Warren Buffett Rotating to Gold

It is sometimes fun to check in on the rich and famous.  And to watch them learn about gold.  That’s because if they don’t learn about gold, they may not always be rich and famous.

Although Warren Buffett’s own father, who was a Nebraska congressman, was very wise about gold and its monetary merits, Warren himself has always eschewed gold.

Until last summer.

That’s when Buffett’s company, Berkshire Hathaway, began buying gold shares.  We wrote a piece about it then called Did Warren Buffett’s Dad Just Get a Whole Lot Smarter?    

At the same time, Buffett began reducing his exposure to banks.  He sold JPMorgan Chase and Goldman Sachs as he rotated to gold.

We think Buffet’s skepticism about banks is an important first step in coming to terms with today’s financial reality.  We wanted to share some of the thoughts that accompany the Oracle of Omaha’s changing outlook.

First, his observation about negative interest rates and debt:

If you can have negative interest rates and pour out money, and incur more and more debt relative to productive capacity, you’d think the world would have discovered it in the first couple of thousand years rather than just coming on it now. We will see.

It’s probably the most interesting question I’ve ever seen in economics.

Can you keep doing what we’re doing now? The world has been able to do it for now a dozen years or so [since 2008]. We may be facing a period where we’re testing that hypothesis that you can continue it with a lot more force than we’ve tested it before.

The testing of that hypothesis is drawing nearer.  It will be a painful period.  Popping financial bubbles are always painful.

Buffet modestly acknowledges that he’s been wrong about a couple of things:

“I’ve been wrong in thinking you could have the developments you’ve had without inflation taking hold.”

We’d say that Warren has been focused on looking for consumer price inflation and has not correctly identified the asset price bubble that has been the Federal Reserve’s primary objective. 

And:

“If the world turns into a world where you [governments] can issue more and more money and have negative interest rates over time — I’d have to see it to believe it, but I’ve seen a little bit of it. I’ve been surprised. I’ve been wrong so far.”

The operative words are “so far.”

And finally, these observations:

“The [US] debt isn’t going to be repaid; it’s going to be refunded.”

“You better own something other than debt.”

We observed last summer that Buffett apparently sees that central banks have lost control.  If he keeps his wits about him, Warren will soon realize that he should be buying physical gold.

Warren Buffett just turned 90 years old.  As they say, with age comes wisdom.