Buffett Sold Silver; NY Times Covers Gold

Silver Stock Report

by Jason Hommel, May 7, 2006

Today, I received word from about 15 of my subscribers that Warren Buffet’s Berkshire Hathaway has sold their pile of nearly 130 million ounces silver.  Five different news articles tell a similar story, that Warren admits he sold the silver.

This is very bullish for silver, because it explains why silver’s rise took longer than we thought (Warren was selling), and it also means that there is much less silver above ground than we thought.  Buffett’s hoard of 130 million ounces no longer exists!  Clearly, Warren made a mistake, and he seems to admit it when he says that he sold silver too soon.  I always suspected that Warren did not understand gold or silver too well.

Buffett emphasized the ‘non-productive”(?) aspect of gold in 1998 at Harvard: “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 answered Buffett’s conundrum on gold, why men keep it vaults, in my article, “Refuting Myths about Gold”, in 2003.  http://www.gold-eagle.com/editorials_02/hommel102802.html

He must have never read it.  It took me about 10 seconds to think up the answer to refute Buffett’s myth, numbered 28 in the article (but it took me about 2 years to compile and write the full article):

28.  It does not make sense to dig up gold from the ground, and bury it again deep in the ground in a vault:

Yes, it does.  Gold is kept in the vault because gold is valuable and rare, and thus, it needs to be protected from theft.  You wouldn’t want your property to be stolen, would you?  Gold ownership also prevents theft from inflation, and from banking collapses during depressions, which happen under paper money systems.

I really feel sorry for Mr. Buffett.  He complains he has $40 billion and does not know what to do with it, or how to protect it from inflation. He recently tried buying foreign currency with it, but that does not work either, when all currencies are overvalued frauds.  Too bad Mr. Buffett.  Buffett’s confusion must be due to God himself, or perhaps senility.  As the Bible says, “God is not mocked”, but perhaps Gold is not to be mocked, either.

Before, I had given Mr. Buffet the benefit of the doubt.  I had thought that his line about the uselessness of Gold was clever dis-information, as foolish traders sometimes try to talk down an investment while accumulating.  But it appears he is just ignorant about one of the most fundamental aspects about the nature of Gold, after all.

The fundamentals of silver have nothing to do with supply and demand after all.  The fundamental nature of silver is that it is different from paper, and paper is no substitute.  Gold’s use is that it keeps men honest!  Gold provides a method for peaceful and non-fraudulent beneficial trade among men.  

What is so special about gold?  I’ll tell you once again, (from silverstockreport.com):

Gold is money because it is liquid because it is easily tradable, with a narrow spread between the prices to buy and sell (about 1%).  Also, gold is easily transportable, because it has a high value for its weight.  This makes gold an excellent medium of exchange.

Gold is money because it is divisible, you can divide it into coins, or re-melt it into bars, without destroying it.  Also, gold is fungible, where each unit of .999 fine gold (99.9% pure) is similar enough to another unit so as to be easily interchangeable. Gold is also nearly impossible to counterfeit, and genuine gold is easily recognizable.  When measured by weight, gold is easily countable.  These properties make gold an excellent unit of account.

Gold is money because it is a great store of value.  Gold is not subject to decay, rot, or rust.  Gold has an intrinsic value in itself, because it is rare, highly coveted the world over, and is a luxury item. 

Silver has all the same characteristics, except silver is heavier by value, (cheaper per ounce).  (Silver is actually less dense, and lighter than gold per unit volume, which prevents counterfeiting coins by plating silver coins with gold).  Silver is also more rare than gold, in above-ground, refined, deliverable form.  Silver is more useful to industry than is gold, as silver is used in more applications than any other item except, perhaps, oil.

Buffett’s problem is a pitfall I’ve worried that my subscribers would fall into.  The danger is selling too soon, due to not knowing why you bought precious metal in the first place.  For example, what if you sell gold as gold rises to $3000 per ounce, on its way to $30,000 per ounce?  Well, between $300 and $3000, you’d make ten times your money.  And then, between $3000 and $30,000, you’d give back all your gains, and be no better off.  This is why I’ve personally risked my reputation, by writing “outlandish” articles about how and why gold can rise to infinity dollar per ounce!  (As paper money dies.)

Future Gold & Silver Prices –December 21, 2005
Why no talk of $32,567/oz ? – 02 January 2003 

During the past 7 years, I’ve closely watched many items that are bullish for gold and silver; most notably, who is covering them, and how good is the coverage.  Finally, the New York Times covers gold in a somewhat positive way.  This is no time to call a top, just because they are covering gold.  (Many old gold bugs believe you should sell gold if the NY Times gives it coverage.)  After all, the Times is still at the bottom of the learning curve, in my opinion, and still rather skeptical of the facts about gold, and the nature of gold, somewhat like Mr. Buffett.  But the interesting thing about the Times is that many newspapers follow stories that the Times covers, and so, we may see the beginning of greater coverage about gold in the U.S. national press, and we may see gold prices rise substantially as a result.

This article was sent to me in email by several sources.  Key excerpts below:

Finding Comfort (and New Friends) in Gold

By Landon Thomas Jr.
The New York Times
Sunday, May 7, 2006


SHARON, Connecticut — …

Their passion notwithstanding, gold bugs tend to be small-time investors. Gold’s recent surge has instead been underpinned by a rush of mainstream investors, including hedge funds, commodity-based mutual funds, and exchange-traded funds. 

For these investors, gold is less a way of life than it is hedge against inflation and a prudent measure of diversification during an increasingly worrisome time. The extent to which this new wave of capital remains invested in gold will determine if the recent spike is just another anomaly or the onset of the second coming of the great gold bull market that the true believers have been calling for since the price of gold crashed a quarter-century ago. 

With their missionary zeal and weakness for conspiracy theories, gold lovers can seem a touch afflicted. They also collect and pass around offbeat, brain-teasing findings. One is that the dollar has lost 98 percent of its value since 1913, when the Federal Reserve System was established. Another is an assertion by the American Institute for Economic Research, an obscure research outfit in Great Barrington, Mass., that since 1945 inflation has eroded $15.8 trillion from the savings accounts of United States citizens.

Both findings underscore their benchmark precept: that a currency not tied to gold becomes debased when central banks print money and governments spend freely. Perhaps Alan Greenspan, who before his run as chairman of the Federal Reserve was highly regarded in gold-bug circles, captured this point best. “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation,” he wrote in 1966, when he was an economic consultant. “Gold stands in the way of this insidious process.”

The great liquidity explosion that occurred under Mr. Greenspan has made him a turncoat in the eyes of the gold-bug crowd. But his successor, Ben. S. Bernanke, or “Helicopter Ben” as they call him, inflames its passions all the more. To this group, Mr. Bernanke’s passing allusion — before he became Fed chairman — to a helicopter dropping money over a recession-bound economy confirmed its deepest fears that a monetary system not anchored by gold was essentially inflationary if not downright immoral.

Like Mr. Sinclair, William J. Murphy III is also a Wall Street refugee. After a one-year stint in 1968 as a wide receiver for the New England Patriots, he began a career as a commodities trader, working for a number of firms, including Shearson and Drexel Burnham. Convinced that the price of gold was being suppressed by an unholy alliance between the central banks and major investment banks, he formed the Gold Anti-Trust Action Committee, known as GATA, that seeks to publicize facts and assertions that support his point — namely that the gold reserves in central banks are significantly overstated.

GATA for the most part is a one-man show — Mr. Murphy, dressed in his sweatsuit, perched in front of the computer in his home in suburban Dallas. With his excitable manner and his outrĂ© theories about gold, he is generally thought to exist on the outer fringe of the gold-bug movement.

Indeed, his central thesis — that Goldman Sachs and other banks have conspired to keep a cap on the price via short sales to back the government’s strong-dollar policy, especially while a former Goldman senior partner, Robert E. Rubin, was Treasury secretary in the late 1990s — is far-fetched.

With the price of gold surging, Mr. Murphy is convinced that Goldman Sachs, J. P. Morgan, and others are frantically buying now to cover for the gold they sold short over the years. Goldman Sachs and J. P. Morgan declined to comment about their gold trading positions or strategies.

“What a day,” Mr. Murphy said one day last week as gold broke through $670. Goldman Sachs and J. P. Morgan were big buyers that day on Comex, the division of the New York Mercantile Exchange where gold contracts trade. Sputtering at the joy of it all, Mr. Murphy could well have been a prospector hitting the Mother Lode. “These guys are short, and they are panicking to get out of their positions,” he said. “They are sweating bullets, and it couldn’t happen to a nicer bunch of guys.”

There is a kernel of truth to what Mr. Murphy says. Central banks have been aggressive sellers of gold, especially in the late 1990s, when gold was touching record lows. But most economists say that there was no grand design involved, just a badly timed attempt to shift into higher-yielding assets like bonds. 

As for investment banks, they are sellers and buyers of any given asset at any given time. But it is also true that they have hardly been enthusiastic advocates for gold as an investment, especially when the stock market was king. Even now, as they have issued positive reports about the metal, their price targets seem oddly out of sync with its relentless rise. 

Goldman’s forecast for a year-end price is $625 an ounce; J. P. Morgan’s target, which is currently under review, is $560, and Morgan Stanley’s is $550. 

Compared with Mr. Murphy and his boylike excitability, James Turk speaks with an assured gravity consistent with his background as a commercial banker at Chase Manhattan. But his views about gold as the ultimate store of value in a financial world on the verge of collapse are no less doctrinaire. 

Indeed, Mr. Turk has established his own online payment system, GoldMoney.com, through which he and his fellow gold bugs may enjoy the thrill of buying goods and services via gold, not cash.

In some ways it is a symbolic exercise. While the payment system is supported by $100 million worth of gold, no merchants have agreed to take bullion as payment, although Mr. Turk hopes that day may come. More than anything else, the site demonstrates his disdain for the dollar and all other forms of paper money — a view that he often heard from his parents, who experienced the ravages of hyperinflation in Austria in the 1920s.

“It’s not gold going up; it’s the dollar going down,” Mr. Turk said by phone from Australia, where he was speaking at an investment conference. Gold has held its value much better than the dollar against commodities like oil, he said. 

With oil hitting new highs — it has hovered around $70 a barrel for weeks — Mr. Turk foresees a return to the 1970s, when high inflation and a volatile Middle East drove gold to its peak. “If we get close to $850 this year, it’s most probable that we will see a four-digit gold price in 2007,” he said. Four-digit gold — an ounce of bullion selling for $1,000 or more — is the gold bugs’ equivalent of a visit from the Messiah. 

But for the growing number of hedge funds that are piling into the commodity, gold is less a virtuous investment than it is a mercenary one.

China and India are buying more gold. Iran is becoming more bellicose in its stand toward the West. And, most important, liquidity is making a broad shift to commodities and out of stocks.

“Do I think that gold is God? No,” said Monty Guild, who runs Guild Investment Management, a hedge fund in Malibu, Calif. “I’m a gold opportunist. When it’s good, we like it; when it’s not, we stay away. Gold does well during wars, and we believe there will be more wars.”

And for those not in gold, or any other highflying commodity, for that matter, the feeling can be lonely. William H. Miller III, portfolio manager of the $19 billion Legg Mason Value Trust, which has beaten the Standard & Poor’s 500-stock index for 15 consecutive years, has no gold in the fund. His view is that inflationary expectations, if not prices themselves, remain quiescent, and that gold — like oil, emerging markets, and small-cap stocks before it — has become the latest investment craze, propelled upward by a wave of hot money, a term for speculative short-term capital. 

“Gold certainly looks extended from here,” said Mr. Miller, whose fund is currently trailing the S.& P. 500 for the year. “It’s easy to make money when you are trend-following,” he added. “But if you are worried that the end is near, the last thing I want is gold because of all the hot money.”


Gold is up from “hot money”, yes.  But Gold IS money!  Paper money is the “hot money” by definition–paper money is the hot potato that people have to dump if they want to protect their wealth.  But gold is not up because gold is a fad.  Gold is up because it’s gold’s time, because gold is timeless, and because the fad of paper money is ending. Once again, such basic misunderstandings mean we have a long, long way to go.


Jason Hommel