Jumping into the Gold Rush? Think again!

Undoubtedly, if there were anything like a God of Investments in Greek or Indian Mythology, it would look like a wizened 70 year old man with plastic framed glasses and an old worn out black suit or simply stated -Warren Buffett . If he says something, you’d better listen hard, because 1) he says very little and 2) he says it publicly only once a year (through his letter to the shareholders) and 3) whatever he says seems to make helluva lotta money!

His latest letter to shareholders has some candid confessions (Read Page 4 and 5), amazing insights and importantly some fascinating metaphors which will make you stop and think. Here’s a link to the actual 22 page letter and one among the many things that caught my attention is Warren Buffett’s take on Gold Investments.

He says (and I quote verbatim from Page 19 of his letter )

“Today the world's gold stock is about 170,000 metric tons. If all of this gold were melted together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube Pile A.

Let's now create a Pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

My Take
What motivates most gold purchasers (including you and me) is the belief that our worst fears may just prove correct. An economic meltdown of catastrophic proportions will rip through our curreny holdings and we’ll be left with nothing but a sack full of paper worth zilch (al la Zimbabwe). If you are to go by what Buffet says, and also if you're sitting pretty on gold right now, I would also advise you to rebalance your portfolio by selling some gold off and book profits. However, If you’re thinking of investing in Gold right now, looking at the bull run, my advise –Don’t let greed overtake you; stay wise; invest elsewhere...for "what a wise man does in the beginning, a fool does in the end"

Happy Alpha hunting!

Wake me up when its over!

Here’s a limerick written by a hotshot asset management company boss that I met recently, which he emailed to his prospective clients

As markets continue to sink,

The end could be here in a blink,

All I ask you, is to stop and think

Do your portfolio managers stink?

Quite relevant, don’t you think? Sometimes having the right portfolio manager, handling your money is probably the best medicine to ensure that you have wonderful night of sleep, but sadly most of the times they just seem to stink.

Here’s a couple of half baked common man questions to test your portfolio manager’s intelligence:


-->Portfolio manager tells me to invest in Gold, but am wondering why he is not investing in Platinum, since its rarer than Gold and has more industrial/ commercial use. Is it because Fort Knox has stocked up Gold that I should also be holding Gold instead of Platinum. Ask your portfolio manager for a convincing answer and see if he doest freeze in front of these headlights.


-->Portfolio Manager explains to me how important asset allocation into Emerging markets is; however can you explain to me why you have not invested any part of my money into rice or wheat futures. With almost 7 Billion in population, am sure feeding them something would be the most valuable commodity in the world ultimately, unless of course you have an explanation that now we’re going to start wheat and rice farms on the moon?


-->The Portfolio Manager told me in the late 80s to buy and hold for long term “Motorola”, Result-Kaput! then in the early nineties you asked me to buy “Nokia” , Result – Kaput! in the turn of the new century he asked me to buy RIM – Result – Kaput! Should I trust him on his Apple stock hold decision or should I sell it?


-->Explain to me why I should not invest in Oil? When the Libyan Oil went away from the market Oil spiked, How long will we have Iran (the second largest supplier of Oil available in the market) before they go the Kim Jong ll route or the Iraq route? Unless you think Obama is going to ask back publicly for his spy drone from Iran/ Syria/ China/ Putin&Co.

Preserving wealth is not all Fun,

Who knows what’s in store in the long run,

Tomorrow there may be a Bank Run,

And then all you’ll need is a Gun!!!!

Happy 2012 everyone! :)