Oracle of Omaha Warns of 'Onslaught of Inflation'

Gold rose sharply in Asia and was up by more than $10 per ounce before trading even commenced on the TOCOM – it rose from $941.60/oz to nearly $960/oz but has given up some of those gains in early trading in London and is now trading back at $950/oz.

Gold and silver fell over 5% and 9% last week after surging in the previous weeks and remain up nearly 8% and 17% so far in 2009. In the short term anything can happen in all of these markets and volatility remains very high in all markets. Correction and consolidation was expected and warned of. Those using derivatives and leveraged speculation continue to get their heads handed to them on a plate and will continue to do so. Passive long term investment through real diversification is essential today.

Stock markets are again taking a pounding today with Asian and European bourses down sharply (Nikkei -3.8%; FTSE -4%) on understandable concerns about the ruptured financial system and a global recession spanning the globe. HSBC (HBC) will attempt to raise $12 billion in order to recapitalize and AIG is set to be quasi nationalised with another huge injection of US funds - a $30 billion rescue. In this climate it is hard to see gold falling much below these levels and gold should be supported between $900/oz and $930/oz.

Oracle of Omaha Warns of “Onslaught of Inflation”

Legendary investor, Warren Buffett has admitted making mistakes and warned that the US economy was in “shambles” this year and “probably well beyond”. He said that reckless lending had caused the worst “freefall” he ever saw in the financial system which had made investors “bloodied and confused”.

Mr. Buffett also warned that the greater reliance on government aid was likely to lead to unwelcome and lasting consequences for the wider economy: “In poker terms, the [US] Treasury and the Fed have gone ‘all in’. Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”

Gold has proved itself a safe haven asset in the worst deflationary slump since the 1930’s (as it did during the Great Depression). Should the ‘Oracle of Omaha’s’ warnings of a vicious bout of inflation come to pass then we will likely see gold really come into its own and likely see it perform as it did in the 1970’s when it rose from $35/oz to $200/oz, then fell to $100/oz consolidated and then surged to over $850/oz. As ever investments can fall as well as rise and important that investors do not have all their eggs in any one basket – including the gold basket.

Stock position: None.

Comments

[Cesato:]

Mark, you've been brilliant in your articles lately. Keep up the good job!!!!

Mar 02 09:04 AM

[Mad Hedge F...:]

nn Bg t Panic buying of gold coins continues to overwhelm coins dealers around the world. According to the Financial Times, the US Mint sold 193,500 American eagles in the first seven weeks of this year, more than it sold in all of 2007 at prices 40% lower. Retail investors fleeing paper assets, like plummeting stocks and bonds, are paying 5% premiums over face values. The same phenomena is appearing in other countries were gold coins are available to the public. Does this have a toppy feel to it?

Mar 02 09:04 AM

[Mad Hedge F...:]

“If you have been playing poker for a half an hour, and you don’t know who the patsy is, it’s you,” said Warren Buffet.

Mar 02 09:17 AM

[yellowhoard:]

Who need's Six Flags for excitement? This week's market is going to be the roller coaster ride of a lifetime. I'm calling it The Vomitron!

Mar 02 09:28 AM

[socrateazz:]

Hmmm I agree that inflation is likely after this fall... but I think Obama's policies will put a lot of folk out of business. And I believe most business will not return for rewards paid to business today.... The inflation will come when severe shortages develop. And most businesses will be afraid to restart with the required prices because government would probably punish them. Obama has shown veiled threats in business eyes. I fear a situation similar to past attempts at over control of societies is going to come about. You can not go back once the ball is rolling. The return trip will probably be steeper than any imagine. Undoubtedly unorthodox business practices will continue more because the businesses feel forced into them than because people are unscupulous

Mar 02 09:56 AM

[Vuke:]

Most people vastly over-estimate the short term economic effect of things and vastly underestimate the long, so the saying goes.

If it took forty years or so to create this mess it's going to take some time to recover. And to do so without the Mother Of All Depressions (MOAD) they're going to have to print a lot of money and fund a lot of programs, world-wide. There's even talk of Switzerland being now in trouble!

No, gold is not going to collapse, not at all. And thousand dollar gold, with presses running flat out, sounds like a good deal right now.

Mar 02 10:07 AM

[yellowhoard:]

If Buffet believes that inflation is coming, why would he sell his stake in COP? Could it be he is aware of punitive taxes coming down the road for the oil industry? Hmmm. Who did he back in the presidential election? Hmmm.

I'm just being cynical and jaded. Buffet buys high and sells low all the time. That simple folksy guy from Omaha would never use inside political info to enrich himself.

All of you oil investors should pay attention to that country boy.

Mar 02 10:48 AM

[mr freddo:]

The last time I listened to Buffet I bought a good deal of SPY believing that they were a good investment at the 900 level. Thanks Warren! Then you come out a couple of months later and tell us all to take cover.

It seems that the circumstances we are in have made fools of even our very best investors, Buffet included.

Mar 02 11:56 AM

[Mad Hedge F...:]

Good discussion. Warren Buffet and his managers feel like “hungry mosquitoes in a nudist camp.” So he revealed in his annual letter to investors in Berkshire Hathaway (BRK/A). I love it! This gem is an absolute must read for anyone in the markets. Although Buffet massively outperformed the indices, book value fell 9.6%, the worst performance since he took the helm in 1965. He admitted he did some “dumb things”, like adding to his holding in Conoco Phillips (COP) at the absolute top in the oil market and the expense of safer stocks like Johnson & Johnson (JNJ). If you analyze his balance sheet and income statement, you can see the method to his madness. He only increased his net equity exposure by $1.3 billion. Much of his new investment when into high guaranteed return instruments, like 10% preferred in Goldman Sachs (GS) and General Electric (GE). He has greatly improved the long term cash flow of BRK/A is the expense of a short term hit to book value. Moves like this justify his “Sage” appellation.

Mar 02 11:59 AM

[doubleguns:]

I am not so sure Buffets investment in GE and GS was so smart. He has lost a lot in market value to get 10% return but in the future if inflation gets over heated 10% might be a SMALL return. Remember the 18% of the 80's.

10% would be punny compared to 18% and I think we are a lot worse off now than in the 80"s.

I do not know if that is where we are heading mind you but Buffet himself says inflation is coming. I think he might reqret those buys. But who knew that we were going to spend 3.7 Trillion. Tarp was only 700 billion for the banks and another 150 billion for congress. First tarp looks pretty small potatoes now.

Mar 02 12:17 PM

[Long Silver...:]

In Weimar Germany, just as inflation was taking off, it's my understanding from Rothbard's analysis of the Great Depression, that the wealthy and upper middle class moved their wealth in to gold. They survived financially. The middle and working class families, and those who didn't convert to gold, were wiped out by the hyper-inflation.

Mar 03 06:39 AM

[Kelly Liebe...:]

"You cannot multiply wealth by dividing it."
So true...and that has been exactly what the financial markets did for the last 2 decades- unregulated, which is why we are in this mess.
Take a loan, divide it and resell it 10 different times...who can make any sense of who owes whom?

Mar 03 10:14 AM

[MauDib:]

Every U.S. war since 1900 has been paid for with equity, not income (excl. Kuwait War paid by Japan Inc). Example, did WWII bonds retain their value 5 - 10 -15 years later? Post-Vietnam 1973 - look at inflation for the next 10 years as govt prints more money to monetize the debt. Iraq war: average cost per soldier per year $800,000 - give OPEC and China bad paper for their good oil and products.

Also, how do you get non-manuf workers and govt workers to take a pay cut in hard times? Answer, inflate away their fixed salaries: teachers, police officers, SS retirees - print 10% more money = pay cut of 10%.

The feds have a strong incentive to inflate as the world's largest debtor.

Mar 03 09:17 PM

[reechurdjoh...:]

We are having deflation right now. It seems to me the performance of gold is not 100 percent clear. It is seen as a flight to safety. That makes sense because we are in a volatile turbulent rapidly declining market right now. It is more clear that gold is a hedge against inflation, but we are in a deflationary environment right now. The home mortgage situation could also be contributing to deflation as, the government does not want home mortgagers to be forced into a higher forclosure rate due to rising interest rates. This pressure for low interest rates contributes to deflation in my opinion. Ag stocks recent tank seems to signal continued deflation for now, in my opinion.
So the case for gold is as a haven for safety, but the countertrend is a deflationary environment which could mean declining prices in everything, including gold. Another thing to watch for is a reimplementation of the uptick rule for short selling, and possibly even a complete ban on short selling. This would definitely increase the flow of money into gold. Right now the question of gold is which is the stronger driver of its price-its perception as a haven of safety, or the deflationary pressure of the current environment

Mar 05 10:09 PM

[Conan the B...:]

Do what he does, not what he says.

Is BRK.A investing in Physical gold/silver, taking stakes in a plethora of gold/silver mining companies, buying TIPS, etc.?

Why is he selling those that would benefit most from the Coming Inflation, like COP?

Personally, I believe he is raising Cash on a net basis.

Mar 08 07:29 AM