Charlie Munger, Warren Buffett’s partner in crime at Berkshire Hathaway, told CNBC earlier this week,
‘I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilised people don’t buy gold. They invest in productive businesses.’
The easiest way to dismiss this statement is to say that maybe it’s 1939 again and maybe this time we’re all Jewish. But we don’t wish to dismiss the statement. We wish to ‘unpack it’ in the words of our tutors at St John’s College in Santa Fe, New Mexico. To ‘unpack it’ we need to focus on two key words in Charlie’s statement: ‘productive’ and ‘civilised.’
Charlie might be right if the world were civilised. But maybe the modern world isn’t as civilised as he thinks. Part of what made the world so uncivilised in 1939 was unsound money. The abandonment of the gold standard made the expansion of the Warfare state possible in 1914. The equally unsound system that emerged out of the war – including the Treaty of Versailles – virtually guaranteed that monetary and fiscal instability would lead to political instability. Radical parties like the Nazis flourished.
Yet it’s hard to argue with Charlie’s implied criticism of gold, namely that it’s not an investment. Certainly that’s true of gold bullion. We view gold bullion as money. You are not buying it for a capital gain. You are buying it, by our reckoning, as way of preserving purchasing power. You extract paper from the fiat money system and turn it into something (bullion) you can later exchange for whatever currency emerges when the financial system becomes more civilised.
That said, gold shares are certainly an investment, and to that extent Munger is wrong. Gold shares can be productive too, if they profitably extract the metal from the ground. And if you were a value investor now, gold shares would probably be worth a look. They’ve underperformed gold badly.
Speaking of which, Berkshire’s own B-class shares have also underperformed gold. This shows you that maybe Berkshire’s historic performance has more to do with the expansion of the US monetary base over time than underlying profit growth in productive businesses. But let’s look at the chart before we make the conclusion.
The chart tells you the number of Berkshire B shares it would take to buy you an ounce of gold denominated in US dollars. The low ratio in 1998 and 1999 is a reflection of gold’s 20-year bottom and Berkshire’s generally solid performance. The spike in the ratio in 2000 coincided with the height of the Internet bubble, in which everyone thought Buffett had become an irrelevant and doddering old fool. They were wrong.
But as you can see, since 2001 Berkshire’s shares have declined relative to gold. That is, it takes you more and more shares of Berkshire to buy an ounce of gold. This may explain Buffett and Munger’s vocal and public hostility to gold. Or maybe that’s just a function of both men living most of their adult lives in an era where the monetary system was not disintegrating. They are unable to imagine it.
In the event, a superficial technical analysis of the chart shows you that the B shares have rallied against gold since late 2011. This is a combination of gold’s 14% fall from its all-time high of $1900 and of the boost to stocks from the various liquidity programs from the Federal Reserve and the European Central Bank (QE2, Operation Twist, LTRO 1, and LTRO 2).
There’s no doubt about the general trend of the ratio since 2000. It’s taking you more and more Berkshire shares to buy an ounce of gold. No wonder Charlie is so cranky!
But this isn’t an indictment of the investment acumen of Buffett and Munger. It’s an indictment of the world! A civilised society with civilised people has sound money. An economy with sound money has price stability. This stability allows for long-term planning and accurate valuation of what a business is worth. Investors are rewarded for identifying which businesses are the most productive and efficient users of shareholder capital.
In an uncivilised society where the value of your labour is stolen through inflation (made possible by an unsound money system) does it pay to invest in productive businesses? Does it even pay to be personally productive at all when a progressive tax system confiscates your wealth in order to be redistributed to the unproductive?
Wouldn’t it be a lot easier to be a rent-seeking capitalist that benefits from the government perversion of money, not to mention the perversion of the tax system in which members of the elite corporate class can escape the predations of the State? Hmm.
If you accept that we live in civilised monetary times where productive labour is actually rewarded, your brain has been tranquilised by the Big Lie of our times. Your brain (and your portfolio) are in danger of falling gracefully out of a tree, like that bear we pictured yesterday.
Munger wants you right where you are. The less you think about how civilised the current monetary system is, the less likely you are to question it or disrupt it (which would be inconvenient for Charlie). We highly recommend movement and adaptation to fit the monetary reality.
But if you live an era that subverts accurate valuation of productive businesses – an era that subverts the productivity of the economy itself by encouraging debt and consumption – how on earth can you get by? Stay tuned…
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