Warren Buffet Is Brilliant But Not Infallible - Why He Risks His Legacy With Thousands of Americans

Dear Mr. Buffett,

Your investment insights have gained you breathtaking wealth, and your successes surely will dwarf mine when our epitaphs are complete. However your recent comments comparing gold to farmland and ExxonMobil are inappropriate and are inflicting harm to many Americans. Specifically, you suggested that productive assets such as agriculture and oil companies are comparable assets to gold and you implied that there is no real benefit to owning gold in lieu of productive assets.

One insight I can provide you from being on the front lines of this issue is that your words have led many Americans to conclude gold is insignificant if not unattractive to portfolios. Because of your stature, even investment professionals fail to recognize that you have compared two totally distinct asset classes with completely different risk profiles and objectives. 

It goes without saying that oil companies and farmland can produce value – that is their raison d'être. Gold on the other hand is not a producing asset, and has a completely different raison d'être, namely to preserve wealth after producing assets have endowed owners with a form of wealth. The investment decision Americans need to make is whether to save wealth in unproductive paper dollars or unproductive gold. Presumably the rational investor would store his wealth in the choice that has been more resilient over time, but not in America. Gold has retained nearly 100 percent of its owners' wealth as a currency since Christ walked the earth when measured by the equivalent of minimum wage. The dollar in contrast has lost 90 percent of its value in our lifetimes alone.

Instead of deriding gold as a non-producing asset and discouraging Americans from diversifying away from their dollars, you would serve your fellow citizens far better by pointing out that there is great utility in an asset that holds its value and is without liabilities. The issue facing Americans today is Risk Management 101: Americans need to diversify away from complete allocations to the shriveling dollar held in savings accounts, bonds, etc. and into a non-correlated cash instrument such as gold.

If one looks through that prism, a more appropriate comparison may be with the dollar and the Titanic as James Grant has made. Like the Titanic, the dollar was once in a class of its own, thought to be of lasting value. Today the dollar has taken on so much water in the form of crushing debt that it tragically cannot be saved in its current form. 

Consider another comparison with the Titanic as it relates to passengers' and investors' behavior. At some point on that fateful voyage passengers realized the ship was going down and that there were not enough lifeboats to save everyone. Today, markets are realizing there is simply not enough gold to protect everyone.

Immoralities aside, imagine if there had been an auction for lifeboats on the Titanic. How smart would it have been to bemoan one had missed cheaper lifeboats when subsequent lifeboats were auctioned at higher prices as awareness spread? In hindsight it was prudent to pay up for a seat especially since the cost of a lifeboat was a rounding error to a passenger's wealth.

Irrational behavior such as passing on a lifeboat because of price is what we see happening in the U.S. everyday – while Asians, Arabs and the richest banks in the world are price takers, repeatedly buying gold regardless of price, Americans lament having missed the move from $1,000.

To illustrate how immaterial the move in recent years is to protecting one's wealth, imagine if someone with a $5 million net worth wanted 5 percent of his wealth diversified into gold. At $1,000/Oz. he could have bought approximately 250 ounces of physical gold. Suppose the investor is now fixated upon buying 250 ounces of gold. If gold were at $1,500 today and the investor still wanted to buy 250 ounces, gold's 50 percent appreciation would still only cost him an incremental 2.5 percent of his net worth to buy his whole position. 

Conversely if gold fell from $1,500 to $1,200 as the whole world expects, to buy the same 250 ounces would only save the investor 1 percent of his net worth.

The dichotomy of our time is the action of governments and the absence of rational American investment behavior. History tells us the dollar will not survive and gold will preserve wealth yet Americans keep virtually all of their net worth in dollars. Americans forget that it is specifically because of gold's unique and long-standing history that gold is globally accepted. As we look into the emerging next paradigm, gold's utility possesses characteristics that PayPal did during the emerging Internet in the 1990's: Whatever the business landscape ultimately looks like when it comes into focus, counterparties can take comfort that gold offers protection other mediums of exchange simply do not.

As it relates to the importance of gold as a currency let us also not forget the words of your father Congressman Howard Buffett:

Is there a connection between human freedom and a gold redeemable money? …When you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty… Various plans have been proposed to reverse this spiral of debt… All of these proposals look good. But they…will not stand against [political] spending pressures.

Here at the twilight of your career you have sent a loud message to Americans that diversifying out of dollars and into gold is unnecessary. At the end of the day you have to know that such advice spits in the face of history and risk management. You don't want to be remembered for discouraging Americans from diversifying their worth given the fate that now inescapably awaits the dollar. Come clean, Mr. Buffett, and explain to America that having gold exposure, uncorrelated to the dollar, is a sage use of capital.