Warren Buffett Does a Disservice
By Staff News & Analysis - May 03, 2011

Warren Buffett shuns gold as an investment … The billionaire investor Warren Buffett has said he'd always bet on a good business to deliver better returns than gold over time, even as the precious metal sets fresh records. Billionaire investor Warren Buffett says of gold: 'you can fondle it, you can polish it, you can stare at it. But it isn't going to do anything.' – UK Telegraph

Dominant Social Theme: The metal is worthless.

Free-Market Analysis: Warren Buffett is at it again, talking down gold and the Telegraph is reporting on it: "Gold really doesn't have utility," the 80-year old told shareholders at Berkshire Hathaway's annual general meeting. "I'd bet on a good producing business to outperform something that doesn't do anything."

Buffet may indeed bet on a producing business to outperform gold, but in the 2000s his track record is considerably spottier than in other decades and the past three years of the financial crisis have savaged his portfolio. Meanwhile, the "greatest investor in the world" has sat on the sidelines while gold has moved from US$250 to over US$1500, throughout the 2000s. He did apparently own some silver but sold it years ago.

The Telegraph tells us that when he was asked about gold at his annual meeting in Omaha, Nebraska, Buffett said "if you take all of the gold in the world and put it into a cube, it would be about 67 feet on a side and you could get a ladder and get up on top of it. You can fondle it, you can polish it, you can stare at it. But it isn't going to do anything."

The Telegraph then provides us with a handy summary of gold prices that would seem to undermine Buffett's arguments. Gold prices reached new highs 15 times in April, it points out, "as a weaker dollar and fears of inflation encouraged some investors to seek the metal as a store of value." In fact, as Bell feedbackers tend to argue, it is not gold prices that have climbed but the dollar and other currencies that have devalued against it – just another side effect of the Internet Reformation as public confidence in fiat money wanes.

Here's another statistic courtesy of the Telegraph: "Gold is already up 10pc this year after climbing for each of the last ten." But Buffett won't purchase gold for his company, apparently, and persists in speaking of gold in investment terms rather than monetary ones. Even central bankers now disagree with Buffett, as they have become net buyers for the first time in two decades last year, purchasing some 87 metric tons this past year alone.

It is almost comical that central banks have chosen to buy gold now after selling so much of it early in the 2000s. Britain's former Prime Minister Gordon Brown famously sold tons of his country's gold at the bottom of the market. Today, out of office, he campaigns to become head of the International Monetary Fund and is said to be one of the front-runners. Only in the modern world could someone who espouses such financial blindness be considered for one of the world's top financial positions. It has little to do with one having common sense and a lot to do with one being a willing foot soldier. (BTW – Have you ever wondered who was on the other side of those Gordon Browne sales and fortunate enough to get Britain's gold at the bottom of the market, just before it began to rise? Makes one wonder as to whether Gordon's potential new appointment is a possible reward for a job well done, doesn't it? Maybe he can engineer a buy back at the high for the IMF and take all his old pals out of the trade.)

It is part of a larger problem, which is that the Anglo-American power elite that stands behind central banking continues to promote the dominant social theme that gold and silver are fairly worthless. The elites do not want to explain the modern business cycle because to do so would open up a host of questions about the modern economy. What is indisputable to an unbiased observer, however, is that the rising price of gold and silver (or the further devaluing of fiat money) in the 21st century has only confirmed free-market Austrian money analysis.

The free-market approach to economic analysis holds that the modern business cycle has been greatly exacerbated by central banks, which print money-from-nothing, which debases currencies and ruins economies. This is an evident an obvious fact. One can see it at work. Over time, money-printing fools business people into thinking that the economy is doing better than it is. Investments are made and economic expansion takes place that it is not warranted. Eventually the market itself realizes the distortion and a crash takes hold after which the economy gradually undershorts, and fiat money begins to sink toward its true worthlessness.

This cycle took place in the 1970s and it took place in the 2000s with redoubled ferocity. Everything that the great free-market economists such as FA Hayek and Ludwig von Mises predicted would happen has taken place over the past 50 years. The 2000s have proven out the worst of their predictions as the current dollar-based reserve system has virtually collapsed.

Central banks have admitted to dumping some US$10-20 TRILLION into the market via purchases of worthless assets and short-term loans and such impossible sums of money are a testimony to the lack of solvency of the fiat money system worldwide. Only Austrian business cycle analysis provides a perspective that allows us to grasp what has happened and why. But it is an approach that it is resolutely suppressed by the mainstream media.

It is really too bad that Buffett chooses to continue to disparage gold as an investment as it only encourages financial illiteracy (another foot soldier perhaps?) and an acceptance of central banking mercantilism, which is the plague of the modern age. Beyond that, it is a sign of the times that the "greatest investor in the world" can make such remarks without much pushback. There is a good deal of irony that a man who has made so much money for himself and others cannot be bothered to tell the truth about the world's economy.

Warren Buffett espouses the modern system of finance in other ways as well. Though the current approach to finance emphasizes regulation, the aggressive regulating of the economy did nothing to ameliorate its meltdown. Nonetheless, Buffet stands directly behind the current system and refuses to criticize it. Regulatory democracy in the 21st century is degrading into ruin throughout the West, but Buffett and others who have profited from the system won't admit it.

Most recently, Buffett's chosen, and now disgraced, successor David Sokol was accused in a report from Berkshire's audit committee of making "misleadingly incomplete" disclosures about an acquisition of shares in a company that he later urged Berkshire to consider buying. Sokol resigned under pressure saying he'd done nothing wrong.

In fact, the fuss about Sokol is hypocritical. The modern financial business is riven with conflicts of interest in every single way and its modern legal assumptions are just that – assumptions. Even its basic building block, the so-called public company is nothing but a legal fiction. There is no such thing as a public company, only a series of onerous legislative and regulatory burdens of disclosure that have not proven effective at "protecting" shareholders in the slightest.

Buffett and Berkshire are held up as a 20th century success story showing that savvy investors can indeed make the system work for them. But Buffett's larger investment approach is not one the average investor can mimic. Beyond that, Buffett's resolute refusal to criticize the system of modern finance does his legacy a disservice. By criticizing gold as an investment, he perpetuates myths about the modern economy and comes down on the side of statism and price fixing (for the function of modern central banks is to fix the price of money).

Buffet has managed to profit from the system as it is and his mouth has been hovering close to the fiat-money spigot for a long time now. But people have profited from unjust and savage systems of production throughout the ages. That doesn't mean that Buffett is any the wiser for having made so much money, only that he is adept at exploiting the current system to create wealth. If he would use his platform to spread the truth about how the system works he would do his own shareholders and larger citizenry of the Western world a service.

Instead, he perpetuates the idea that the current system is workable, that it does not create ruinous business cycles and that modern regulatory democracy itself is functional and utile. His own experience in the 2000s shows us that Buffett is fallible as any mortal but instead of admitting the wrongheadedness of his perspective regarding investing during such cycles as the current one, he chooses rationalization over reality.

After Thoughts

Warren Buffett has created great wealth for himself and his shareholders but his achievements have been used by the powers-that-be to reinforce the status quo. That, among other things, will be Buffett's legacy. He could have used his hard-won credibility to demand changes in the way the system operates. Instead, he merely reinforces its current excesses.

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