'Civilized People Don't Buy Gold'

Includes: BRK.B, GDX, GLD, PPLT, SLV
by: The Financial Lexicon

In a recent interview with CNBC, Berkshire Hathaway's (NYSE:BRK.B) Charlie Munger stated, "Civilized people don't buy gold. They invest in productive businesses." If that's the case, then call me uncivilized. Although I do invest in productive businesses, I also designate a certain percentage of my portfolio to gold (NYSEARCA:GLD).

For reasons about which a doctoral thesis could likely be written, humans have a long history of completely mismanaging fiat currencies. Throughout the countless historical examples of the leaders of nations destroying the value of that nation's currency, gold, as a store of value, has stood the test of time. Today, people who have an appreciation for the historical role that gold has played may choose to purchase gold as a hedge against a very powerful group of individuals who seem to prefer to attempt to solve today's economic difficulties through money printing.

It's certainly not shocking that Mr. Munger ridicules purchasers of gold. After all, people who benefit tremendously from the current fiat system have an incentive to ridicule any asset, person, or thing that stands in contrast to the status quo. Warren Buffett, in stark contrast to his father, Howard Buffett, author of "Human Freedom Rests on Gold Redeemable Money," also has a less than favorable opinion of gold. In Berkshire's 2011 Shareholder Letter, Warren Buffett writes:

"What motivates most gold purchasers is their belief that the ranks of the fearful will grow . . . Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth - for a while."

While I was reading Buffett's take on gold, it actually reminded me of the stock and commodity markets in general and the pervasive view among investment gurus that buy-and-hold will always be a winning strategy. If you can convince enough people that buy-and-hold will work and you have a government willing to print money and run massive deficits, you can create your own truth, as Mr. Buffett puts it "for a while." The incredible bull market of the 1980s and 1990s helped fuel a belief that buy-and-hold is the path to future prosperity and security. The question people should ask themselves is whether the conditions that fueled that incredible bull market exist today. And, if the conditions do not exist today, what might supplant them to keep asset prices heading to levels they otherwise couldn't sustain on their own? This is where money printing comes into play.

Those in power have reminded us that eventually deficits will come down and tighter monetary policy will take hold once a self-sustaining recovery exists. However, if you are open to the possibility that money printing and massive deficits will prevent a self-sustaining recovery from ever taking hold while at the same time diluting the purchasing power of your fiat currency, you might be inclined to purchase gold, or even silver (NYSEARCA:SLV) or platinum (NYSEARCA:PPLT). You might also consider investing in certain productive gold miners (NYSEARCA:GDX), although, since its inception, GDX hasn't exactly kept up with gold's performance, underperforming the physical metal by more than 10,000 basis points.

Being aware of the historical inability of those who run nations to manage a fiat currency over an extended period of time without eventually destroying the purchasing power of the people is something that certain investors might not appreciate, understand, or care about. Warren Buffett admits that he won't invest in things he doesn't understand. And based on his and his colleague Mr. Munger's comments on gold (not just the ones quoted in this article), it is quite clear they do not understand gold. Hence, they do not invest in it.

What I find most fascinating is their need to comment on it in a way one might colloquially call a "cheap shot." It is certainly their right to do so, and I would never dream of saying otherwise. I'm more interested in why these two very powerful men choose to comment in the way they do about gold. I have a hunch they actually fear it. If their net worth is tied up entirely in fiat currency during a period in which the entire world economy is dependent on easy money, it would make sense to talk down an historical store of value. After all, gold, the asset that has been around far longer than any productive business or fiat currency in which anyone invests today represents the antithesis of the modern monetary system. That seems like something you'd want to have a bit of exposure to just in case the historical experiences of fiat money come to pass again. Charlie Munger can call gold investors "uncivilized;" I'll call them alert and astute.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long gold, silver, platinum, and a whole bunch of productive businesses.

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