Gyroscopic Investing

Interesting article theorizing why Gold is shunned by Buffet and many other investment professionals. The author almost endorses a Permanent Portfolio approach without even realizing it. Some nice charts too.

http://pragcap.com/ben-grahams-curse-on-gold

Since many forms of physical gold were "illegal" to own during the formative years of some of these investors, I wonder if that is a factor?

It is interesting that in Atlas Shrugged, published in the US during the illegal-to-own-gold time, the measure of value was gold - bars, coins, etc.  Perhaps Rand's Russian origins?

Slightly more vitriolic deconstruction of Buffet's (and others) position here

http://fofoa.blogspot.com/

And that's why he wrote this piece trashing gold. Because when you buy a tube of gold coins and put it in your sock drawer, it's out of [his] reach.

But what about the fact that through his late 1990s silver speculation, Buffett made himself one of the largest precious metals speculators of modern times?

BTW, if Buffett hadn't exited his silver trade when he did he would have earned enough money for Berkshire Hathaway to offset most of the equity losses in the last 10 years.

In general, I think that when a nation has a currency that is more or less backed by precious metals (as the U.S. did during basically all of Graham's investing career), I can see why it would seem silly to view gold as anything other than another type of "cash" holding.

MediumTex wrote:In general, I think that when a nation has a currency that is more or less backed by precious metals (as the U.S. did during basically all of Graham's investing career), I can see why it would seem silly to view gold as anything other than another type of "cash" holding.

That is a good point.  I think Rick Ferri referred to gold as "...very volatile cash..." in CraigR's interview with him. And I'd forgotten about Buffett's silver trades.

Perhaps one of the big reasons for gold's disfavor - you do not need a broker or brokerage account to buy and sell it.

MediumTex wrote: But what about the fact that through his late 1990s silver speculation, Buffett made himself one of the largest precious metals speculators of modern times?

I thought I read that he didn't buy silver except when it hit a 10- or 20-year low. Is was that earlier?

dualstow wrote:

MediumTex wrote: But what about the fact that through his late 1990s silver speculation, Buffett made himself one of the largest precious metals speculators of modern times?

I thought I read that he didn't buy silver except when it hit a 10- or 20-year low. Is was that earlier?

I believe he started his silver position around 1998 at around $5 an ounce and exited 18 months or so later at $7 an ounce.  That's probbaly not exactly right, but I think that was the general thrust of the trade.

Not that anyone here needs to hear this, but here's a nice simple counter-argument to Buffet's opinions on gold...

It’s bold to call Buffett ignorant, but according to the rules of logic and their Latin parlance, in this instance he may be. His argument is ignoratio elenchi — an ignorant conclusion, or put simply, he’s missing the point. According to logic, because X is true, it does not necessarily follow that Y is false.

Buffett suggests that because someone would not exchange pile B (the best of productive, corporate America) for pile A (a massive cube of all the world’s gold), then gold should not be in your portfolio. You don’t have to be an investment sage to know that you shouldn’t take all your cash to buy a pile of metal. (Although, to be slightly playful with this point, if you owned all the gold in the world, you would quickly become the world’s gold market-maker — and market makers generally do quite well in driving up an asset’s value.)

To explore this question, simply exchange gold for cash in this comparison. Would it be wise to own a huge $9.6 trillion pile of cash over $9.6 trillion in diversified corporate value? The answer is the same, no. The wise investor would select the diversification and compounding of corporate productivity every time. What can cash do for you other than sit there, produce nothing and deflate at an historic rate of approximately 3% a year.

Should you then draw a conclusion that cash does not belong in your portfolio? Obviously not. Even Buffett himself would acknowledge that cash, stocks and bonds are fundamental building blocks of a portfolio. Cash is useful on several levels including liquidity, security, fixed value, and simplicity, to name a few. Therefore, although you may not want your entire portfolio to consist of one asset class, you may in fact want some of that asset class represented in a globally diversified account.

Source: http://www.marketwatch.com/story/buffet ... 2012-02-29