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Buffett Blunders into Misrepresenting the Logic of Gold Investment

June 20, 2012 Leave a comment

Warren Buffett has kindly taken time out from his exhaustive schedule to offer the investing community his wise pronouncements on Gold. We are, as ever, deeply grateful to the great investment guru of our times for any advice he feels ought to be imparted to the investing public.

We are especially indebted to the avuncular sage when his great wisdoms are not limited exclusively to the pages of his private investment letters and brochures, but are graciously shared in public space, in such esteemed publications as Fortune Magazine.

REFERENCE: Warren Buffett: gold has no value

Buffett gives us a privileged glimpse into his anti-Gold thesis. No-one can accuse the great man of not getting his hands dirty and engaging in the essential scientific research. We get a clear mathematical underpinning of his 68 feet cubed stock of Gold calculation, which with Gold priced at $1750 per ounce would value that cube at $9.6 trillion. You see, this is scientific; this is indisputable fact. And it leads Buffett to the self-assured logical conclusion:

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators -must continually absorb this additional supply to merely maintain equilibrium at present prices.

And in these few brief words, Buffett reveals his stunning lack of understanding of both Gold and the Gold markets. For all the seductive quality of his scientific and mathematical calculations, Buffett neglects one critical piece of information.

The public price of Gold which Buffett cites, $1750 per ounce, does NOT represent either the true value or true price of Physical Gold. That $1750 per ounce public price represents the ‘value’ of LBMA and Comex PAPER gold. For the clearly documented and openly admitted truth is that 100+ ounces of paper gold contracts are sold for every ONE ounce of Physical Gold that exists. The $1750 per ounce figure used by Buffett in his calculations is, at best, a promise to deliver sometime in the future 100 ounces of Physical Gold for every existing ounce of Physical Gold. Put another way, that public price of $1750 is NOT the price of Physical Gold in a 68 ft all-sides cube of Gold; it IS the price of the foundation cube of 68 ft all-sides Physical Gold with another 100 additional same-sized cubes of PAPER sat on top of it. Those additional 100 paper storeys of the edifice may have the words Gold written all over them, but when that inevitable, ever more imminent tower-tipping event comes, watch that paper seek to be redeemed for Physical Gold, only to be told: “Get real! That Physical Gold has NEVER existed.’

Buffett’s ill-conceived and wholly misrepresentative cube thesis, and his ‘absorption of annual production required just to maintain equilibrium’ concept collapses, torn to shreds, in the face of these facts.

It is difficult to imagine that Buffett lacks knowledge of such essential, widely available, ever more widely-disseminated truths about the LBMA and Comex paper markets, and the volume of paper gold sold against each ounce of real, tangible, Physical Gold. It is, after all, an operation run by Central Banks and their agent Bullion Banks, and it seems reasonable to suspect Buffett can include some of these people in his close circle of friends.

When one takes the time to acquaint oneself with the facts about the operation of the gold markets, and the two very different beasts, paper gold and Physical Gold, it becomes an exercise in stifling the most enormous laughter to read Buffett’s assertion:

“Gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production.”

Never mind the somewhat abusively excessive supply of paper gold generated by Bullion Banks to meet the investing public’s complete disinterest in Gold. The time is close when people will look back and kick themselves for failing to see the ramifications, for failing to understand the implications of a Gold market saturated with 100 ounces of paper gold supply per single ounce of Physical Gold in existence.

Warren Buffett has his Funds to sell. Shareholder newsletter time approaches. Buffet can NOT talk up, nor recommend an investment in Gold. It would be to shoot his Funds full-on in the face. I think it is quite reasonable that we view his misinformative comments about Gold against this background.

Buffett is a business-man. Who can blame him for seeking to maximise his Funds’ shareholder profits? What I didn’t realise quite so clearly until now is the degree of resentment he feels that he is unable to invest in Gold. But I’m grateful for his showing me.


			
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