Soros, Keynes & Buffett vs The National Economist on Gold

Gold is a store of wealth.  Gold is an element, abbreviated as Au, with an atomic number of 79.  Gold is an industrial commodity.  Gold is sought after for its use in jewelry and other lavish decoration.   Gold is a monetary metal.  Monetary can be defined as:  of or relating to money (synonym: pecuniary).   Monetary comes from the Latin word monēta, which means money, and the word monētārius, from Late Latin, which means, minter, coiner or of money.  

When gold isn’t money, it can be an investment, as it appreciates against depreciating world currencies, which are measured against one another.   The reason why the dollar index was at 86.00 in 1988 and was also at 86.00 in 2010, while the purchasing power of that dollar in terms of real goods has been reduced by 50%, even when measured using quite conservative figures.  Gold’s purchasing power has doubled since then in real terms and nearly quadrupled in nominal terms.  Gold's value and use can be confusing to even the brightest and most prominent in the world of business, finance and economics.   
    

George Soros slighted gold publicly, "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment," he told the World Economic Forum, "the ultimate asset bubble is gold."   I would argue that western debt and fiat currencies are the bubble, though they may inflate the price per ounce in dollars, yen or euros, the value remains relatively the same in this new age where governments, markets and the common man have all adjusted to a purely fiat system.  Soros' own theory of reflexivity may lend some credit to his statement, in that, as greater percentages of people expose themselves to gold and gold related assets, the optimistic expectation or belief that prices will continue to rise, will in turn drive the prices too high at some point.

In The Alchemy of Finance, Soros wrote, "In trying to deal with macroeconomic developments, equilibrium analysis is totally inappropriate.  Nothing could be further removed from reality than the assumption that participants base their decisions on perfect knowledge.  People are groping to anticipate the future with the help of whatever guideposts they can establish.  The outcome tends to diverge from expectations, leading to constantly changing expectations and constantly changing outcomes.  The process is reflexive."   This statement summarizes his philosophy quite well.

But when will money stop flowing into gold, $5,000/oz... $7,500/oz?  Simple, when the world's money supply contracts.  I don't think Soros has his timing right.

John Maynard Keynes once called gold a “barbarous relic,” I point him to his own work The Economic Consequences of the Peace, where he stated, "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."  The currency is being debauched.  This diagnosis is official, and the prescription is hard assets, the most stable of the hard asset class in this environment is gold, barbarous or not.    

Warren Buffett was once moved to say of gold: “It gets dug out of the ground in Africa, or someplace. 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.”   

I wonder if anyone would be scratching their heads about cotton, linen and plastic notes in combination with digital entries being used to represent wealth as opposed to something of value.  You see gold's value is specifically as a store of wealth, the first metal widely known to man was gold, found in rivers and streams in nearly pure form. Gold served as money in coin form for over 2500 years.  Money used to be the best store of wealth, along with being a proper medium of exchange.  Since August 15th, 1971 what we used as money was no longer convertible into gold at a fixed rate.  Though there were many attempts to fix the prices years after 1971, gold began to float freely amongst world currencies, which led to the high prices in the late 1970's into the 1980 peak.    

Buffett's flagship Berkshire has underperformed gold consistently for over a decade.  You have to go back to 1995 to present to find a substantive time frame that Berkshire outperformed gold.  One would have had to invest in Berkshire in the early 1990's to experience the gains gold has seen, simply from an increase in the currency amount required to represent that same level of purchasing power or wealth.  Gold experiences short term gains based on fear and "tail risk" as Ben Bernanke recently put it, but these gains in the short term are irrelevant to what it represents in the longer term.       

Buffett said that all that gold would fit into a container 67 feet or so across, and yet it would be enough to buy all the farm land in America, ten lots of Exxon Mobiles, and still leave you $1 trillion in walking around money.  This is quite possibly the dumbest scenario I have ever heard laid out by an intelligent investor as to why an assets is deficient in any way.  If he were here and said that, I would kindly respond, "Would you rather have all the US treasuries or complete ownership of all 500, S&P 500 large cap companies and still have a couple trillion walking around money... you see Warren, that is not an argument for or against bonds, especially not a rational or even a cognizant one."

The only Buffett statement on gold I have ever taken seriously was in his new letter to Berkshire shareholders: "When it's raining gold, reach for a bucket, not a thimble." 

What many don’t understand is gold is still acting as money in a way, in recent history, the price of gold equals the total amount of global currency in circulation divided by the total gold stock.  This will give you an approximate fair value for gold on a per ton or per ounce basis.