Buffett intrigue: Is he buying gold?
Commentary: Bullion bugs seize on his stock-trash talk
By Thom Calandra, CBS.MarketWatch.com
Last Update: 1:11 PM ET Mar 4, 2003
>>Much of the gain, and a corresponding rise in sputtering gold-mining shares (HUI), came Tuesday after Andy Smith, a London-based bullion analyst, publicized Buffett's remarks about a derivatives nightmare and the potential for a fiscal meltdown.
"True, the 'G' word does not appear. Except between every line," said Smith Tuesday in a Mitsui Precious Metals report. "The (derivatives) genie is out of the bottle, and you do not have three wishes. Just a potentially toxic, mega-catastrophic mess."<<
SAN FRANCISCO (CBS.MW) -- Just hours after Warren Buffett took his annual bash at stocks and derivatives, bullion investors Tuesday speculated the famed financier was buying gold.
"This could be the gold story of the decade," said James Turk, a veteran of the gold-trading world. Turk, owner of transaction service GoldMoney.com, stated in mid-February that he had heard Buffett, one of the world's richest people, was buying gold. Join the discussion.
Buffett, in prepared comments Tuesday ahead of his Berkshire Hathaway (BRKA) annual report to shareholders, made no mention of owning gold. In 1998, however, he told the world he and his partner, Charles Munger, had bought 4,000 tons of silver (82799W01), a revelation resulting in a brief frenzy for that metal.
Now comes a new round of Buffett metal speculation, this time apparently pumping up the price gold, which has been flirting with three-month lows. It was just a couple weeks ago that bullion seemed unstoppable, reaching a spot price of $389.50 an ounce. Gold's price Tuesday at midday in New York was up $4 at $353.30. See full story: Oracle of Omaha rejects stocks.
Much of the gain, and a corresponding rise in sputtering gold-mining shares (HUI), came Tuesday after Andy Smith, a London-based bullion analyst, publicized Buffett's remarks about a derivatives nightmare and the potential for a fiscal meltdown.
"True, the 'G' word does not appear. Except between every line," said Smith Tuesday in a Mitsui Precious Metals report. "The (derivatives) genie is out of the bottle, and you do not have three wishes. Just a potentially toxic, mega-catastrophic mess."
Several organizations, among them the Gold Antitrust Action Committee, are warning that years of bank gold-leasing and derivative-linked hedging of the metal will lead to short-circuited financial markets and a monstrous bullion rally.
"I have never received so many e-mails and phone calls as on Buffett's warning of a potential derivatives catastrophe," Bill Murphy, chairman of the Gold Antitrust Action Committee, told me. "My guess is there will be a gold derivatives banking crisis some time this year. If Buffett thinks like the GATA camp, he certainly would be long gold."
Smith told me from his London office he had reservations about issuing his Buffett report. In it, Smith details the legendary investor's spectacular shift into silver from mid-1997 through January 1998, after which the portfolio manager publicly denounced gold as an investment in a Harvard University speech.
At the time, the silver investment amounted to about 2 percent of Berkshire Hathaway's portfolio. Few details have emerged since then about the state of that silver investment, or whether Buffett and his entities still own the precious metal. Silver trades at about $4.60 an ounce.
Smith says he was reluctant to fan the fires among gold bugs, who seemingly embrace any and every rumor that could boost prospects of the long-languishing metal. "I have detected a too-ready willingness to believe this," Smith told me about a Buffett-gold connection, "which is why I nearly did not send it out."
Still, Smith said he detects a growing uneasiness with traditional investments on the part of Buffett, an investor watched by tens of millions of other investors around the world. Buffett in his excerpts from his upcoming annual letter to shareholders, expected on Saturday, was ultra-negative on most stocks.
Smith's comments will get a mixed reception from some gold historians.
He is reviled in many gold circles for downgrading his gold-price forecasts through all of the 1990s and into 2000 and early 2001. He believes traditional gold jewelry buyers in India, Pakistan and elsewhere are more interested these days in owning cell phones and GameBoys than they are in buying bullion.
Turns out, Smith has been largely correct on gold as a diminished commodity.
The Mitsui analyst turned the corner on gold's short-term prospects after the events of Sept. 11, 2001. Smith's bullish 2002 price forecast of $355 an ounce came close to hitting the mark. For 2003, he sees a trading range of between $310 and $385 an ounce. See: Noted gold analyst turns heads.
Except for Smith's notation of Buffett's Harvard University remark, the analyst tells me he knows little about the legendary investor's involvement with gold. Back in April 1998, Buffett said in a speech, "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."
Now, Smith is scratching his head. What would it take for Berkshire Hathaway to make a "meaningful" investment in gold? I asked.
"Meaningful is an empirical question for Berkshire Hathaway," Smith told me. "I believe that above 2 percent of their market capitalization, they report specific investment risks in their annual report. With a market capitalization of Berkshire Hathaway now $84 billion, this would translate to a self-imposed reporting cut-off of around 150 tons of gold, say 5 million ounces."
Smith, whose data about gold ownership and trading positions for global investors is among the best in the world, said a Buffett purchase of gold, over the past 18 months, might make sense. Gold has enjoyed a 30 percent-plus rebound since Sept. 11, 2001.
"Buffett might help explain part of the very orderly moves upward since 2001, just as [it turned out] it did for silver through the second half of 1997," Smith says. "The mixture of unusually colorful and
eerily familiar, (gold) bug-like rhetoric, plus his big downer on the financial world as we know it, seems to hint at not a little disquiet with mainstream investments."
Gold is seen as the anti-matter of stocks, and most traditional investments, for that matter. Other professionals in the bullion world are, like Smith, intrigued but circumspect.
"If a 'Buffett buying gold rumor' is circulating, I would be dubious about it," says Ian McAvity, a director of gold repository Central Fund of Canada (CEF) and a Toronto newsletter writer. "Rather like all the guys back in 1979-1982 who were claiming to be playing with Kuwaiti and Saudi money. If you leaked it, you weren't. The invisibility of gold and other foreign activity is paramount to most buyers."
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