Skip to main content

Dig Deeper

Forget the Yellow Metal versus American Mettle; Nothing Matches Buffett's Brass


In his most recent letter to Berkshire Hathaway shareholders, Warren Buffett used a variety of logical fallacies and enormous economic ignorance to disparage gold.  Buffet wrote,
"On March 11, it will be 77 years since I first invested in an American business.  The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six.  What I bought was three shares of Cities Services preferred stock.  I had become a capitalist and it felt good....To protect yourself, you might have eschewed stocks and opted instead to buy 3.25 ounces of gold, with your $114.75.  And what would that supposed 'protection' have delivered?  Your asset would now be worth about $4200, less than 1% of what would have been realized from a simple unmanaged investment in American business.  The magical metal was no match for American mettle...."

Before delving into everything Buffett gets wrong here, it is rather ironic that Buffett impugns the patriotism of all those - including his father, the late congressman Howard Buffett - who recognize the critical role gold has played throughout history as a brake on both the creation of credit money and the accumulation of centralized government power.  In Buffett's analysis the people who attach any significance to gold are not just wedded to dubious ideas and outdated modes of thought; they are skeptical of everything about America.  In actuality, people who appreciate the role gold has traditionally (1) played are also the first to recognize that gold, by controlling the power of any moneyed elite, thus complements the role the constitution (should) play in placing chains on the federal government.  Indeed, Buffett's father examined what he believed to be the indispensable role money backed by gold plays in limiting government power and promoting human freedom.  (2)  Rather than being most skeptical of the "American experiment," believers in the important role gold should play in credit - and thus government - are the most fervent and last true believers in America!

Because Buffett gets so much wrong in so few words, brevity will force me to simply list some of the most glaring mistakes;

  • Buffett ignores the fact that in 1942 private ownership of gold was outlawed in the United States.  Gold  could not be purchased at any price in 1942, certainly not $114.75.
  • Buffett ignores the fact that the price of gold was essentially held fixed for much of the time period he cites.  Between the Bretton Woods agreement of July 1944 and August 15, 1971 - and President Nixon "temporarily" closing the gold window - gold was held fixed at the price of $35 per ounce. 
  • The Dow Jones first broke 1000 in 1972 and - with the benefit of one of the longest bull runs in history - now trades about 26-times that amount today.  In contrast, even after enduring a protracted bear market - with prices well below what they were eight years ago - gold trades at 37-times its 1971 price of $35. 
  • Buffett references an 'unmanaged' investment of stocks.  Apparently he is referencing the rage of investors today, index funds, or funds that seek to mimic the performance of entire stock indexes like the Dow Jones.  Index investments of this type didn't even exist for individual investors until John Bogle started one in 1976.  Moreover, any long-term review of a large stock index - like the Dow Jones - will benefit from the fact that the worst performers in these averages are removed from the average.  For a market cap weighted average like the Dow Jones the impact of removing poorly performing stocks from the average can be enormous.  (3)

However, as large as all these mistakes are, none of these rise to be Buffett's biggest mistake.  What Buffett's contemptuous dismissal of gold and the functions gold provides - keeping government honest and small - overlooks  is the enormous concentration of wealth and power that is the direct result of fiat money (gold no longer backing money).   Without a need to back money with gold, government is free to create as much money as it pleases.  This is the textbook definition of inflation.   As described in several other articles on the site, see (4), inflation is the 'surest way to fertilize the rich man's field with the sweat of the poor man's brow.'  As the enormous inflation of the post-gold (1971) era continued, wealth began to be concentrated as never before.  As wealth was increasingly concentrated, raw political power was more concentrated and capriciously dispensed as never before.  The walking, talking embodiment of this concentration of financial and political power is none other than Warren Buffett.  

As just one example of his enormous financial and political power, in the depths of the 2008 financial crisis, Warren Buffet called Treasury Secretary Henry Paulson, Dunce #38 (5), in the middle of the night.  Not only did Paulson pick up, Paulson did exactly as Buffett "suggested" he should.  Buffett told Paulson to set up a "capital purchase program" (CPP) to invest money in several large banks.  The investments would take the form of preferred shares that would pay a large, 10%, dividend.  Not coincidentally,  Buffett owned stock in several of these large banks, Goldman Sachs and Wells Fargo in particular.  The day the program was announced to the public, Buffet's holdings in Goldman alone increased by over $1-billion! (6)

The crony capitalism that Warren Buffet both celebrates and benefits greatly from can only exist in a world of fiat, paper money.  It is then hardly surprising that a crony capitalist like Warren Buffet would be such an ardent defender and promoter of paper money.  In his 1832 veto of the charter for the Second Bank of the United States, Andrew Jackson presciently predicted how a financial system like the one that exists in the United States today - and that Warren Buffet celebrates and manipulates - would descend into one that routinely dispenses 'exclusive privileges' to the the rich and powerful and does so at the expense of the 'humble members of society.
"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes.  Distinctions in society will always exist under every just government.  Equality of talents, of education, or of wealth cannot be produced by human institutions.  In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society  - the farmers, mechanics and laborers - who have neither the time nor the means for securing like favors for themselves, have a right to complain of the injustice of their government.  There are no necessary evils in government.  Its evils exist only in its abuses."

Make no mistake about it, it is only because money is no longer backed by gold that the 'rich are becoming richer and the potent more powerful.'  It is completely unsurprising then that a rich, powerful person like Warren Buffett would disparage gold.

    Peter Schmidt
    Sugar Land, Texas
    17 MAR 2019

    PS - As always if you like what you read, please consider registering with the site.  It just takes an e-mail address, and I don't share this e-mail address with anyone.  The more people who register with the site, the better case I can make to a publisher to press on with publishing my book!  Registering with the site will give you access to the entire Confederacy of Dunces list as well as the Financial Crisis timeline.  Both of these are a treasure trove of information on the crisis and the long-running problems that led to it.

    Also, if you like what you read, hit the 'upvote' link below.



    (2) "Human Freedom Rests on Gold Redeemable Money," Hon. Howard Buffet, US Congressman from Nebraska, May 6, 1948 (from The Commercial and Financial Chronicle)

    (3) GE was dropped from the Dow Jones average in June of 2018.  GE had a market capitalization of around $110 billion at the time.  In the nine months since being removed from the index, GE stock has dropped about 25%.  Cities Services - the company Buffet invested in 77-years ago - after many mergers, acquisitions and corporate raiders is now Citgo.  It is owned by the Venezuelan national oil company, Petroleos de Venezuela, S.A (PDVSA).  Venezuela is, of course, bankrupt.