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Article by Market_Ruminator    (02-13-09 04:27 PM)

Lately, gold has become a favorite investment of professional investors. Jimmy Rogers, the legendary investor who wrote A Bull in China: Investing Profitably in the World's Greatest Market, is bullish on gold. His latest book, A Gift to My Children: A Father's Lessons for Life and Investing ,is coming out in April 2009.

Seth Klarman, founder of Baupost Group, a hedge fund firm with an enviable long-term track record, who recently co-authored Benjamin Graham and Dodd's classic, Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions), discussed the merits of gold in a recent Graham and Dodd breakfast gathering of value investors in October, 2008.

David Einhorn, chairman of publicly-traded Greenlight Re, and author of the best-selling book, Fooling Some of the People All of the Time: A Long Short Story, has also jumped on the gold bandwagon.

The merits of gold as a store of value has been well documented in Peter Bernstein's book, The Power of Gold: The History of an Obsession. Gold, as opposed to currencies of different nations, is no one's liability. Gold is scarce. Gold does not rust or tarnish. Gold has been trusted as a store of value for over 2,000 years. It was only the last 30 years when man moved away fully from the Gold Standard.

With Barack Obama, Tim Geithner, Ben Bernanke, the IMF, the European Central Bank's Trichet, and China's Wen Jiabao leading the world in increasing the money supply of all countries, the consequence is that the value of gold will appreciate relative to the U.S. dollar, the Euro, the Chinese renminbi and the Japanese Yen. But wait a minute, have all these investors gone nuts? They claim to be long-term fundamental investors who value an investment as the value of all cash flows generated discounted at an appropriated discount rate to the present. But where are the cash flows generated from holding gold? In fact, it costs an investor money just to "hold" gold.

Is gold going to be another investment where all the value pretenders will end up holding forever and end up realizing that they were playing the "Greater Fool" game all along? Or will gold be another pump and dump scheme where these well-known investors promote their positions to the public and sell their gold to the unsuspecting Mrs. Jane who is your neighbor watching CNBC?

Have our gold hoarding value investors forgotten the advice given by the world's greatest investor, Warren Buffett, who said the following about gold? Warren Buffett: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." In 1977 Buffett was also quoted as saying about stocks, gold, farmland, and inflation: "stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices." (Source: The Snowball: Warren Buffett and the Business of Life ) My conclusion is that gold is an intermediate trade (a greater fool game) and not an investment to hold forever. I would rather have a piece of land and raise chicken. If the world comes to an end, I will still have eggs and fried chicken to eat.

Gold does not generate cash flows. It is simply a way to take advantage of the fear and negativity. In the next installment of articles, we will try to discuss gold as an investment and hopefully, we will be able to spot the turn and call the sell signal before it is too late. By the way, Warren Buffett did find a better inflation hedge than gold. He bought See's candies, a cash flow generator that manufactures chocolate, which has matched or even beat gold as an inflation hedge.

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Username Comments
Posts: 249

Reg: 09-24-07

02-16-09 07:22 PM - Post#2006    
    In response to

Valid points, but with all the government's printing so much money, who is to say that gold's intrinsic value in terms of dollars will not be permanently higher from here?

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Posts: 35

Loc: Santa Barbara, CA
Reg: 02-16-09

02-16-09 08:03 PM - Post#2014    
    In response to dailystock_admin

If Americans just decided to put 1% of their net worth in gold, gold prices will be permanently higher than here.

Bloomberg says pension funds are inquiring about allocating to more gold.

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Posts: 11

Reg: 02-22-09

02-16-09 10:49 PM - Post#2015    
    In response to munger

Gold is a stupid investment. I have to agree with Buffett here. This is a pump-and-dump by the professional investors.

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Posts: 31

Reg: 02-16-09

02-19-09 10:51 AM - Post#2104    
    In response to netnet

I know Buffett is selling America, has style drift and is out of touch... But this was Warren Buffett and Charlie Munger's answers to gold at the 2000 Annual Meeting

When would you tell a single mother to exchange her shares of Berkshire for gold?

Warren Buffett:
I would rather trust good companies run by good management. I'm not excited about gold — I never understood its intrinsic value. (I can sell you some at Borsheim's.) The idea of exchanging a producing asset for a non-producing asset is foreign to me.

And at the 2005 Annual Meeting

WEB: “Gold would be way down on our list as a store of value.” I heard all this over the dinner table, long ago. I would rather have 100 acres of farm land, or an apartment building, or an index fund. From 1900 to 2000 gold went from $20 to $400, but the Dow went from $66 to $12000, not including dividends and carrying charges. If you’re worried about paper money, there are better stores of value. I see no reason why it would work in the future.
Charlie Munger: “Gold was good for the Jewish family in Vienna, 1935. But now, it doesn’t interest us at all.”

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Posts: 0

Reg: 02-22-09

02-21-09 12:29 AM - Post#2170    
    In response to graham

At the end of the day, people from any country will accept gold. The question, I counter, what is the intrinsic value of paper money?

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