"If currency in a bank is worth less than currency in your hands ... that could produce something in the way of behavior," he said. "It's a different world. If you have a lot of money in euros, as we do ... you're better off putting it under your mattress than in a bank."
The above quote came from a pretty smart guy. That was Warren Buffett speaking to CNBC around the time of this year's Berkshire annual meeting. As per usual Warren takes a very complex concept and boils it down to a very simple and rational conclusion.
If you are going to lose money by keeping it in a bank, you are going to take it out and put it somewhere else. Warren suggests a mattress, we think a there is a better place.
Buffett, as most readers likely are aware, has never been a big fan of gold (NYSEARCA:GLD). His problem with gold is that it doesn't do anything, it doesn't generate any cash flow. Buffett is just too rational to understand the appeal of gold. Without a cash flow stream, Buffett doesn't think it has any value.
For the rational Buffett, the value of something is determined by a simple formula.
Value = Future Cash Flows Discounted To The Present
Buffett thinks he understands gold well enough. He thinks that without the ability to generate future cash that it is valueless. There is a not insignificant segment of society would suggest that Buffett simply doesn't understand gold.
We aren't sure which side of that fence we should be on.
While Buffett feels he has a good handle on gold, he feels more than a little confused by Negative Interest Rate Policy ("NIRP"). In the previously linked CNBC interview, Buffett explained that what Central Bankers are doing today is completely unprecedented. Buffett believes we are all witness (and part of) a giant financial experiment that we can't predict the ultimate outcome of.
Buffett himself admits to not having a clue as to how this will all play out. This is where he hits on what appeals to many others about gold. We just don't know what is going to happen.
Buffett likens what the Central Banks are doing to eliminating gravity. If the world lost its gravitational pull, we would all be floating. Today, all kinds of asset classes have lost their gravitational pull without interest rates to hold them to the ground.
In the interview, Buffet said, "negative interest rates distort everything."
Think Of The Power The Banks Have In A Cashless Society
How many people took notice when Larry Summers made the case for a cashless society in the Washington Post? Summers thinks that we should abandon the $100 bill. He is opening the door to a path that will change how our financial system operates.
By banning the $100 bill, it will suddenly be nearly physically impossible to keep large sums of cash anywhere but with the banks. Buffett's suggestion of a mattress isn't going to be sufficient to keep enough small denomination bills. The Summers suggestion would be one giant leap down the road to a cashless society.
Now hold on a minute. We need to put a couple of things together.
First, we have banks that are paying depositors a pittance to hold their money. Now we have policy leaders starting to make noise about making moves that make it impossible to keep our money outside of a bank?
And then we have the very real possibility that interest rates could actually not just be near zero, but negative?
We would suggest that the idea that our system could result in people not only being forced to keep their cash in the bank, but then actually having to pay for that privilege as being ridiculous…..but it is happening already elsewhere in the world.
Source of image: Zerohedge
This is where we circle back to gold. We just don't think it is crazy to think that a lot of people are going to prefer holding their liquid assets in gold as opposed to paying a toll to keep that money in a bank.
It isn't going to take a big percentage of people to start thinking that gold is a better option to really have an impact on the price of the shiny currency. Whenever we discuss gold, we always break out our favorite Jim Grant quote:
"The price of gold is a reciprocal of the world's faith in Central Bankers"
You start charging people to keep money in banks and eliminating their option to keep it at home in large denomination bills and you are going to have a lot of people questioning their faith in the system. And doing so for good reason in our opinion.
Gold Isn't Just The Choice Of The "Gold Bugs" These Days
It isn't just the tinfoil hat wearing worried about the sky falling crowd that is interested in owning gold these days. Two of the greatest investors of the last 40 years have been adding sizable amounts of gold to their portfolios.
We think investors should be paying attention to the fact that both of these gentlemen are drawing the same conclusion. There may not be two better macro investors on the planet.
One option for adding gold exposure to your portfolio is the SPDR Gold Trust. Following Druckenmiller is never a bad idea. We have an alternative idea that we released a 20-page comprehensive report on to our premium members over the weekend.
This company is an 11% weighting in the portfolio of one of the world's greatest investors. The company generates significant free cash flow, is traded at a discount to its peers and has a rock solid balance sheet. We expect that its discounted valuation could bring an acquirer knocking in the near future. If you are interested in getting a look at this idea and many others sourced from the portfolios of the world's greatest investors, just follow the link and get started.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.