May 9th, 2012

Buffett and Precious Metals

It’s been some time since last discussing precious metals so I thought I’d revisit those charts to see if something new might be revealing itself.  What struck me was the near perfect patterns in both the charts that stretch back almost a year to the early days of the European sovereign debt crisis began in August 2011.  The only problem is that one can interpret the emerging patterns as either consolidation (flags) or as reversal (right triangles or head-and-shoulders) depending on whether you’re a gold bug or Warren Buffett.  On CNBC this past Monday, Buffett stated that

When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000. Or you can take a broader example. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900.” Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.

As is usually true with statistics, there are several interpretations depending on what you’re trying to prove.  Forbes points out in that same article that Berkshire would have outperformed gold over the 20 years since Buffett started Berkshire Hathaway but the reverse was true over the last 10 years as gold far outshined Berkshire stock.

What do the charts say?  Again, it depends on the frame of mind of the observer:

Both charts contain familiar features:

  • descending channels;
  • potential necklines;
  • a zone that could indicate whether the controlling pattern is a consolidation or reversal;
  • lack of clarity as to whether price will cross below the potential neckline

I’m not an economist but it would seem to me that with all the uncertainty surrounding the future of the Euro money would continue to boost the prices of precious metals.  Instead, Euro Zone investors have been dumping money in what they assume to be the world’s last safe haven, the $US … even when they earn near next to nothing.

But with another round of our own debates on our deficits, federal budgets and taxation coming at the beginning of the year after the Presidential election, so analysts say it’s going to be like falling off a cliff.  If anything happens to interest rates here it’s going to have to be that they go higher and bond prices are going to decline.  Foreign investors are going to begin seeing increased risk in US bonds and will jump ship quicker than they climbed on board.

With all that upcoming uncertainty in the $US, I can’t imaging that the emerging pattern in precious metals isn’t a consolidation and, with all due respect to Warren Buffet, there won’t be another run higher beginning towards the end of the summer.  For all those conspiracy afficionados out there, perhaps Buffett wants us all to sell our gold so that he can scope it up at this price and lower.  After he’s bought all he wants and these prices , he could even come back in August and say that everyone should own some gold and thereby start pushing the price higher.  He’s a nice guy but he didn’t get to be the richest man by being a sweetheart.

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  • guest

    Guru, do you have concern 
    Gold Under a ‘Death Cross’?

    • Yes I do. My definition of Death Cross is when the 50-dma crosses under the 200-dma although Investopedia defines it as the less stringent 50-dma crossing below the 100-dma. The Death Cross is a critical component of my Market Momentum Meter. When I extrapolate the S&P Index in a straight-line descent at the recent rate of -0.168%/day since the high on March 26, a Death Cross would result around July 4-11 when the S&P Index was at approximately 1250. You may or may not recall but 1250 has been a critical pivot point area several times since the Secular Bear Market began in 1999, 13 years ago.

      If the market does continue to decline, there will be an interim warning around June 10-12 when the Index hits 1290; that’s approximately where the 100-dma would be at that time. At the point, the Market Momentum Meter will no longer flash Bull/Green.