Is Gold Among Warren Buffett’s $21.4-bn Currency Investments?

By Tim Wood –
TORONTO ( — Exactly two years ago, Mitsui Metals analyst cum gold bug pincushion, Andy Smith, distributed a delightful note to clients speculating about the possibility of Warren Buffet being invested in gold. Smith may have been more right than he realized.
The coke chugging, burger bolting chairman of Berkshire Hathaway has just told his investors that they were exposed to 12 currencies through $21.4 billion worth of foreign exchange contracts. What is not clear is if Berkshire has placed gold within the broad description of “currency”; which would be an accurate appellation for the metal which has been tightly twinned with the euro for some time.

Buffett is no obvious friend of gold having said of the metal in 1998 at Hahvahd: “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.”
Andy Smith was clued in to Buffett’s potential revision by the terminology he employed for some portions the 2002 Berkshire annual report which was very gold buggish in its views on derivatives. Indeed, the 2004 report dealing with the US dollar and America’s deficits, just released, could be a verbatim replay of the sort of the case put forward by the likes of Newmont’s Pierre Lassonde and Dr Martin Murenbeeld.
For example, Buffett dissents from the more mainstream economist view that the trade and budget deficits are benign necessities that secure the world against economic depression. Buffett issued an exceptionally stern condemnation of the mercantilist attacks on America by its trading partners, which he says are resulting in the transfer of treasure abroad and fostering a de facto royalty mechanism.
“As time passes, and as claims against us grow, we own less and less of what we produce. In effect, the rest of the world enjoys an ever-growing royalty on American output. Here, we are like a family that consistently overspends its income. As time passes, the family finds that it is working more and more for the “finance company” and less for itself,” Buffett wrote.
Buffett did not say it in as many words, but he is clearly suggesting that in such a scenario Americans would eventually refuse to pay tribute. In which case you’d better be holding gold as insurance.
Buffett is no stranger to precious metals having once poured 2% of Berkshire’s wealth into silver; a 4,000 tonne position that was apparently liquidated at a loss.
Back in early 2003, Smith noted that you didn’t need to see “gold” printed in the annual report – it was just between every line.
The caveat is that Buffett loves to talk to his book, and his annual reports are packed with populist themes, be it homilies against crooked executives or visions of a WMD attack on America. At the risk of sounding conspiratorial, it is notable that the Berkshire report, which would have been through the printers and editors for a while, was timed rather well against recent dollar weakness.
He is no fool and he knew that his comments would swing the currency market, just as any hint of an acquisition by Berkshire rocks the equity market.
It’s always important to isolate the “Charlie and I” segments in the report. The 2003 highlight was: “Charlie and I believe Berkshire should be a fortress of financial strength… We try to be alert to any sort of mega-catastrophe risk…derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
This year it is: “Charlie and I run a clear risk with our foreign-exchange commitment. But we believe in managing Berkshire as if we owned 100% of it ourselves. And, were that the case, we would not be following a dollar-only policy.”
That’s a smoke-screen for shifting the market by semaphoring for the herd to follow his lead, something Buffett cannot do as easily with other securities because of regulatory controls.
That would suggest that if Buffett is invested in gold, it is small percentage rather than a big bet because it is clear that liquidity is upper-most in his mind as Berkshire looks for opportunities to deploy $43 billion into securities that are not macro-economic bets. However, the advent of gold ETFs does provide a means to play the market better through nominee structures and so avoid getting scalped by the coterie of bullion dealers.
FOOTNOTE: It is interesting that Buffett is so full of praise for the Financial Times which still holds the editorial line of its former economics correspondent, Gerard Baker, that the US deficits are necessary; or as he recently put it in Foreign Policy: “The political bloodletting that would ensue [were the US to cut its trade and budget deficits] would make the world wish it had kept quiet.
Source: Resource Investor

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