David Einhorn Slams Ice Cream Cone in Warren Buffett’s Face

By Dominique de Kevelioc de Bailleul

“Let blockheads read what blockheads wrote,” Warren Buffett once said.

The man who loves being photographed with his favorite prop, an ice cream cone, also said this about gold:

Gold 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.

Since the earth is a place for humans, those unique creatures of the cosmos who have sought gold for 5,000 years, and who’ve eaten Warren Buffett’s See’s peanut brittle more recently, what Buffett’s hypothetical Martians have to do with making his case against owning gold is telling, as well as nonsensical and manipulative, strongly suggesting that people who buy gold are foolish and are laughed at by Buffett’s imaginary Martians.

He’s right; fiat currency isn’t dug out of the ground; it’s printed, created out of thin air, everywhere, and that same Martian would wonder why it has any value at all to us silly humans.  And what value is there in See’s peanut brittle other than people like to eat it.

Gold has no utility?  Who categorized gold as an investment in a power company or auto firm?  Indians of India find spiritual value in owning gold, for one thing, and there’s about a billion of them, at last count.  Why do Indians like gold?  Why do people like sunsets?  Many people don’t like See’s peanut brittle, but they like gold and sunsets.  Maybe Buffett is truly different from the majority of the human race.

In a great post by David Cohen on DeclineOfTheEmpire.com, titled, Sociopaths in America,he writes:

 . . . some proportion of the population is “sick” and there’s nothing you can do about it. However, a Decent Society uses a multitude of checks & balances to rein in conscienceless people, to prevent them from running amuck. But in America, the most dangerous inmates are now running the asylum. These elaborate controls on immoral (unethical) behavior have been lifted. (This is often called deregulation or regulatory capture.) The corrupt politicians have rewritten the laws in such a way as to make it legal to rip people off. There is no longer any fear of punishment. 

Sociopaths can run wild—

ñTrue sociopaths have no conscience—none.

ñThey make life a game

ñThey get their kicks from kicking others, from manipulating, and most of all from WINNING.

And Warren Buffett surely hates to lose, according to his own words.

The first rule is not to lose. The second rule is not to forget the first rule.

He also refers to his life’s adventure as a game—again, according to his own words.

If past history was all there was to the game, the richest people would be librarians.

The game.  How many people call life a game with a straight face?

Back to Buffett’s argument against owning gold.

You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

Instead of Martians, Buffett now talks about cubes, an irrelevant and manipulative obfuscation of thought.  How many Hope Diamonds can fit in the trunk of his car?

Or this, from Greenlight’s Capital Fund Manager David Einhorn, who wrote in a recent report to investors:

The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us.

Einhorn knows quite well the system is rigged against investors, those Warren Buffett suckers who must lose for him to win.  Buffett’s original empire of insurance companies, by definition, are rigged to profit the ‘deep pockets’ at the expense of the ‘scared money’ with no pockets, if things don’t work out.  But Buffett wouldn’t understand that; he gets bailed out from his corrupt political friends when he doesn’t take out his insurance: GOLD.  Insurance is for suckers, not for vampires who view life as a “game”.

Another Buffett quote:

Only when the tide goes out do you discover who’s been swimming naked.

If he had not cared what a Martian would think of him, he would not have lost three-quarters of his fortune in realterms, that’s right, in terms of gold—real money! —a currency that he and his Martian friend don’t seem to ‘get’.

Why would someone pay a quarter of a billion dollars for the Hope Diamond?  Answer: Because they want it.

Essentially, Buffett shows a huge blind spot in his understanding of the wholeness of the human race.  But he insists on telling us how foolish we all are for owning gold, the Hope Diamond and holding spiritual beliefs, beliefs that are no less noble than his—in fact, more noble in many cases.  He never talks about human feelings other than the feelings of fear and greed, but he talks about value, cold cash, critical journalists, Martians and cubes.

He once said, “Value is what you get.”  Is this some kind of riddle?  Is value only derived from cash flow?  If so, why didn’t he speak up about overvaluations of the housing market?  But he wants to talk endlessly (through he’s lately enlisted his  sidekicks Munger and Gates into the fray) about the overvaluation of gold.  And he should have know better, too.  Munger talked about persecuted Jews, and Gates couldn’t come up with anything intelligible to say about gold.

And another one-liner from Buffett:

There are 309 million people out there that are trying to improve their lot in life. And we’ve got a system that allows them to do it.

But then he said:

The rich are always going to say that, you know, just give us more money and we’ll go out and spend more and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.

Yeah, ‘Blockhead of Omaha’, the American public is “catching on.”  And kudos to Greenlight Capital’s David Einhorn for his critique (the ice-cream-cone slam to the Buffett face) and very generous and charitable giving at such a young age.  And it’s unlikely, too, Einhorn will disown his granddaughter, if he ever receives one in the future.

Buy Gold Stocks, Peter Schiff & David Einhorn

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“I think if you look at the underperformance relative to bullion, they (gold stocks) are the cheapest they have ever been.” Schiff told KWN.

Anyone following Schiff’s commentary knows he’s liked gold stocks, especially as the gold bull market enters its second stage—a stage when hedge fund managers start jumping aboard more broadly in both the bullion and stocks.

One such manager, Greenlight Capital’s David Einhorn, has been getting lots of press lately for his decision to lighten up on gold bullion to buy gold shares for his clients.   Einhorn has been a gold bull for several years, but he anticipates that after 30 months of poor performance of the gold stock relative to the metal the time is now to change to a faster horse.

“A substantial disconnect has developed between the price of gold and the mining companies,” Bloomberg News reported Einhorn saying in a conference call to investors. “With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further.”

He added, “Since we believe gold will continue to rise, we expect gold stocks to do even better.”

According to Bloomberg, Einhorn has chosen the gold miners ETF, GDX, to expose his fund to the sector’s major producers.  He still favors the metal, but he now wants to get more for his buck from the leverage to the gold price that gold stocks offer investors.

As with any stock, management and operation risks remain as primary concerns to investors taking on exposure to the gold bull market through the ownership of mining shares.  Einhorn’s choice of mitigating that risk through the GDX ETF is a good one, in that a diversified holdings of the world’s major producers reduces his exposure to either a surprise nationalization of a mine somewhere in the world or some other negatively impacting event to one or two of the stocks which make up the GDX.

The graph, below, demonstrates Schiff’s assessment and Einhorn’s bet.  The ratio of the gold price to the GDX has risen to approximately 30 while the gold price rallies to above $1,750.  One would think the gold:GDX ratio would drop rapidly. Not yet.

Note the low gold:GDX ratio between the years 2002 and 2008.  While gold traded below $1,000 (except briefly for a short spell in 2008), the gold:GDX ratio stood at below 20 nearly consistently throughout the six-year+ period.

Today, however, the majors have enjoyed bullion prices above $1,500 for quite some time.  The gold price to the oil price is quite high, which is also favorable to the majors.  Margins of the majors should be ballooning quite rapidly.  It’s only a matter of time investors notice some pretty hefty earnings from the majors, decompressing those P/Es through higher stock prices.  That’s the Einhorn bet.

A Gold crash coming?

If you’re loaded up on gold, silver and commodities, congratulations, you’re in good company.  Mega hedge fund managers John Paulson, David Einhorn, and George Soros (rumored to have sold his GLD for gold stocks) are with you.  Iconic investors and gurus, Marc Faber, Jim Rogers, Jim Sinclair, James Turk and Richard Russell are on board the gold train, as well, along with many more lesser-known brilliant investors.

So, should the above-mentioned investors be frightened by articles published by Reuters, entitled, “Gold crash: What could trigger the inevitable”?  That’s the title of a piece posted on the news agency’s Web site over the long weekend.

From the start, the premise of the article’s title, that a gold crash is inevitable, is flawed.  Long-time gold expert Jim Sinclair, Richard Russell of the Dow Theory Letters, James Grant of Grant’s Interest Rate Observer, and World Bank president Robert Zoellick would most likely disagree with a gold crash theory, as these three men suggest highly that some form of a gold-backed currency, including a gold-backed U.S. currency, or not, must eventually become part of the new international monetary regime.

Under that scenario, as outlined on many occasions by James Sinclair, gold would most likely trade within an elevated band (instead of fixing the price) as central banks become locked in a gold-backed regime that loosely resembles the articles set forth at Bretton Woods in 1944.

The inevitable gold crash?  It’s much more likely that a crash in the U.S. Treasury market should be assessed as inevitable.  PIMCO’s Bill Gross would be loaded to the gills with U.S. Treasury notes bonds if gold was destined to crash.  Gross is not. In fact, the Bond King has no bonds in his BOND fund.

Can you imagine McDonald’s not offering hamburgers?

The article goes on to suggest that betting on the dollar’s next direction is akin to gambling.  In the short run, the author is spot on.  But, as a long-term investors, which the author believes is the only way to play this financial debacle, betting on the dollar’s demise is for the foolhardy—better yet, for the “nervous Nellies.”

“The clearest threat to gold’s reign as the reserve currency of nervous Nellies is a possible rebound of the dollar,” according to Reuters. “Given the congressional wrangling over the debt limit, budget and growing inflation, betting on the buck is like trying to figure out whether a racehorse will finish. They often pull up lame.”

The author suggests that a miracle is in the offing and that politicians who know that shutting down the U.S. Government to save the dollar is political suicide (the 1992 Congress comes to mind) and will miraculously learn the meaning of noblesse oblige and do the right thing for the country.  But, until we see Ben Bernanke and Ron Paul scheduled to a duel on the White House front lawn, the author may be onto something.

Holders of gold will take the other side of this author’s bet in a New York second, and have, by betting on a racehorse that’s come in first, without except, for more than 5,000 years. And not only have the heavy weights of finance mentioned above taken that bet, but central banks around the world, who have collectively become net buyers of gold, are increasingly placing that bet, too.  According to another Reuter’s article published in April 2010, central banks have become net buyers of gold in 2009, a first since 1989.

And as far as the author’s points regarding a “strengthening U.S. economy and rising interest rates . . . derailing the epic yellow metal mania,” they are as flawed as the title of the piece.

Mania?  This Reuters writer originally suggested that gold investors are nothing but “nervous Nellies,” which is quite the opposite mindset to the greed thesis characterized by manias?  So, which is it? Is fear or greed driving the decade-long gold price rise?

Reuter’s point that a strengthening U.S. economy will save the day and stop the embarrassing ascent in the gold price may well be true in a relativistic context, but not in real terms, however, which is the whole point of the Fed’s zero interest rate policy (ZIRP) and the investor revolt into the gold market.  Real interest rates at, or below, zero propel the gold price, not nominal GDP.  So, the notion that gold doesn’t throw off income is a species one within today’s financial environment of near-zero Treasuries at the short end while food and energy prices soar well past the double-digit mark.

And as far as the case that higher stock prices presage an economic turnaround in the U.S. economy has less to do about a real strengthening economy, but has more to do with institutional investors locked into the bond/stocks allocation charters betting on a devaluation, a la Zimbabwe—wherein the Zimbabwe stock market, in one year, outpaced the returns of the S&P over its entire history as an index.

And lastly, higher interest rates, as Swiss money manager Marc Faber has stated, mean nothing if the rate of inflation is higher than the Fed’s federal funds rate—as during the 1970s. Maybe the author was too young to remember that golden decade of wealth destruction, which in real terms eclipsed the the wealth destruction of the Great Depression.

And since this present crisis is expected to dwarf the financial pain of the 1970s, it makes a lot of sense for investors to become “nervous Nellies”—and fast.

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Gold Corp. Inc. (NYSE: GG)

Barrick Gold Corp. (NYSE: ABX)