valuable when governments and central banks are profligate. But what of bonds? Those are the opposite.”
This is an interesting assertion, too. Investment grade bonds (LQD) are up 12%-13% over the last year, while gold is up ~25%. So, yes, gold is up more, but bonds have done just fine, despite the alleged ‘profligacy’ of gov’t.
David,
I did review your Gold Medal Gold Model post and I liked it.
But in today’s post you state:
“The price of gold reacts to real interest rates.”
Are you claiming a causal relationship or stating a correlation in which rates preceed the change in gold?
I view the markets of 90 day t-bills and gold as liquid, but the CPI-U as lagging.
I guess my question is, have you ever used the price of gold to model future inflation (changes in CPI-U)?