Take It Back, Mr. Munger

Dear Mr. Munger,

Gold investors the world over, from central bankers to piggy bankers, kindly await your apology.

For the record, I refer to the following excerpt from your recent speech delivered at the University of Michigan:

I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk.

Let's work our way backward through your statement, starting with your vilification of the character of individuals based upon their investment decisions. I happen to be a nice guy if you'd take a moment to know me, but your statement suggests you would have no interest in looking beyond the shares of gold and silver bullion proxy Central Fund of Canada (AMEX: CEF  ) that I hold steadfastly in my investment portfolio.

Of course, your boss at Berkshire Hathaway (NYSE: BRK-B  ) (NYSE: BRK-A  ) once owned 37% of the world's above-ground silver supply. By extension, would you have called Warren Buffett a "jerk" for hoarding silver even though it worked?

The foundations for common understanding
Given the degree of overlap in our macroeconomic perspectives, the capacity for mutual understanding may well have existed. I was duly impressed by the parable that you published at Slate.com back in February, wherein you blasted the continued proliferation of financial derivatives as the "casino gambling" that threatens to doom the United States to a sorrowful financial future. I have similarly viewed the massive global derivatives market as both a primary proximate cause of the global financial crisis and the single greatest threat looming over the global financial system (and in particular the United States and its currency).

As a matter of fact -- and you may well appreciate the irony here -- I used your parable as a direct springboard from which to discuss gold as a safe haven, and the investments by China's sovereign wealth fund into miners Freeport-McMoRan Copper & Gold (NYSE: FCX  ) and Gold Fields (NYSE: GFI  ) . I employed your scathing account as a means to reiterate dollar-defensive stock recommendations like diversified materials supplier BHP Billiton (NYSE: BHP  ) , and my top stock pick for 2010: Silver Wheaton (NYSE: SLW  ) .

Regarding rationality and moral imperatives
I am particularly mystified by your attempt to relate the decision by investors to save capital in gold, rather than in rapidly depreciating U.S. dollars, to your moral imperative to understand what does or does not work in human systems. Could not this entire post-Bretton Woods experiment with unbacked fiat currency prove the ultimate example of what does not work in human systems?

In fact, if you wish to engage in a rational discussion of what does or does not work in human systems, there is a range of relevant topics that we could explore. For example:

  • What can we infer from the historical record regarding the likely consequences of quantitative easing and deliberate monetary debasement?
  • Is persistent, expanding, and unfunded deficit spending something that can be shown to "work" in human systems over the long term?
  • Whose idea was it to begin referring to U.S. citizens solely as consumers, and is boundless expansion of consumption something that works in human systems?
  • Why is saving called hoarding when it's done in gold?

If you have no interest whatsoever in gold, I am not here to attempt to change your opinion. What I do seek is your recognition for the people who bear the ultimate burden of the persistent currency devaluation and reckless fiscal policies that carry sustainable recovery further from our grasp. They include many millions of struggling individuals with nary a minute fraction of your financial resources, and those which see gold as a means of protection from further losses deserve far better than to become the subject of your misplaced ire.

Sincerely,
Christopher Barker

Berkshire Hathaway is a Motley Fool Inside Value selection. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of BHP Billiton, Central Fund of Canada, Freeport-McMoRan Copper & Gold, and Silver Wheaton.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 29, 2010, at 10:44 AM, slowwhizz wrote:

    Munger has devoted his life to "rational" investments and he has been very very successful. He believes in capitalism and the attributes that made this country great. Munger sees gold as a bet against capitalism and a bet against the United States and by extension the many companies Berkshire Hathaway owns. But even he hedges against the future of the U.S. by believing the future of big economic growth in investments lies in China and the developing countries of the world and not so much the U.S. His model for gold seems to be consistent with Buffett's: you pay to dig it out of the ground and then you pay some one to store it under ground for you.

    I believe Munger views silver as an industrial commodity more like copper, iron, lithium, etc. and not like gold. He and Buffet sold the silver because the government did not want them to own it and threatened them. Their ownership was sending bad signals inconsistent with government policy.. They did not sell because they thought it to be a bad investment.

    slowwhizz

  • Report this Comment On September 29, 2010, at 11:17 AM, BillyTG wrote:

    Munger's take on gold is ridiculous.

    Reminds me of politicians and pundits I've seen on TV recently saying things like how it's our "patriotic" duty to pay more taxes.

    He needs to step outside his little bubble to get a little perspective. Jim Rogers's well-traveled, professorial, global-trend-spotting macro insights make Munger's "Costco-is-saving-the-world-and-goldbugs-are-jerks" thoughts look like elementary school nonsense.

    Munger's hypocrisy is as dense as gold. Berkshire has a long and strong history of betting against the dollar, by hoarding silver or buying foreign currencies (which I believe they still hold). Also, he writes that capitalist parable earlier this year, and now suddenly he's all about government bailouts and wants more. He fails to mention that Berkshire has benefited from the bailouts.

    Munger needs to stick to his core competency---investing---and leave his amateurish, hypocritical moralizing and comparative politics to himself. He lost a lot of credibility this week.

    I suspect that he has strong anti-gold sentiment because he stands to lose a great deal of wealth as the dollar devalues, and knows he'll be on the sidelines watching gold rise. As a competitor, he's naturally pumping out whatever propaganda he can muster to save himself. Meanwhile, he's watching as guys like John Paulson scream ahead on Fortune's billionaire list: http://www.businessinsider.com/john-paulson-gold-at-4000-dou...

    PS. Aside from Munger's poor showing last week, he really has had some incredible investment insights. In my opinion, these are the greatest words to ever come from the man: http://www.paladinvest.com/pifiles/MungersWorldlyWisdom.htm

  • Report this Comment On September 29, 2010, at 2:23 PM, ejhickey wrote:

    Mr. Munger and Warren Buffet are also guilty of hoarding. their company Berkshire Hathaway hoards all the dividends they get . they do not pass it on to their shareholders and they are always sitting on a mountain of cash. In this respect , their stock is just like the etf , GLD, except in one respect: GLD has increased 5% more than BRK.B since September 2009. Like Yogi Berra said " You can look it up." One more thing- the two and five year charts look even worse for BRK.B. If I am not going to get a dividend, I will stick with GLD and physical gold

  • Report this Comment On September 29, 2010, at 2:24 PM, bfischer55 wrote:

    Investing in silver and gold is not a bet against the U.S., rather it's a hedge against the stupid decisions our elected officials have made.

    Social Security raided for decades and now holding IOU's, insolvency by Fannie Mae, Freddie Mac, Postal Service, Medicare, etc.

    Who wouldn't want to hedge against this complete incompetence, except Mr. Munger? Bernanke is doing the best that he can to offset the financial mess legislators like Barney Frank and Barry Soetoro (aka Barack Obama) have brought upon us (these two received more in contributions from Fannie Mae than anyone else).

    Let Bernanke do his job, anticipate his moves, and possibly improve your portfolio in doing so. Heck, the U.S. has the largest gold reserve in the world, so it can't be un-American!

  • Report this Comment On September 29, 2010, at 3:15 PM, takes2 wrote:

    No one should have to "take back" their opinion. We call that free speech. Likewise, there is no reason to be easily offended by another man's opinion.

    The fact is that people invest in gold for many different reasons. I suspect many do so as a currency substitute, as a hedge against the US dollar, for example. Obviously that doesn't make anyone a jerk. But there are also end-of-the-world gold nuts who hoard thinking they will be better off when civilization collapses. I too hold a negative opinion of people with that particular motivation.

  • Report this Comment On September 29, 2010, at 3:24 PM, ETFsRule wrote:

    "What I do seek is your recognition for the people who bear the ultimate burden of the persistent currency devaluation and reckless fiscal policies that carry sustainable recovery further from our grasp."

    Can you explain what this means? Over the past couple of years since the economic crisis began, we have seen the inflation rate do nothing but drop, drop, and drop some more. So, while we slide closer and closer towards a deflationary environment, it makes me wonder: what is this "devaluation" that you speak of? And how does it "carry sustainable recovery further from our grasp"?

  • Report this Comment On September 29, 2010, at 4:04 PM, BillyTG wrote:

    @ETFsRule

    http://www.shadowstats.com/alternate_data/inflation-charts (government inflation stats are meaningless)

    There is an ongoing global fiat currency devaluation. Countries are competing with each other literally to try to devalue the fastest, which will give the "winner" a trading edge. They should call this The Biggest Loser!

    http://seekingalpha.com/article/194006-currency-devaluation-...

    http://seekingalpha.com/article/227626-report-from-europe-up...

    Google "currency devaluation" for more.

    http://www.videonewslive.com/view/288549/peter_schiff_on_200...

  • Report this Comment On September 29, 2010, at 4:08 PM, XMFSinchiruna wrote:

    ETFsRule,

    You need look no further than the rising price of gold (i.e. real money) to see the declining purchasing power of the post-Bretton Woods U.S. dollar (monopoly money) in action. In 1971, one dollar could purchase 0.029 troy ounces of gold. Today, less than 40 years later, that same dollar is good for only 0.00076 troy ounces. That's a 97.3% loss of purchasing power.

    For another perspective, check a 10-year chart of the USDX to witness the deteriorating purchasing power of your dollars relative to a basket of foreign currencies over just the past decade ... dollars have lost more than one-third of their overseas purchasing power in ten short years.

    The current and prescribed policy of combating deflationary pressures with further unfunded stimulus and currency-busting quantitative easing ensure that further devaluation will follow.

    http://www.bloomberg.com/news/2010-09-28/u-s-dollar-is-one-s...

    See also:

    http://www.fool.com/investing/general/2010/09/23/death-knell...

    http://www.fool.com/investing/general/2010/08/19/tomorrows-p...

    "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights." - Alan Greenspan

  • Report this Comment On September 29, 2010, at 4:29 PM, ETFsRule wrote:

    Sinch: Yes I know about long-term currency devaluation.

    However, the author of this article wrote about how devaluation is preventing us from reaching a "sustainable recovery". This implies that we are experiencing currency devaluation right now (in the short-term, since the economic crisis began). This is simply not true. Just look at inflation rates, or the bond markets.

    You can look at Europe if you want to understand what is happening right now. Many European countries have adopted strict austerity measures - they have taken their national debts much more seriously than we have, and they have drastically cut government spending in an effort to balance their budgets. The result? Their economies have fared much, much worse than ours. The latest news is that violent anti-austerity protests are on the rise, causing havoc in several European countries.

    I really hope that we can get our inflation rate back up to a normal level... but I don't see it happening in the near future.

    "The current and prescribed policy of combating deflationary pressures with further unfunded stimulus and currency-busting quantitative easing ensure that further devaluation will follow."

    We'll see about that. A lot of "conservatives" have been warning about inflation for the past three years... but as we have seen, they have been completely wrong in their predictions up to this point.

  • Report this Comment On September 29, 2010, at 5:13 PM, XMFSinchiruna wrote:

    ETFsRule

    I am the author of this article. :)

    If you are looking solely to the government-issued inflation numbers and the freakish condition of the bond market as your sole indicators of inflation, then I am not surprised if you do not detect its scent.

    European austerity to date has been little more than fleeting window dressing upon a still-mounting pile of debt. Euroland's $1 trillion intervention remains a bit too fresh to be using the continent as an example of fiscal austerity.

    Again, please pay close attention to this: http://www.fool.com/investing/general/2010/09/23/death-knell...

    "This is a key point to consider, because I believe many investors mistakenly believe that inflation can only occur in the context of economic recovery. I have stressed repeatedly that inflation is a currency event rather than an economic event, and I view a comprehensive understanding of currency induced, cost-push inflation as one of the more important topics of inquiry for Foolish investors struggling to ascertain what the future may hold. Stated another way, the currency event that is likely to trigger abrupt inflation is precisely that crisis of confidence now set to unfold for the U.S. dollar."

    Some like myself who have consistently warned of looming inflation have not been wrong ... but rather misunderstood. Inflation is a currency event, and that currency event is well underway. Gold's ascent is itself a reliable barometer of that inflationary event.

    I offer excerpts of comments I made back in early 2009:

    When you have a contracting economy, but massive spending transitioning into quantitative easing in a failing attempt to counteract de-leveraging, and foreign creditors grow increasingly wary of the entire mess... these are clear ingredients for stagflation.

    I believe the bailouts and fiscal interventions will fail to generate economic recovery in the face of an insurmountable mountain of toxic derivatives (at least $684 trillion). I believe that the recent foray into quantitative easing is just the beginning, which creates a dangerous vicious cycle for the USD, prompting further acceleration of the printing press and sealing the downward trajectory of the USD against the basket of foreign currencies.

    This will yield higher USD prices for core commodities like oil, food, metals, etc., forcing the hands of foreign holders of USD reserves to begin unloading in one form or another and making the eventual emergence of a replacement reserve currency system a certainty. Foreseeing this scenario, I believe, China and Russia have held no punches in voicing their level of discomfort with our policies and the continuing role of the USD as the reserve currency of the world.

    It seems most folks are watching housing prices, unemployment figures, and other such domestic economic indicators for clues about when we could being to see deflation bottoming and allowing inflation to rear its head. I agree that such a reversal would indeed herald the arrival of inflation, but I consider this scenario far less likely than the stagflationary case.

    Instead, I have my focus honed in upon Treasury bond auctions and quantitative easing, the USDX, gold, the growing crisis tally, strategic moves to secure future commodity supplies, and global currency developments with respect to concern over the fiscal health of the greenback, etc. These, I believe, provide the clues we need to follow to predict the onset of inflation.

    With that said, if you have anything further to discuss on the topic, please bring it to the CAPS blogs, as we risk straying from the central topic of this article. Thanks. :)

  • Report this Comment On September 29, 2010, at 5:22 PM, HectorLemans wrote:

    I get the feeling Charlie Munger and people like the author of this article are talking past each other. Unless I'm reading him wrong, Mr. Munger isn't saying anything about how well the dollar will hold up long-term to other currencies. What he's saying is that people who have most of their investments in gold are jerks - all they're doing is placing a bet for the dollar to fall in value. No more / No less. They're taking their money out of the world's capital markets (where it could be used to better someone's standard of living) and exchanging it for shiny metal that has no practical value. If you think the dollar will collapse, fine - invest in European or Asian or South American companies.

  • Report this Comment On September 29, 2010, at 5:33 PM, XMFSinchiruna wrote:

    HectorLemans,

    So ... if I'm understanding you correctly, then you also think I'm a jerk because I choose to invest in gold? Just checking. :)

  • Report this Comment On September 29, 2010, at 5:52 PM, HectorLemans wrote:

    Just a jerk investor. I'll withhold judgement on your personal character until I get to know you :-)

  • Report this Comment On September 29, 2010, at 6:15 PM, XMFSinchiruna wrote:

    HectorLemans,

    Thanks for throwing me such a charitable bone. :P

  • Report this Comment On September 29, 2010, at 9:19 PM, TMFBent wrote:

    If Munger thinks gold bugs are jerks now, he should spend a few days reading blog posts in Caps.

  • Report this Comment On September 29, 2010, at 9:29 PM, XMFSinchiruna wrote:

    TMFBent,

    And the insults just keep coming. Nice.

  • Report this Comment On September 29, 2010, at 10:01 PM, topsecret09 wrote:

    Very good article Sinch. We are In very dangerous territory right now In the stock market. I bought and sold Seabridge a couple of times,and I only own two miners right now,Taseko and Yamana. You made a super call on Silver Wheaton, do you have a target on It ? TS

  • Report this Comment On September 29, 2010, at 11:11 PM, XMFSinchiruna wrote:
  • Report this Comment On September 30, 2010, at 12:18 AM, topsecret09 wrote:

    Wouldn't suprise be In the least If It traded Into Franklin territory.... Kicking myself for not buying $20 calls when It was trading at $18.00..... TS

  • Report this Comment On September 30, 2010, at 12:19 AM, topsecret09 wrote:

    Wouldn't be suprised.... LOL !!!!

  • Report this Comment On September 30, 2010, at 12:23 AM, topsecret09 wrote:

    One more time ..... I am really tired :) Wouldn't surprise me In the least If It traded Into Franklin territory...... Thanks for all of your great articles, TS

  • Report this Comment On September 30, 2010, at 12:30 AM, bfischer55 wrote:

    TS, I bought SLW 11/08 at $3.35, and still riding with it. Great ride so far.

    I believe that silver will go north of $40, and that SLW may hit the $70 to $80 range. Bumpy ride between now and then is expected.

    I also like Hecla Mining (HL). Could be a takeover target. I bought HL at about $2.00, it's now over $6.00. Nice ride, but not as good as SLW.

    Another potential winner is ProShares Ultra Short 7-10 year Treasuries (PST), this is a leveraged play that will bounce significantly when the 7-10 year Treasuries shoot-up (it's a short on Treasuries). With the 10-year Treasury at such lows (about 2.60%), I view it at or close to the bottom.

    Happy investing Bro.!

  • Report this Comment On September 30, 2010, at 2:28 AM, ChrisFs wrote:

    I have been called far worse than a 'jerk' by mentioning that gold will eventually fall and likely fall hard within a year or two rather than reach $5000.

    Supporting your own opinions on the market is not something Charlie Munger, least of anyone, is required to do.

    " * What can we infer from the historical record regarding the likely consequences of quantitative easing and deliberate monetary debasement?

    What can we tell about the record of gold in not just the last 10 years, but the last 40? Hasn't it plunged at least once and stayed flat for many years at a time despite all economic signs to the contrary?

    * Is persistent, expanding, and unfunded deficit spending something that can be shown to "work" in human systems over the long term?

    This is a leading question. When you borrow money to get something that will bring benefits later (like a house) or have to borrow to prevent a catastrophe (like covering rent while unemployed, or paying for treatment of a very serious illness), is that 'bad' deficit spending? Are there times when not spending can lead to worse consequences?

    * Whose idea was it to begin referring to U.S. citizens solely as consumers, and is boundless expansion of consumption something that works in human systems?

    This is a topic that extends well beyond gold, and many late night pitchmen have taken advantage of the cosumptive nature of people to seel the gold.

    * Why is saving called hoarding when it's done in gold? Hoarding is the buying of amounts of gold way in excess of diversification, with the expectations that it will never go down.

  • Report this Comment On September 30, 2010, at 9:02 AM, XMFSinchiruna wrote:

    ChrisFs,

    Thanks for sharing your thoughts. I'm sorry that disparaging remarks have been hurled your way. As one who has received my fair share of unwarranted verbal abuse, I can certainly empathize.

    I did not take issue with Mr. Munger's views on the market, but rather his offensive vilification of an entire demographic within the investment world. He is certainly more than welcome to possess a negative outlook on gold (as are you).

    "What can we tell about the record of gold in not just the last 10 years, but the last 40? Hasn't it plunged at least once and stayed flat for many years at a time despite all economic signs to the contrary?"

    You can't answer a question with a question, but I'll answer your question anyway. :) Let me start by saying that I wish gold would go down. I say this not in the usual sense that I would like to buy more on dips, but I mean in the larger sense that I wish events would prove me entirely wrong about the outlook for gold. Although I am heavily invested in silver and gold equities, I would rather lose every penny I've invested if it meant that by some miracle the economic fate that I see laid out before us could be avoided. I have been expressing this sentiment throughout the bull market for gold ... none of this pleases me ... I simply invest in gold and silver because they are the only assets with which I feel sufficiently confident.

    Yes, gold plunged in 1980 on the heels of a most dramatic interest-rate hiking event led by Fed Chairman Volcker. As Munger himself alluded to in his parable, woe unto those that ignore Volcker. It traded sideways for a while, and really dipped in the 1990s when the U.S. was running budget surpluses for a change. In any event, the broader 40-year trajectory of both gold and the dollar since Nixon "temporarily" closed the dollar's convertibility to gold is far more instructive to this conversation than any subset thereof.

    "This is a leading question. When you borrow money to get something that will bring benefits later (like a house) or have to borrow to prevent a catastrophe (like covering rent while unemployed, or paying for treatment of a very serious illness), is that 'bad' deficit spending? Are there times when not spending can lead to worse consequences?"

    I disagree that mine was a leading question, and again you sought to answer a question with more questions. :) But to use your example ... borrowing to pay for a major surgery sounds like a reasonable use of credit under extenuating circumstances.

    Applying the metaphor to the macroeconomic landscape, however, if the surgeon proposes to pump gallons of puss into an already-infected limb that will surely have to be amputated anyway, then the patient may wish to give ample and appropriate consideration to the cost-benefit analysis. In other words, I reject the notion that all these trillions of dollars in debt are actually poised to bring a positive benefit down the road. Again, based upon the content of his parable, I suspect that Mr. Munger may agree with me on these points.

    "This is a topic that extends well beyond gold, and many late night pitchmen have taken advantage of the cosumptive nature of people to seel the gold."

    Again, I don't think you've addressed my question in any way, shape, of form. Mine was a philosophical question regarding the paradigm that attempts to reduce human beings to receptacles of conspicuous consumption. Until that paradigm is abandoned, we are unlikely to discover first-hand what actually works in human systems.

    "Why is saving called hoarding when it's done in gold? Hoarding is the buying of amounts of gold way in excess of diversification, with the expectations that it will never go down."

    That's a creative definition of hoarding, though it still dodges the question of how saving in gold triggers a different term entirely than the act of saving in dollars. Also, I didn't realize the goal of savings was diversification.

    As for the expectation that it will never go down, I find that to be a core characteristic of sound money. There was once a dream of a U.S. dollar that carried similar expectations.

    If we are to adopt your definition, furthermore, then we live in a world of consummate hoarders, because the notional value of all outstanding derivatives -- commonly defended as necessary hedging vehicles -- is of a scale ten-times greater than the entire global GDP! Do our corporations and financial institutions not hoard leverage? Charlie's own company is one of those derivative hoarders. Shall we modify his quote above and replace the word "gold" with "derivatives"?

    All of our conspicuous consumption is built upon that leverage. Something (still) has to give.

    Thanks for sharing your thoughts, and please know I don't leap to any character judgments on the basis of your incorrect outlook on gold. :)

  • Report this Comment On September 30, 2010, at 11:17 AM, jhaw wrote:

    So, to paraphrase, Munger says people who invest in gold are jerks. You disagree, but the tone of your article seems to support his thesis.

  • Report this Comment On September 30, 2010, at 11:53 AM, silverminer wrote:

    jhaw,

    Intriguing critique ... please, by all means, do elaborate.

  • Report this Comment On September 30, 2010, at 11:53 AM, silverminer wrote:

    [silverminer = TMFSinchiruna]

  • Report this Comment On September 30, 2010, at 12:07 PM, ETFsRule wrote:

    He was probably referring to your final paragraph, which contained thinly-veiled partisan politics, and a bizarre association between gold investors and the struggling working class - in an apparent attempt to gain populist support for your ideas.

    Rich people and fat-cat politicians buy gold too, you know.

    (and no I am not jhaw - I just wanted to give my 2 cents)

  • Report this Comment On September 30, 2010, at 12:41 PM, silverminer wrote:

    ETFsRule,

    Wow ... keep the negativity coming. This is proving quite a fascinating exercise.

    As a member of the struggling working class, I can't speak to how bizarre it might be to suggest that Fools of limited means might find gold an important means to protect hard-earned capital from the ravages of competitive currency devaluation.

    But really ask yourself ... even if you disagree vehemently with my opinions on the topic, is there any basis in logic for extending that disagreement into a character judgment like the one offered by Mr. Munger?

  • Report this Comment On September 30, 2010, at 1:01 PM, ETFsRule wrote:

    Regarding Munger's original comment, it sounded like he was half-joking, and I think you're making too much out of it. It would be interesting to hear him elaborate on it though.

    I think HectorLemans said it best:

    "They're taking their money out of the world's capital markets (where it could be used to better someone's standard of living) and exchanging it for shiny metal that has no practical value."

    I think he nailed it. And, this is also pretty similar to what Buffet has said about gold.

  • Report this Comment On September 30, 2010, at 1:02 PM, jhaw wrote:

    I was actually just being a bit of a jerk myself (even though I don't invest in gold or precious metals). My only point was that demanding that Munger "Take It Back" is not a great way to begin an argument that gold investors aren't jerks, but I do realize that some of these titles are designed to be provocative.

    Reading the article, it was not clear to me exactly why Munger is anti-gold, or why he feels gold investors are jerks. If it is, as HectorLemans suggests above, that gold is a shiny metal that has no practical value, then that is consistent with my own aversion to gold investing. But I still don't understand the "jerk" part of Munger's comments.

  • Report this Comment On September 30, 2010, at 1:11 PM, TMFHousel wrote:

    Only because some readers have emailed me asking about it, I want to note that the Munger quote is not taken out of context. That's everything he said on the matter.

  • Report this Comment On September 30, 2010, at 1:22 PM, silverminer wrote:

    jhaw,

    Precisely. Had he left out the "jerk" part, and stopped short of injecting moral imperatives and notions of rationality into the discussion, then I'd have had nothing at all to say in reply.

    I stand by the title of the article, though to clarify the only part I meant to ask him to retract is the part where he calls gold investors "jerks". I could have made that distinction clearer.

    Thanks for elaborating ... as is often the case, it has led to a greater mutual understanding.

  • Report this Comment On September 30, 2010, at 2:31 PM, XMFSinchiruna wrote:

    ETFsRule,

    "They're taking their money out of the world's capital markets (where it could be used to better someone's standard of living) and exchanging it for shiny metal that has no practical value."

    So let me get this straight ... you feel it is wrong to hold gold because doing so does not provide a discernible benefit to society? If investing is to be seen as an exercise in fulfilling moral obligations, then where is the line drawn? If that's your contention, this opens up a whole can of worms.

    By the same logic, investing in shares of Altria, for example, would then present a moral conundrum ... since cigarettes are fairly well understood to lower the quality of life for those who smoke them. If we are to ascertain the greater societal benefit between supporting the jobs, revenue, and tax base of the cigarette industry and the positive impact upon collective human health if investors were to withhold their collective capital support, I think you'll likely agree that no one person can authoritatively issue such a messy and subjective determination except as it relates to themselves and their own personal investment decisions.

    I can't help going back to the derivatives example, either. Munger's own company has made substantial use of derivatives, which I don't think anyone will argue contribute anything of value to society at large. To the contrary, as Munger understands, they present perhaps the greatest existing threat to our standard of living. This activity of hoarding derivatives contradicts his own notion of a moral imperative with respect to investment decisions.

    Turning back to the comments you agreed with above, what becomes of that supposed moral imperative to contribute to the greater good by maintaining steadfast exposure to equities when one's own macroeconomic outlook comes to anticipate a major decline. Say, for example, that out of a sense of moral obligation you had maintained a stake in Bank of America back in February of 2008 when I urged investors to "run to the nearest exit" (shares were above $40, $39.23 adjusted). They will be down 66%, without even factoring in the dilutive impact of an $18.8 billion equity offering conducted in late 2009. If they had seen the problems emerging within the banking industry and the mortgage market in particular, can anyone honestly support the notion that a moral imperative commands them to maintain that equity exposure rather than protecting their family's capital by selecting an asset that they see providing protection from such losses?

    Since Bank of America provides merely an iconic example of the situation facing the broader equities market in that timeframe (i.e. systemic risk), the same question can be asked with respect to any index-based mutual fund or even equity exposure in general. By extension of that argument, one would have been duty-bound to maintain equity exposure even of one's analysis led to the expectation of substantial losses.

    If anyone among us volunteers to watch their family's hard-earned investment capital deteriorate in a major stock collapse like the one we witnessed in '08-'09, even when they see that collapse coming, then that is a moral commitment to the greater good that I would like to highlight in a future article. I chose to safeguard my family's capital with gold exposure because I saw a major collapse looming, and I will not stand by silently and let some gazillionaire tell my I'm a jerk for doing so.

    Urging investors in Bank of America and all major mortgage lenders to "run, not walk, to the nearest exit" in February 2008:

    http://www.fool.com/investing/dividends-income/2008/02/26/ho...

  • Report this Comment On September 30, 2010, at 3:16 PM, WalterMiddy wrote:

    Great give and take, you guys (and gals), although some of you have taken a headline designed to grab your attention a little too seriously. Can't tell if Munger was serious or not but if serious, a bit perplexing and inconsistent, as the author points out throughout this thread.

    My friend and financial advisor (unfortunately now deceased) put my and our kids' college accounts heavily into gold and mining stocks back in 2001.

    For the record, we're not at all rich but those accounts put a big dent in some heafty tuition bills. Wish he were still around to see his predictions come true.

    Like TMF Sinchiruna, while my friend thought the debt bubble was inevitable and tried to protect us and himself by investing in PMs, he hoped he was wrong because he knew there was going to be a lot of pain resulting from all this.

  • Report this Comment On September 30, 2010, at 3:48 PM, XMFSinchiruna wrote:

    WalterMiddy,

    Thank you for sharing your thoughts and experiences. I am very sorry to hear of your friend's passing!

  • Report this Comment On September 30, 2010, at 7:40 PM, ETFsRule wrote:

    Sinch: It's great that you avoided losses in the crash. If you are an expert in market timing, then it can certainly be a good move to invest in gold in order to avoid a stock market crash.

    Of course, you also could have just held dollars at that time (the dollar index increased in the period of time from the market high of October 2007, to the market trough in March 2009). So, a perfect market-timer could have held either cash or gold for that year and a half, and then moved back into stocks.

    Anyway, if you look at the facts from the past 3 years, it's painfully clear that the rise in gold price has not been caused by the devaluation of the dollar. Since October 2007, gold has nearly doubled, while the US dollar has only decreased in value by a couple measly percentage points. For that reason, it's pretty obvious that gold is in a bubble right now - caused by gold-pushing, fearmongering pundits like Glenn Beck.

    Sooner or later, investors are bound to move their money out of gold and back into the stock market. So my question is, how can you keep your families "hard-earned money" in a commodity which is so obviously overpriced right now?

    The fact is, gold isn't safe. It can become overpriced, and it can crash - just like anything else.

    You'll see.

  • Report this Comment On September 30, 2010, at 9:19 PM, WalterMiddy wrote:

    ETF:

    I think you've asked the same question I used to ask my friend, "When." And his answer was always the same: "I'm not a timer and won't pretend to be and wouldn't recommend someone trying to be a timer."

    Of course gold can crash; in fact, it will crash at some point like all bubbles do when the price of the asset is unrealistic. But when? I think Sinch's point is "probably not for a while." So, you look at everything and try to extrapolate and take your best, hopefully educated, guess. I tend to think the world situation (economic or currency: both are way over my head) tilts more toward later rather than sooner. If that makes me a jerk, so be it. I'm not sure that's the appropriate characterization of someone trying to preserve his/her assets, whatever those assets are.

    Anyway, this has been a very informative, and civil, I'm happy to say, exchange of ideas. Thanks to all.

  • Report this Comment On September 30, 2010, at 9:29 PM, XMFSinchiruna wrote:

    ETFsRule,

    I don't think one has to be an expert market timer to take part in a decade-long secular bull market driven by discernible macroeconomic drivers.

    With respect, the relative scarcity of gold relative to the supply of dollars results in disparate percentage moves between the two currencies without providing any of the evidence you claim of a failed correlation.

    I have offered my opinion on countless occasions regarding claims that gold is in a bubble, and indeed I have fielded such claims fairly regularly over the past 5 years from individuals exhibiting similar confidence to that which you express above.

    http://www.fool.com/investing/general/2010/09/22/popping-the...

    http://www.fool.com/investing/general/2010/06/23/why-gold-wi...

    http://www.fool.com/investing/general/2010/01/04/nouriel-rou...

    http://www.fool.com/investing/general/2009/10/12/gold-overlo...

    You are welcome to your opinion that gold is overpriced, and likewise to your opinion that gold is a commodity. I will not concede as "fact" that gold is not safe, as you state ... in the world we reside in I believe it's the safest thing going with perhaps the exception of silver. That is my opinion, of course, and I will not seek to present it as fact.

    Now ... there are limits to my time. If you have more ideas you would like to discuss with respect to gold, please express your thoughts or ask your questions in a CAPS blog post ... you will find therein a very knowledgeable and extremely helpful community of investors with a range of opinions on gold. Among them, you will discover that even those with bullish outlooks on gold are both extremely affable and entirely rational human beings who are delighted to engage in respectful dialogue on the topic.

    Thanks,

    Sinch

  • Report this Comment On September 30, 2010, at 10:07 PM, ETFsRule wrote:

    I can see that you like to get the last word in. A true businessman.

    If anyone is interested in reading my reply, I will post it in my CAPS blog later tonight. Cheers.

  • Report this Comment On October 01, 2010, at 10:38 AM, PMRANKIN wrote:

    Dear Mr. Barker:

    Although you are absolutely correct, you wasted your time by responding to Mr. Munger. If I would have bought Coke and JNJ 40 to 45 years ago and continued to so, I would be rich today. I am trying to be respectful to Mr. Munger. I would not call him a fool; respectfully, he is just a curmudgeon.

    From my perspective and viewpoint, Mr. Munger has made many statements that are flat wrong and just make you scratch your head.

    We listen and waste our time writing about him simply because he is a wealthy investor. However, that does not mean he is right.

    As a newcomer to this forum I look at the success of so many individual investors on this site and am amazed. We should be looking two places for investment advice; to ourselves and other members of this forum. I know I would much rather listen to an opinion on this site that from Mr. Munger. He has been wrong before! And right now the markets for Gold and Silver are telling him he is wrong and they have been telling him so for a long time.

    Mr. Barker, my advice to you is don't waste your time trying to support your successful strategy. Just enjoy the spoils of your investing ideas.

  • Report this Comment On October 01, 2010, at 1:52 PM, hudsondusters wrote:

    The only reason gold is a store of value is because people treat it that way. It has no value apart from people's desire to own it. It doesn't create wealth. It doesn't cure the sick, power an engine (ok, I know it has some uses, but leave those aside, since those uses aren't what is driving the price), improve communications, house people, etc. I think this is what Munger is driving at. Just because it is at an all-time high now doesn't make him wrong (aside from using a loaded term like "jerks"). That would be like saying if he told you investing in pets.com is stupid and pets.com went to $100 meant he was "wrong." What the market is willing to pay for an asset at a given time does not change its intrinsic value. Gold is not quite as volatile in price as a stock with no earnings power. It's a powerful brand, gold, kind of like coca-cola, which also has little intrinsic value except folks like to drink the stuff.

    It's a relic. Which doesn't mean it won't continue to be treated as a store of value for many more millenia.

    I don't think Charlie is saying keep all your wealth in dollars. I think he believes you should have your wealth in productive, wealth-creating enterprises.

  • Report this Comment On October 01, 2010, at 5:10 PM, rfaramir wrote:

    "Why is saving called hoarding when it's done in gold?"

    Because those invested in manipulating dollar holders cannot manipulate gold holders. They are out of their reach, and they don't like that. Dollar holders are slowly raped by fractional reserve banking and electronic printing of unbacked dollars. Escaping being raped is not appreciated by those doing the raping, but as it is legal, all they can do is disparage it.

    Refusing to participate in a dollar plunge accentuates it, which is good. A non-backed currency is worth nothing, so its plunge benefits society.

    Similarly, derivatives (at least options and futures) help the underlying commodity more quickly find its true price point. Causing producers to increase supply and consumers to reduce consumption ahead of a coming shortage. (And causing less production and more consumption of something in excess.)

  • Report this Comment On October 02, 2010, at 11:08 AM, arkayny wrote:

    I think the point made is that gold is not an investment but a speculative hedge. Betting that everything else will loose value and that gold is the one standard that will hold its own. But history shows buying and holding is not an option.

    My personal belief is gold is wampum. Carved seashells as currency? Only if everyone agrees it is. Similarly Gold is valuable because it is generally agreed it's valuable. It is pretty and it doesn't corrode or tarnish. And it is harder to find than other metals. But we could more easily live with out it. It is relatively low on an industrial usage scale . It is no longer exchanged as currency. So it value is purely determined by peoples desire to own it and the arbitrary value, those who do, place on it.

    I say arbitrary and speculative because its value is tied to emotion. Historically, when things look bad, people flock to gold because of the common belief it is the only thing that has "real value" But then when people realize we in fact are going to survive and in all likely hood flourish, gold prices plunge. Hence, speculation in gold has been and might be good for the near term and I salute all the profits made. But if you "invest" in gold y'all better not sleep. Last time gold dropped from the 800s to 200s. In an era where stock prices can fluctuate 1000 points in a couple of days, gold could loose 75% in value over a month or even a week.

  • Report this Comment On October 02, 2010, at 8:10 PM, longtermgrowth09 wrote:

    If you hold gold you dont understand the world and the US economy, therefore youre worse than a jerk. Forgett about gold and try to understand the unbeatably power of american brands.

  • Report this Comment On October 02, 2010, at 10:55 PM, XMFSinchiruna wrote:

    longtermgrowth09,

    That's quite a statement. Please ... do tell. What is it that's worse than a jerk and more accurately characterizes gold investors as people?

    arkayny,

    The price of gold is not as arbitrary as you suggest. There is an actual, structural crisis in the U.S. dollar that plays a very unemotional role in gold's ascent. Additional fiat currencies with severe impairment of their own have rendered this a re-pricing event for gold against a basket of the world's unbacked paper currencies.

    Gold's rise can not -- I repeat -- can not be adequately understood in terms that seek to relate the move to human emotion. The word "fear" I believe muddies the water ... since we can not ascertain the emotional state of those investing in gold. Certainly, it is variable at the least. Perhaps it's more useful to discuss what may be anticipated by those buying gold... like quantitative easing, inflation, etc. But anticipated events are only part of the story behind gold's rise ... there are plenty of events which have already transpired that account for gold's strength.

    For gold to reverse on a dime as you suggest, the dollar must likewise heal itself overnight. The weight of ballooning and untenable debts must be removed from the greenback's back. There would have to be no threat of a bubble in U.S. Treasuries. The Euro would likewise have to mend. The economies of both continents would have to execute truly sustainable recoveries while seamlessly removing excess liquidity and battling the very inflation they now seek to promote. All that would have to be accomplished in a rapidly rising interest rate environment. The $600 trillion market for derivatives would have to unwind from its presently excessive leverage in a smooth and orderly fashion despite representing 10X the global GDP. Oh yeah ... and it would probably help if we could declare world peace and instantaneously roll-out clean, sustainable fuel alternatives to reduce the outlook for future conflicts. If all of those things transpire in the near future, then perhaps gold could indeed reverse on a dime and settle back down beneath $1,000.

    In a nutshell, I suppose gold investors like me continue to invest in the space because we perceive a very low probability for all of those (and other needed) repairs occurring in tandem.

    That being said, gold can exhibit gut-wrenching volatility within a secular bull market of this magnitude. Gold shed about 30% during the 2008 correction from peak to trough. Additional percentage swings of that sort of scale must be seen as possible scenarios, and all gold investors must contend with anticipation of same.

    Finally, you suggest that gold is no longer exchanged as currency. Technically, that is a matter of choice. The U.S. Mint still issues gold coins denominated in USD. :)

  • Report this Comment On October 04, 2010, at 1:18 PM, decbutt wrote:

    Munger rules.

    Misinterpret his words willfully, it makes for great web 2.0 content. In terms of quantity, if not quality.

    V. poor.

    See me.

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