Warren Buffett’s Latest Insurance Con

In an article authored by famed investor Warren Buffett, titled, Warren Buffett: Why stocks beat gold and bonds, he attempts to dissuade investors from accumulating gold (again) as insurance during the ongoing financial crisis.

Cleverly riddled throughout his ‘sales pitch’ for keeping with paper assets at this time, essentially, Buffett deploys the old “Feel, Felt, Found” technique of persuasion on his readers, in the hopes of instilling confidence through his past performance, aided by his Lt. Columbo-like charm and icon status.  Sign-up for my 100% FREE Alerts

Here’s how it works:

Buffett begins his pitch against the yellow metal with, “ . . .  gold . . . currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful).”

You see, Buffett wants you to know that he knows how you feel.  He validates your fear.  But . . . now for the ‘but’.

“True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production,” he continued.  “Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.” Emphasis added.

He continued his article by guiding the reader to his understanding that others felt the same way about gold, but after they found that the Berkshire method of investing outperformed very well throughout 46 years, they turned to him, Warren Buffett, the prudential ‘oracle’, the ‘you’re in good hands’ master of money.

In the above quote, Buffett demonstrates that he doesn’t really know how investors feel about the U.S. government and Fed, or he dismisses the fear altogether, as it is the threat to his dollar-based empire.  Does he want to end the Fed and stop the madness, which is the very root of investor fear?

Polls show that the American people don’t trust the Fed, or the U.S. government.  So, Buffett asks you to trust him.

Moreover, he neglects to point out that other billionaires, central banks and ‘smart’ money don’t hold gold for its industrial and decorative utility; they feel that they should own gold because it can be used as money, whose demand for it, while currencies are actively debased, doesn’t have a limit, just as there is no limit to governments debasing currencies.  Why, then, does the Fed store 8,150 tons of gold for the U.S. Treasury?  Why did the EU ask Germany to back the EFSF with German gold? Aren’t they listening to Warren Buffett?

Though Buffett states earlier in his article, “the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time,” he fails to alert the reader to the connection between the gold price and the dollar’s drop in value during the last 46 years.

Sure, the correlation is no where near a lock-step rise in the gold price as the dollar dropped in value, but gold investors understand the myriad of reasons for that—which includes central bank collusion to ‘manage’ its rise, as former Fed Chairman Paul Volker (1979-1987) laments his remissness during the dollar crisis of the 1970s.

Regarding the dollar’s 86 percent decline in value since 1965, hasn’t Buffett seen massive balance sheet expansions of the Fed, BOE, BOJ, ECB, PRC’s central bank and the SNB since the beginning of the financial crisis?  Hasn’t the Fed indicated that ZIRP could be extended into the year 2014?  What will be the extent of the latest dollar devaluation during this decade against the value of the dollar of 1965?

In essence, Buffett provides the reader with the bum’s rush into having you believe that he knows how you feel, when, in fact, he doesn’t know—or doesn’t want to address the more salient point for owning gold.  Maybe, along with the Fed, he too, is in fear of opening a can of worms to his own argument against holding the yellow metal.

His fortunes are tied to the Fed’s continuation of the dollar-debasement scheme, an old scheme from which he has profited smartly, along with the money center banks—at the public’s expense, not at his expense.

And speaking of eternity (in reference to the above Buffett quote), no one has suggested that gold accumulators hold the precious metal longer than they deem necessary, so why the talk of the long run?  Some investors will hold some gold for eternity (and should), but the point of long-term investing is a specious one for many old hands and newcomers alike to the gold market.

Moreover, gold’s track record of preserving wealth is a bit longer than Buffett’s 46 years of performance, by approximately 3,000 years.

Isn’t gold really an insurance against Buffett’s paper insurance empire, which, by the way, had to be bailed out by the taxpayer?  Gold investors didn’t need a bailout; they’re not connected to Washington.  That’s why they hold gold.

Shouldn’t Buffett know his audience (customer), an audience of many politically and financially repressed retirees who don’t have time for the long run?

Investors have been, as Jim Rogers has recently said, “forced to own real assets” while the Fed deprives retirees, especially, of a market-clearing interest rate for their savings.  Can Buffett still imagine what it must be like to live like Jim Rogers, telling it like it is, instead of pitching nonsense for his own self-centered survival and legacy?  His entire identity was saved by taxpayers, and he’s still talking the same game.

Buffett may have forgotten that it was the taxpayer who took on the roll of AIG’s reinsurance policy, not the other way around, giving true meaning to The Black Swan author Nassim Taleb’s statement, “We’re all blind to rare events and routinely fool ourselves into believing we can predict risks and rewards.”  Touché.  Buffett grossly under-priced risk, and that’s his job.

“I don’t want to spend too much time on Buffett. George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does. Soros is vastly more robust,” said Taleb, in response to a question regarding Buffett’s investing performance.  “I am not saying Buffett doesn’t have skill—I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.”

A snapshot of financial history, between 1946 and 2008, or 62 years, could easily suggest to a statistician that Fed money creation during that period, as well as the demographic trends associated with baby boomers living out their lives staring in 1946 (through 1960), may have more to do with Buffett’s savant-ish buy-smart-and-hold investment strategy than his brilliance for assessing and quantifying ALL risk throughout his various long-term holding periods, as Taleb implies.

In his book, The Black Swan, Taleb reminds readers of the story of Long Term Capital Management (LTCM) and its demise due to the unforeseen event of a crisis in the Thai baht in 1997.  The collapse of LTCM prompted the Fed to quickly bailout the financial system before a Lehman-like event occurred.

At the helm of LTCM were two Nobel Prize laureates who are quite familiar with the Black Swan.  In contrast, Buffett, not only ignores gold’s vital role within the financial system, he ignores his own shortcomings.  Pure hubris.

In a somewhat similar manner, Buffett’s empire was saved by TARP, and now he has the nerve to advise investors to roll the dice again on his paper promises—and just in time, too, for the European crisis to spread to the U.S. in the not-so-distant future.  Holders of gold are betting Buffett will need another bailout, but he doesn’t see that, just as he didn’t see the crisis that necessitated the first one.

“The inability to predict outliers implies the inability to predict the course of history,” Taleb wrote.  At 81-years, Buffett may not be around to pay off on his bets.  It’s been quipped, “The goal in life is to pass on while the last check you write bounces.”  Is that the Buffett personal endgame to the endgame.

“Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle,” concluded Buffett.   “In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.”  Emphasis added.

Correct, Mr. Oracle.  It’s that little bit about “exchange” that has people worried. With what?  Your Berkshire shares denominated in dollars, or See’s peanut brittle?  Please don’t pass off the obvious as some kind of profound wisdom.  Isn’t Buffett making the case for gold with his cute ‘See’s peanut brittle’ remark?

But the one-trick buy-and-hold aged pony doesn’t see that either, or has Buffett made his latest installment to the cabal with his latest ‘advice’ in return for a tip about the kibosh of the Keystone Pipeline?  His railroad looks like a mighty fine investment right now.

Maybe Taleb is right.  Buffett sure is one lucky guy.  Sign-up for my 100% FREE Alerts