On the heels of a rough couple of weeks in major markets, today King World News takes a look at Warren Buffett and the greatest crisis facing the world today.

Warren Buffett And The Greatest Crisis Facing The World
Stephen Leeb:  “Do I think everyone – young and old – should own gold? Without a doubt. Or at the very least, if you can’t afford to purchase a gold coin or buy shares in a mining company or gold ETF, you can own silver. Silver coins are available for around $20…

Gott’s Law & Gold
Precious metals advocates might think gold and silver are obvious recommendations. After all, gold and other precious metals have served as currencies over the millennia, and to bet against their role in a new monetary order – a role that will lead to their dramatic revaluation – defies common sense and some well-regarded philosophical principles. One of these is what I term “Gott’s law.” In the 1990s, in an article in Nature, renowned astrophysicist J. Richard Gott argued that to project how long something, such as a particular civilization, will last, your best guide is to ask how long it has been around. The longer it already has lasted, the better its chances of continuing to exist. For example, Bach and Rembrandt have been cherished for hundreds of years, making it likely that their appeal will outlast most modern composers and artists.

Gold’s longevity makes it a prime example of something Gott’s law would tell you to bet on. Yet advising gold or silver as an investment goes squarely against the grain of the entire U.S. financial advisory industry. Financial advisors tell young and old alike that the three basic asset classes are stocks, bonds, and cash. If you were taking a test to become a financial advisor and suggested you’d tell clients to consider gold, you’d have to repeat the class.

Warren Buffett, Gold And The Dollar
Recommending gold also goes squarely against the advice of the person widely considered one of the most successful investors in history: Warren Buffett. Buffett, one of capitalism’s most ardent cheerleaders, is a genius when it comes to picking financial assets. I’ve been recommending his stock, Berkshire Hathaway, for as long as I have been writing books and newsletters. Buffett is also revered for his plain spoken investment advice. But when it comes to gold, I think his often quoted folksy wisdom has missed the mark.

It probably shouldn’t be surprising, though, that even Buffett has inherent biases when it comes to his own self-interest. After all, Buffett – along with virtually every Western banker, from J.P. Morgan to the Bank for International Settlements (BIS) – counts his money in dollars, making him understandably wary of anything that would upset the dollar’s hegemony.

Buffett’s comments about gold go completely against what one would think in that they defy the kind of common sense he otherwise displays so brilliantly. Because he’s so widely and justifiably revered as an investor, his statements on gold further encourage financial advisers to continue to advise shunning the metal. But even the most revered human expert is human and shouldn’t be blindly followed.

Buffett’s most famous observation about gold goes as follows:

“If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about 7 Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

Buffett Not Crazy, But Dead Wrong On Gold
No I would not call Mr. Buffett crazy. But I would say he’s comparing apples with oranges, or maybe, perhaps “the color blue” with “milkshake.” For starters, gold is a currency so you can use it to buy farmland or shares in a company or dollars. More precisely, as a currency that doesn’t lose value over time, it is a store of value. You can readily exchange gold for dollars on exchanges that trade gold. In fact if you have a gold bar, you can usually sell it for a bit more than its current value. Yesterday, gold for December delivery settled at $1,261, about $10 higher than the current price. Similarly, if you have dollars you can buy gold, though you might have to travel to China or the Middle East to get immediate delivery (but that is a story for another interview). Once gold is recognized as a currency or at least as a substitute currency, Buffett’s question is essentially meaningless in that farmland and stocks can be exchanged for gold – they both have the same value.

The more relevant question would be if you didn’t want to make the exchange at a particular time, would you be better off holding gold or the dollar as a currency? According to Samuel Williamson, a research professor in economics and founder of the website “MeasuringWorth” (whose board of advisors includes a slew of topflight academics from places like Oxford and Berkeley), gold, by a wide margin has outperformed two of the world’s currencies, the pound and the dollar, since at least 1257. (Obviously, his data on the dollar only goes back the late 18th century.) There are records of gold outperforming paper currencies for more than 230 years before Columbus discovered America. 

Also important, as I have mentioned before, is that according to another gold historian, Roy W. Jastram, since the mid-16th century there has never been a period in which gold has not gained purchasing power in deflationary times. I single out deflation because those are the times when safe financial harbors can be the difference between starvation and three meals a day.

Gold’s Enduring Longevity
The first recorded use of gold as a medium of exchange was in 900 BC. This suggests, according to Gott’s law, that gold not only will likely outlast the dollar as a currency but that it also will outlast the American civilization, which is less than 250 years old and already a little long in the tooth, given that the average civilization lasts about 200 years.

There are many reasonable explanations for gold’s longevity. Gold is incredibly malleable, doesn’t tarnish, is very hard to destroy, and, perhaps most important is sought as an object of beauty. The French poet, Nicholas Boileau-Despreaux said:

“Gold lends a touch of beauty even to the ugly.”

Because gold has been a currency for about 3,000 years, we often overlook its intrinsic beauty, which likely made it such a natural choice for a currency. Another poet, John Keats, identified beauty with truth and with timelessness. From this perspective, Buffett’s question asks whether you would trade a unique object of beauty for farmland and stocks, if the marketplace said they were worth the same. There is no answer but I think for most to have beauty and a currency in the same package is extremely special.

But to be as fair as possible to Buffett and others who scorn gold as an investment, instead of comparing gold to other currencies, let’s compare it to the assets that a currency can buy. As our chart below shows, since late 2001 gold has vastly outperformed stocks, including Exxon; soybeans, which is used as a proxy for farmland; and, of course, the dollar, which would simply be a flat line at the bottom of the chart…..More Here