Where Warren Buffett is Wrong

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We got the news yesterday. Gold went over $1,900. This morning we find it soared $39 yesterday.

Wow!

Has making money ever been easier? We bought gold at around $300 at the turn of the century. Now, it’s 6 times as much. And if Ben Bernanke announces another money-printing spree, gold will probably close the week over $2,000.

Getting rich is a piece of cake.

All we had to do was to sit tight…and ignore all the people who claimed that gold was an overpriced bubble. Or that it was worthless. Or that we were idiots.

People like Warren Buffett, for example. Buffett says that buying gold is a waste of time. He prefers stocks. His Berkshire Hathaway produced a return of 76% from 2000 to 2010. Not bad at all.

But nothing like the 500%+ from gold. And BRK went up and down; it had good years and bad years. Gold only went up; only good years.

Probably the best thing about gold is that you didn’t have to go to Omaha to attend Warren’s annual meeting.

We were very sympathetic to Buffett for a very long time. He rarely said anything we didn’t agree with. But now he seems to misunderstand completely what is going on. He is telling investors to buy stocks now, because nothing beats quality US stocks over the long run.

He also tells investors to avoid gold, because it doesn’t produce anything. It doesn’t make candy or sell insurance, for example.

He’s telling everyone that the US should raise taxes on the rich. And he says US bonds should be up-graded, not downgraded. There just aren’t enough A’s in the alphabet to describe the quality of US debt, says the Sage of the Plains.

Wrong, wrong, wrong.

He’s wrong about US stocks. Yes, if you buy them when they are cheap…and if the US is in a boom period…you can make some money. But how about now? The US economy is in a period of correction…and debt de-leveraging. US stocks probably won’t go up for years.

What’s more, US stocks still aren’t cheap. They’ll have to go down another 30% to 50% before they are bargains. Most likely, they’ll get sawed in half before the bottom comes.

He’s wrong about taxes on the rich too. Raise the taxes on the rich all you want. There just aren’t enough rich people to make much of a difference. Allowing people to think they can get out of the debt trap just by soaking the rich is a dangerous illusion. You might want to soak the rich just for the fun of it, but it’s not a serious way to solve the debt problem.

As for gold, Buffett has been wrong about that too. Gold is not something you buy to make money. It’s something you buy so you won’t lose money. You buy it when you see the feds’ crackpot financial system coming apart. That’s what’s been happening for the last 10 years. The fixes don’t stay fixed. And gold goes higher.

But what now?

Hmm… Now, it’s a little harder for us gold bugs. We want to say “buy gold,” but we know that the risk-free profits have already been made. Now, it’s more of a gamble.

On the one hand, the feds are ready, willing and able to print more money — which is sure to send gold much, much higher.

On the other hand, this correction has much further to go too. And a correction is fundamentally deflationary. Cash — even dollar cash — should become more valuable. Do people need gold when their government-issue currency is becoming stronger? Well…it depends…

Already, a dollar will buy nearly twice as much house, in some areas, as it did 4 years ago.

It will buy more stocks too — US stocks are down about 15% from the peak, equivalent to a 15% price reduction.

Gasoline? Not yet. But the price of a barrel of oil has dropped nearly $20 over the last 4 weeks. If this keeps up, it will be cheaper to fill your tank too.

Commodities have taken a big hit too — so look for lower food prices.

And what about gadgets from China? They’ll go down too…as fewer and fewer people have the money to buy them.

And yet, the price of gold is still going up even faster than dollars…zooming up…soaring up…blasting up…

Has the long-awaited Third Stage of this bull market in gold finally arrived? Maybe…stay tuned.

Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Ok, so today gold fell 5%. The ‘Blue Sky Brigade’ have managed to find a convenient spin out of this by saying that a $100 fall in the price of gold hasn’t been seen since 1980.
    Maybe this is true, however gold in those days was priced in the hundreds rather than the thousands.
    When the ASX or the S&P gets smashed as it has been recently, the ‘Blue Sky Brigade’ blathers that is that it’s a wonderful buying opportunity!
    As Peter Schiff states:- All asset classes are in a state of deflation relative to gold.
    Well put.

    Alexander Malejew
    August 25, 2011
    Reply
  2. Hi Bill,

    A little survivorship bias here don’t you think? Just because you are in profit does not mean you are right or wrong..
    Gold is useless.. It is the purest form of speculation.. Doesn’t mean you can’t make money from it. And What about George Soros? he sold all his Gold back in March.. Rumor has it.. And it is only rumor.. That he put all that money into Gold stocks.. Do you think this is because theses stocks irrationally track the Gold price.. AND pay dividends? Who knows, but worth considering.. No?

    Rob.

    Reply
  3. Very biased article there. I’ll take Buffett’s advice over yours any day of the week. I won’t buy gold. Time will tell how wrong you are. Time has told over 50 years how right Buffett is and it will continue. I won’t come back to this website again.

    Reply

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