Category Archives: Financial System

Gold and the Feds

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Everybody knows that federal banks have a lot of ‘pull’ on the state of the economy, however how these institutions affect the prices of gold is an entirely new paradigm. Federal Banks or central government controlled banks and the International Monetary Fund (IMF) are major forerunners that determine the prices of gold despite the daily London Gold Fix that takes place daily in London. According to statistics released by the World Gold Council at the end of 2004 19 to 20 percent of all the gold above ground was held by Federal Reserve’s through the world. Central banks as well as official government sanctioned organizations held the official role as official gold reserves.

The decade long Washington Agreement on Gold (WAG), which was put into effect since September 1999 to 2009, limits the sale of gold at a ceiling benchmark to 500 tons or less. The members of this treaty were comprised of Europe, United States, Japan, Australia, and Bank for International Settlements and the International Monetary Fund. During the tenure of this treaty over the decade European central banks mainly banks such as the Bank of England and The Swiss National Bank, were the primary gold sellers to eager gold buyers. The viability of this treaty caused it to be extended to a further five year period beginning in September 2009 up to September 2014. However the extension also saw the further reduction of the limit of gold sales by twenty percent to 400 tons of gold that was sell-able.

Although huge amounts of gold reserves are stored in these vaults, most of the gold does not belong to them. The gold is tangible assets that are owned by corporations and foreign governments. The Federal Reserve Bank of the United States of America and Ford Knox collectively is said to have 50,000 tons of gold stored in their vaults. Of these 50,000 tons of gold only 10 percent of it belongs to the government of the United States of America, the rest yet again belongs to foreign governments and huge private corporations. Gold is the safest way to secure assets of any form. Be it property, cold had cash or stocks of goods and services, none of which are as tangible as the precious metals that include primarily gold, silver, bronze and copper.

The economy of the world depends on the stability of gold prices to be able to function in a healthy manner. Erratic and irresponsible speculations are the sole reasons for the prices of gold to become volatile and drive its value up and leave inflation in its wake.

Is Warren Buffett confused about Gold?

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Warren Buffett is a well respected man in the financial world. People generally listen to what he has to say. He is after all the oracle of Omaha and everything he touches turns to gold. However, Buffett is not a fan if the yellow metal and he goes to great lengths to explain to people why he believes investing in gold is not a good idea.

Every year, Buffett sends a letter to his Berkshire Hathaway shareholders to share with them some of his wisdom about investing and financial management. His yearly missive just landed in the mail recently and as expected, he implores investors to put their money in stocks rather than gold.

Buffett started investing in the stock market in 1942. According to him, he started off by buying shares that were $114.75. He says that if those shares had been invested in a no-fee S&P 500 Index fund they would have a value of $606,811 today.

Had he used the amount of money to protect himself financially by buying gold, he would only have been able to get 3 1⁄4 ounces of gold. The gold would only be worth $4,200 which is less than 1% of the money he would have made had he invested in a no-fee fund.

Thee problem with Buffet’s illustration is that there was no S&P 500 index in 1942. The S&P 500 index only began in 1957 and non-fee funds only became available in 1976. In addition to that, Buffett would not have been able to buy gold because Franklin Roosevelt had already declared that private individuals could not own gold.

Buffet’s illustration also neglects to mention that the price of gold was tightly regulated for 30 years after 1942. The price was fixed at $35 an ounce and $42 an ounce between 1934 and 1971. During that time, America was trying to dig itself out of depression and recover from the wars. Public company shares were free to appreciate. However, there were only 60 companies of the 500 that initially made up the S&P Index in 1957. The share price of many of these firms plummeted to Zero dollars. Buffett sidesteps these facts in his comparison and makes it sound like shares of any stock would become more valuable than an ounce of gold sitting in a vault for a couple of years. What he fails to acknowledge is that gold is more reliable than stock in the long run. Another mistake that Buffett has made in his analysis is to think of gold only as an investment asset when it is so much more. Gold is treated as money that is more valuable than any fiat currency by central banks and governments. There are different ways of owning gold. You can buy gold bars or buy gold bullion coins and rounds or even own gold in the form of jewellery.

 

When you take all of the above into consideration you can see the holes in Buffet’s analogies. It would have been fairer had Buffet compared buying stocks to keeping the dollars in a savings account rather compare it with gold. However, that would make gold look compelling which is not what The Oracle of Omaha wants you to believe.

 

The reality is that gold has been a better investment that stocks for year. It outperformed the S&P 500 during the 1970s. Gold is money. Currencies can lose their value able but this yellow metal never does .

 

Sources:

https://www.fin24.com/Economy/World/read-warren-buffetts-just-released-annual-berkshire-hathaway-shareholder-letter-20190223

https://markets.businessinsider.com/commodities/news/warren-buffett-bashes-gold-2019-2-1027977003