WHAT’s UP GOLD ?

A few weeks ago, I was watching a recording of the annual shareholder meeting of Berkshire Hathaway, the investment vehicle of Warren Buffett – an encyclopedia, for commodities inforamtion ( A Woodstock for the mid life financial freaks). This organization, has always been a great reflection point, to understand the views, perspectives etc of the financial wizards on some of the ‘Asset class Commodities’, within the radar of the common man. This time, there are no prizes for guessing, the focus was on Gold.

Hearing the views of the Commodity from the World’s Third Richest man is not a bad idea – it’s like hearing the nuances of the golf swing from Tiger Woods or the roll of the wrists on a backhand down the line from the great Roger Federer.

Buffett, with all his wizardly wisdom of the financial markets, has never been a fan of gold. His most famous quote on gold: “Gold gets dug out of the ground, and then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

With Gold being the topic of discussion over the past few weeks, it is imperative to take a closer look at how long this bull run would last, for, as we speak, the bubble is getting larger by the day. It is the law of nature, “What goes up, must come down”, that has prevailed in the past and will continue to do so in the future. The question is not will it, but when and it pays to be prepared for the day, Gold comes crashing down.

The first argument for the gold prices skyrocketing is the deep impact that Gravity has on the US Dollar, bringing it closer to earth, which was essentially caused by the caving in of leading banks in the continent. So, the best bet to hold the US reserves high, was for Gold prices to be increased (US is the biggest official holder of gold with over 8,000 tonnes).

The other argument is the impact of the frenzied gold buying by most of the banks across the world, to neutralize (bluntly- get rid of) their investments in US assets, which again are valued in US Dollars, which in turn is plummeting. Our own RBI’s (Reserve Bank of India) recent surprising move, of buying 200 tonnes of gold from the IMF (International Monetary Fund) is a good example to this argument.

However, there's good evidence that central banks are well aware that gold could be nearing a cyclical high, and that it could be profitable to unload some of it, as it is what any sensible investor wants to do; buy at the bottom, sell at the top. Even for central banks, gold implies a wanted profit-post on balance sheets. Moreover, with the dollar falling apart, eroding their assets, the need the precious trade profits, to restore some of their lost sanity.

Price rise in general, has been on an average of 3% a year, for the past 10 years, while Gold has gone up 17%. A highly unsustainable model in an unstable economy. In fact, the high gold price has led to a plunge in gold jewellery sales and gold demand in countries like India and China, two of the largest consumers of the yellow metal in the world.

There was a time, not very long ago, when people were convinced that investment in real estate would never be a risk. Today, in the USA, more than 30% of their faith in real estate has already been wiped out, while back home in India, the bell curve is staring down its descent slope.

I hate to sound like a doomsday protagonist, but common sense tells me, we are in for an interesting few years ahead, when, like the IT Bubble, the Gold bubble can trigger a global financial churn, which apart from correcting markets, leveling currencies and stabilizing trade, will also bring a sense of normalcy to the current insecurities in the financial markets. When this will happen, only time will tell.

But for now, I am tempted to follow what the learned Warren, came up as a piece of practical advice: “When it is raining gold, reach for a bucket and not a thimble”

Maybe, the Oracle of Omaha, truly has a point . . . .