"Civilized people don't buy gold," Berkshire Hathaway's Charlie Munger told CNBC yesterday in an exclusive "sit-down" interview.
It wasn't some off-the-cuff remark, either, as he went on to remind us that "gold is only useful if you're a Jewish family in Vienna in 1939" and "sewing it" into your clothes.
The statement has received a lot of attention in the alternative press since then, with numerous articles and commentaries mentioning it. The sheer obstreperousness of the comment virtually flies in the face of much of what's taken place in the past decade.
At the same time Munger was making these dubious observations, Berkshire Hathaway was announcing that it had more than doubled its profit in the first quarter. The conglomerate's insurance business, according to a Reuters report, "was spared from the devastating natural disaster losses that hit the company a year earlier."
The company also made money on its derivatives portfolio and substantially wrote down part of a bond portfolio. But it's hard to avoid the idea that all of this organized PR is setting the table for the company's upcoming shareholder meeting that's been called the "Woodstock for Capitalism," to be held in Omaha, Nebraska.
At this meeting Buffet and Munger shall be lionized as great investors once again, as before. We shall be subject to the interminable assertions that Buffet and Munger are simple men with a simply fantastic knack for picking "great companies."
Can we really believe it? It should be obvious by now for those who care to look that Warren Buffet in particular has been flailing for years.
Virtually every time you look around he's on television calling for higher taxes. When he's not calling for higher taxes, he's making deals with companies like Goldman Sachs at insider prices.
Buffet rarely if ever takes a naked long position, from what I can tell, without some sort of additional assurance or inducement.
He uses his size and leverage to create advantages while extolling the plain common sense of "value investing." But given his use of derivatives and the way he throws his substantial investment weight around, it's hard to believe that he is really "walking the walk" anymore.
In the case of investments in companies like Goldman Sachs, he's in the enviable position of knowing what the results may be of various investigations and regulatory issues.
If Buffet can bring his considerable influence to bear on those issues and investigations the success in the short term is almost assured. And over and over this seems to turn out to be the case.
Buffet continues to pursue a kind of business that has little to do with his stated affection for "value investing," and he also unfortunately is not being honest with the general public when it comes to gold and silver.
Gold has gone up nearly tenfold since 2001 and silver has gone about that high as well. As we've pointed out, there's nothing magical about it. The business cycle – a concept Munger obviously isn't keen on explaining – turned about a decade ago.
It was obvious to anyone who cared to look. And so was the mechanism. Central banks overprint money and cause first booms and then busts. The last bust – when money metals took over – was in the 1970s.
During the 1970s, gold and silver specie and bullion were bid up. Then when physical gold and silver were finally too expensive for many, paper gold and silver began to feel the effects of the golden bull.
This is perfectly predictable, not because investing is easy or conveniently managed but because modern investing is an artificial phenomenon dependent on central banking monetary stimulation.
If one takes the trouble to figure out how the economy works in the modern age, then absent extracurricular factors success would seem to be partially a matter of holding on and waiting – and watching – while the cycle almost inevitably spins through to its conclusion.
What conclusion is that? Well … it should be obvious. Miners and then junior miners will rise at the end of the current cycle, along with other paper gold products. The only unknown is whether the powers-that-be will allow the current cycle to play itself out.
Many factors could come into play, from war to outright confiscation of gold and silver if it really begins to threaten the underlying monetary status quo.
It's my belief that the road to US$ 5,000 gold (or wherever it ends up) is going to be a rocky one – given the pushback that may be coming from the powers-that-be. But the process itself is undeniable and obvious no matter what people like Munger say.
What Munger is doing in this interview is providing us with a kind of dominant social theme, an elite promotion of sorts. We're supposed to believe that the price-fixing of central banking is part of the larger "free market" that Munger and Buffet claim they are fond of.
I'd like to see both of them practice what they preach. They should stop talking about the advantages of higher taxes and stop avoiding the issue of how money is created in the modern world.
They would do everyone a favor if they explained how business cycles actually work and how people might be able to take advantage of them (within a properly cautionary environment).
You can bet that Buffet and Munger invest according to their perception of how the business cycle is affecting the larger economy. It's a shame that they don't share this knowledge instead of making statements that seem less than honest.