When Investing in Gold is a Good Idea

Drums keep pounding rhythm to the brain
La dee da dee dee
La dee da dee da

The beat goes on! Here’s the world’s most successful investor talking about our favorite metal:

Warren Buffett on gold:

“You can fondle it, you can polish it, you can stare at it. But it isn’t going to do anything.”

Except protect you from losing every dime!

“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.”

Yes, so would we. And we’d usually rather have a jacket from Ralph Lauren…or Brooks Brothers…than a Life Jacket. And we’d usually like to see a pick-up truck or a delivery truck in our driveway, rather than a fire truck. And we’d much rather spend the night with Julia Roberts stark naked than with a heart surgeon in full medical regalia.

But hey…guess what? There’s a time and a place for everything.

Why did God bother to create gold, anyway? Is it just for ornamental purposes?

Historically, gold has had one other very important use. And, while most of the time it is useless, occasionally it is indispensable. Most of the time, gold is as dumb and lifeless as a joint session of Congress. Buffett is right; most of the time, it’s as useless as a seat belt.

But there are times when a common lifeboat has greater utility than a luxury sailboat.

Could this be one of those times?

Well, something is going on that is turning this do-nothing metal into an investment champ. The price of gold is up 10% already this year. It’s gone up every year for the last decade. You don’t have to look too far to see what it is.

How about $4.5 trillion in deficits over the last 3 years? How about tripling the Fed’s balance sheet holdings since the end of ’08? How about TARP, TALF, QE1, QE2…and zero interest rates?

Oh, and lest you think it is all just an emergency response to the crisis of ’07-’09, soon to be history…here’s The Washington Post with some perspective:

WASHINGTON – The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.

In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses for the foreseeable future. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.

Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in US history except for the period shortly after World War II.

Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits essentially forever. As policymakers grapple with the legacy of the past decade, a demographic wave of senior citizens is crashing at their doorstep, driving up the cost of Medicare, Medicaid and Social Security.

How will the feds cover this debt…and future deficits? Do you think they will put on the brakes…raise interest rates…cut spending…and raise taxes? If so, you should not own gold. Gold would go down and the dollar would go up. Of course, the bond market would crash and the economy would go into a depression too. Rehab isn’t for sissies. Getting clean can be painful.

More likely in our view: the feds will keep flying…until they crash.

“There’s something peculiar about an asset that will really only go up if the world is going to hell,” said Charlie Munger.

Yep. Very peculiar.

But occasionally, the world does go to hell.

And more thoughts…

And here’s another problem with gold. As the danger of inflation increases, so does the cost of protecting yourself. When you finally realize you need a life-vest, you’re already in over your head.

Yesterday, gold changed hands at $1,557. If you bought when we first told you to, you’re congratulating yourself. Your life vest has gone up more than anything, except, investment grade wine!

But if you didn’t buy then, is it too late now? Now, it’s not so easy. You’ll be reluctant to get in now – the price is more than three times higher.

So what do you do? You wait for a correction. But the correction doesn’t come when you want it to. And then, when it does come, you hesitate. You check your bearings. You read the financial press. You read about all the “poor gold bugs” who are getting killed. You hesitate more. You wonder: maybe all the run-up in gold was just a fluke. Maybe the problem has gone away. You worry that it’s not a correction in a bull market, but a new bear market that will take gold back down for the next 10 or 20 years.

Then, before you know what has happened, the metal has swung up again. And soon it is more expensive than it was when you decided not to buy the last time.

*** So what should you do? We don’t give advice here in Markets and Money. Giving advice is for our colleagues, who know what they are doing. But we will repeat the non-advice we offered for the last 11 years:

Buy gold on dips. Sell stocks on rallies.

You have a rally in the stock market, no question about that. But a dip in gold? Not now. Not yet. Stay tuned. It will come.


Bill Bonner
For Markets and Money Australia

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "When Investing in Gold is a Good Idea"

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Paul frost

Aussie gold is still pre GFC PRICES. How many other countries are in the same situation.

I agree Paul. We’re pretty lucky to have such buying opportunities! As the US dollar goes down, the AUD relatively goes up. So we maintain some purchasing power of gold, even if it goes up in USD. It’s a bit of a win/win scenario really. Think about why gold might go down in price (USDs): stronger USD, which means lower AUD, which means higher AUD gold price. And the inverse is more or less true aswell. Essentially, the AUD is rising and falling with confidence in the USD. Which is more or less what gold is doing too. This might… Read more »
Gold won’t lose its rise now that the gloves are off with the central banks to screw the middle classes over good and proper. But survival in the face of the financiers’ onslaught will take more than having shiny metal and no debts. You need to look after your food supply, water supply, means of transportation, personal security, privacy, and especially for the U.S., look into ways of acquiring skills without entering into debt traps that are being created for university students. It’s getting late for all of that, and people who still don’t accept the need for this kind… Read more »
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