Trashy Cash

Posted 17 Oct 2008

Warren Buffet wrote an op-ed in The New York Times on October 16, 2008.  He argues that “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.

Indeed, the policies that government [Note:  The central banks lowering interest rates, backing of commercial paper and other governmental intervention.] will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. ...In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

When political advice is given always ask ‘How does it benefit them if I believe it?’  Remember, Buffett recently took a large $5B stake in Goldman Sachs and is probably just doing his political duty to support the political currency.  To discern motives always follow the yellow brick road.

What is wrong with Buffett’s advice?  Equities are still overvalued.  Gold’s best use is to perform mental calculations of value over long periods of time.  Here is a long-term chart of the DOW in gold.

I have used the same chart I used on the homepage for nearly and year and in Payment Risk v. Exchange Rate Risk.  The current price of the DOW in gold has continued its downward trend and is currently at about 11.4 ounces.  That means since over the last year the DOW has lost about 50% of its value.

A friend of mine, who is a tax accountant for KPMG, made a good report.  He recently opened a free GoldMoney holding.  He sent over dollars using WaMu (they offer free wires for customers) and had no transaction fees getting the dollars into his holding.

  Within 24 hours of sending the dollars he had made his first purchase of gold and silver in an offshore holding that is protected by bank secrecy.  He even remarked to me that he feels bitten by the ‘gold bug.’  Only those who own gold may be able to relate to these feelings.

As the world economy shifts from the 60 year consumption cycle to a savings cycle during this deflationary credit contraction, a Kondratieff Winter, more and more people will be bitten by the ‘gold bug’ sending the value higher and higher.

Buffett is right about cash being a terrible investment.  Gold and silver are cash and they have a negative return because of storage or insurance costs.  But where is capital better allocated?

My friend is skating to where the puck will be.  The time will come when gold is expensive and the DOW or real estate is cheap.  But that time is not now.  Now is the time to be consistently accumulating bullion especially at its fantastically cheap price.

The time to purchase the DOW and equities will eventually come when the DOW costs 1-2 ounces of gold.  There will come a time to purchase real estate also.  The price of an average American home hit a high of 37,000 ounces of silver a few years ago.  The current price is around 22,000 ounces.  The bottom for the average American house will be around 500-1,000 silver ounces.

Performing mental calculations of value with trashy cash-like instruments, like the US$, will prove extremely damaging to many portfolios.  Even the Zimbabwe stock market is up huge percentage gains but the value, calculated with silver and gold, is actually down.