The Golden Bear


Let’s begin the week by congratulating the hardest working blue chip index around, the S&P 500. It closed up for the week on Friday in US trading. That’s seven consecutive higher weeks for the index. It hasn’t begun the year in such stupendous fashion since 1967. The longest weekly winning streak, by the way, is 1957, where the index closed higher for a lucky thirteen weeks in a row.

Hmm…1957. That was one year after Warren Buffet formed his first investment partnership, and two years before he met his long-time co-conspirator Charlie Munger. We’ll come back to the dynamic duo in a moment. When you’re comparing stocks to other assets (like gold) you have to include Charlie and Warren.

But first, Australia the brand is enjoying a good run in America too. The Australia iShares exchange traded fund (NYSE: EWA) is threatening to break out past its 2011 high of $28.27. When most American investors think of Australia, they think of iron ore, coal, koalas, and Crocodile Dundee. They might be surprised to know that 40% of EWA’s assets are in the financial sector, although this would confirm that Australia is full of poisonous and lethal things.

EWA’s Top Ten Holdings

  1. BHP Billiton Ltd (BHP): 12.20%
  2. Commonwealth Bank of Australia (CBA): 10.33%
  3. Westpac Banking Corp (WBC): 8.65%
  4. Australia and New Zealand Banking Group Limited (ANZ): 7.22%
  5. National Australia Bank Limited (NAB): 6.32%
  6. Woolworths Limited (WOW): 3.97%
  7. Wesfarmers Ltd (WES): 3.90%
  8. Rio Tinto Ltd (RIO): 2.94%
  9. CSL Limited (CSL): 2.74%
  10. Woodside Petroleum Limited (WOR): 2.40%

The one hope investors have is to buy shares of a productive business that can grow your money faster than the authorities can debase it. That is what ‘civilised’ people do, if you’ll recall the wisdom of Charlie Munger from last year. We thought of Munger this morning when we saw that the S&P had closed higher for seven weeks in a row.

In particular, it seemed like a good time to go back and visit the ratio between the spot gold price and the ‘B’ shares of Berkshire Hathaway, the company Munger directs along with his pal Warren Buffett. How is Berkshire doing relative to gold? Have a look below.

The chart shows you how many ‘B’ shares it would take you to buy an ounce of gold. The lower the ratio, the better the ‘B’ shares are doing or the worse the gold price is doing. You can see that when the gold price peaked in 2011 above $1900, so did the ratio. Since then, it appears to be in decline.

What the chart doesn’t show you is that Berkshire’s ‘B’ shares closed at their all-time high on Friday at $99.77. The gold price, meanwhile, closed at a six-month low and briefly dipped under $1600. Yet despite all that, the price action in gold, at least in terms of Berkshire ‘B’ shares, has favoured gold since 2002.

Of course what we’re really trying to discern is whether stocks will keep going as a result of monetary inflation. We’ll cut to the chase for today and make a prediction: a combination of falling gold prices and rising stock prices will drive the ratio down to 14. But let’s assume the worst.

Let’s assume that gold does all of the falling while the ‘B’ shares stay put. And let’s round the value of the ‘B’ shares to an even $100. That gives you a gold price of $1400 at a ratio 14. That’s a 12.5% decline in the gold price from $1600. And that sounds about right. What do we mean by ‘about right?’ Tune in tomorrow…

Dan Denning
for The Daily Reckoning Australia

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From the Archives…

As Gold Flows Eastward, It’s No Longer Money
15-02-13 – Greg Canavan

The Setting Sun – Japan’s Forgotten Debt Problems
14-02-13 – Satyajit Das

The Phony Boom in Stocks
13-02-13 – Bill Bonner

First Home Buyers Not Interested in the 30 Year Debt Trap
12-02-13 – Greg Canavan

Money, the Discredited Credit
11-02-13 – Greg Canavan

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 years 8 months ago

The 25 per cent fall in December quarter earnings was the result of adjustments to the bank’s hedging derivatives.

This should be happening on the NAB’s Australian boreal estate oks where the mother of all derivative risk overlaying another south sea bubble decision on funding the NZ branch office operation was taken:

“The 25 per cent fall in December quarter earnings was the result of adjustments to the bank’s hedging derivatives.”

There is lots more of this to come.

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