Buffet bearish on commodities (isn't gold a commodity?)

[blazespinnaker]

http://business.timesonline.co.uk/ar...170452,00.html

Glad I'm not the only one. I think his approach: foreign companies is the right approach (ie, iscar)

[EJ]

At the height of the Internet bubble, my partner and I had a lot of Cisco stock from the sales of Arrowpoint and Compatible systems. We sold all of in in July 2000 on the dead cat bounce we were expecting from NASDAQ. At the time everyone, including our account manager at Goldman Sachs, insisted that we were idiots, that Cisco stock is like cash. We insisted it was not cash but stock, and a very over-priced one at that. Our account manager asked me at what price I'd consider Cisco a buy. I told her $10. That was when it was around $80. She hung up on me.

So in 2001 I have this cash from the Cisco and other stock and am still sitting on the sidelines. I did buy a bunch of long term treasury bonds, that are still doing well, but in retrospect should have bought more. In any case, I'm busy running a company and trying to raise money for Bluesocket during the post-bubble IT depression, so I don't have a lot of time to think about what to do with the cash. But I do notice that platinum, gold and silver are priced as if the Fed is going to sit around and let the economy go into toilet. So after a bit of research I buy a bunch of all three and a couple of stocks but not many because in my research I learn that no one ever seems to pick mining stocks well, that mining companies are about the worst run businesses from a shareholder perspective, and there's a ton of research that shows that buying the stuff versus stocks in the stuff works out better. There are no ETFs yet so I buy the physical stuff.

Now, five years later, they're all up a lot. So, I'm thinking, am I with my PMs in 2006 where I was my Cisco stock in July 2000?

The answer is, no. Here's why:

1) I still don't know anyone who owns any PMs or other commodities, at least not directly. Maybe some do via hedge funds but I don't know one person who owns more than a token amount of any of these metals. Mostly everyone's been piling into real estate and emerging markets. The problem with emerging markets was well stated by Robert Hormats after the economic crisis in Mexico in 1995: "One of the things investors have learned about emerging markets recently is that they are hard to emerge from in an emergency." A lot of emerging markets investor are about to re-learn the lesson, and a lot of real estate speculators are about to learn a similar lesson.

2) I never get lectured by neighbors, business associates, the mailman -- anyone -- about the merits of commodities generally and PMs that have a dual function as money. When I get a lecture on fiat money from one of my card buddies, then I'll think about selling. Gold bugs can't believe after 20 years of swimming upstream that the tide has finally turned. Must be a conspiracy or a bubble.

3) When I see headlines like these: Russia says UN plan for Iran is 'first step to war'

Russia will seek the removal tonight of the core of a UK-sponsored draft United Nations resolution on Iran because it fears that it could pave the way to unilateral military action to curb the Iranian nuclear programme.

http://news.independent.co.uk/world/...icle362745.ece

Where's the evidence that PMs are a bubble? No one's trying to talk me into buying. Everyone's trying to talk me into the opposite. That's just not how the psychology works at the top of a bubble.

[blazespinnaker]

What are the fundamentals of PM? I guess if you thought we'd move away from a fiat currency and central banks are going to buy up PM, then, yeah the fundamentals would change. I don't see that as highly probable.

Also, what if Iran resolves itself? What if China and Russia are just playing good cop to the US bad cop? How could it possibly be in their interest that Iran gets nuclear weapons? If this happened it's possible that PM may take a very huge and sustained dive.

I called up about 8 brokers the other day (big canadian banks, small fries, etc .. I'm canadian) looking for someone to invest in foreign equities and bonds. Practically all of them were saying "Commodities" "oil wells" etc. Maybe not exactly your card playing friends but to me it is the equivalent.

I read the odd magazine, and they're all very bullish on commodities. Again, not the postman, but commodities are definitely not the contrarian play at this point.

My contrarian viewpoint is that I see a recession in the US, I see a slow down in the Chinese economy - both caused by the housing crash, lack of access to HELOCs and therefore less demand from sluggish economies for commodities in the next short while. Not to mention good old profit taking.

But yes, as a hedge against a declining dollar (and I am very bearish on the dollar) PM will do well, but I'd like to get a yield as well.

Also, there are personal factors: tolerance of risk and time horizons always come into play which may make my perspective different than yours..

I sold my house and wish to buy during the crash, therefore my ideal time horizon is 1-2 years and my tolerance for risk on this investment is small, as I am looking to invest a pretty significant chunk of my housing equity, so this is a bit of a big bet for me.

I also believe low risk bonds denominated in foreign currencies that zig when the USD is zagging are the best, and lowest risk bet with a time horizon of 1-2 years.

I'd like to buy some equities, but that is pretty complicated I suspect. I may diversify up to 50% off my portfolio in less complicated investments, but I'm still not sure of that number. All I know is I want to get out of US imports / housing sustained economies right now.

[BK]

Blazes..
Two items:
To compare Precious Metals and Oil and Industrial commodities may be a mistake - from my sophmoric view point. During times of industrial expansion there is a huge demand for steel, copper, concrete, and Oil.

If we slip in to a recession you could see a drop off in demand of Industrial commodities. But, Central Bankers would need to utilize increase the Money Supply to avoid Deflation and keep the Economies going. Increasing in Money supply should lead to inflation = flat or much higher oil prices because of the inflation impact on the dollar.

Remember , Helicopter Ben - he earned this name because he once said that printing money/dropping it from helipcopters and increasing inflation is preferred to Deflation (he calls this managing inflation).

Meanwhile, because of the infaltion being created to stimulate the economy more folks will seek the security of Precious Metals. At least, this is what I have gleaned from Financial experts.

Your time horizon for re-entering the Real Estate may be early if you want a great bargain.

[blazespinnaker]

True, but developing news with iran could soften the demand for gold and oil.

The dollar, however, has structural problems. The current account deficit can't go away over night and neither can the debt.

Well, and here I was worried about the market crashing too soon! So, there you go.

[jk]

PM's are still early in stage 2 of a 3 stage process. Brokers may pitch commodity stocks as the next new thing, but it remains the next thing for most investors. There is a process by which new investors get on board a trend, and that process can go on for quite a while. The equity bull ran for 18 years or so - that was in spite of the crash of '87, the "irrational exuberance" speech of '96, and predictions from various quarters that a crash was imminent in '97, '98, and '99. The trend IS your friend.... until it isn't.

Stage one is the true believers and early adopters. Stage 2 the idea begins to spread to the sophisticates. Stage 3 the general public talks about it at neighborhood barbecues. And even then it takes a while. How long has real estate been bulled? The TIME magazine cover of last June may have nailed the top, but all the precommitted resources, the developers' land purchases, permits in place, subs lined up, mean that housing starts are still enormous, even as inventory builds.

If you think the dollar is weakening, where do you go? What country wants a strong currency? None. Every nation has been pumping liquidity. If China wants to manage its currency, it has to issue yuan to buy the dollars brought in by their exporters, and then recycle those dollars into tbonds and the like. So money supplies are up all over. Gradually people are becoming aware that their paper dollars, euros, yen and yuan are first and foremost paper.

So I have a significant investment in other currencies, but more in PM's, the universal currency and no one's liability.

[pwcmba]

Re: Buffet bearish on commodities (isn't gold a commodity?)

As JK said, gold is money/currency and not a commodity in our current situation.

[thunderdownunder]

Re: Buffet bearish on commodities (isn't gold a commodity?)

My view is that commodities are the tools that make goods. In this climate I have been fortunate to have been secured by the belief that you go back to basics.
Food. It is the one commodity that remains as a constant stream of dividends and no price falls - you may laugh but my wealth has grown through this. Some people think that it is boring with slow growth - nothing can be further from the truth. In an inflationary environment I think it will keep you more than safe. You won't make a fortune but thats not the aim - I have a belief that in times of turmoil it is not the return on capital that is important, it is the return (and preservation) of capital that is paramount.
My parents are alive and are children of the depression, they tell me that the biggest thing was the search for sustenance even though food was "cheap" it was not plentiful. This time around we have a much larger populous that need to live, and so have an opinion that food will be the "Commodity" that pays
Do your own research in the current market and see how "lowly" food has faired - Is it Off 10 -20- 40 % - No it has kept me safe, Beer/alcohol is a bet- as is confectionary - biscuits and treats but basically anything that is consumed on a daily basis is a good bet. If push comes to shove you will eat first and pay bills second
Pearls to pigs perhaps (no offence intended) but to those who think things through - Wars will be fought over 3 things = Energy,food and water. Two are the things you won't last 4 days without, end of argument. but what would I know? Not on anyones radar ........... I think it is
http://www.spiegel.de/international/...606937,00.html
I am and always will be a long term investor. {slowly slowly catch the monkey}

[metalman]

Re: Buffet bearish on commodities (isn't gold a commodity?)

My view is that commodities are the tools that make goods. In this climate I have been fortunate to have been secured by the belief that you go back to basics.
Food. It is the one commodity that remains as a constant stream of dividends and no price falls - you may laugh but my wealth has grown through this. Some people think that it is boring with slow growth - nothing can be further from the truth. In an inflationary environment I think it will keep you more than safe. You won't make a fortune but thats not the aim - I have a belief that in times of turmoil it is not the return on capital that is important, it is the return (and preservation) of capital that is paramount.
My parents are alive and are children of the depression, they tell me that the biggest thing was the search for sustenance even though food was "cheap" it was not plentiful. This time around we have a much larger populous that need to live, and so have an opinion that food will be the "Commodity" that pays
Do your own research in the current market and see how "lowly" food has faired - Is it Off 10 -20- 40 % - No it has kept me safe, Beer/alcohol is a bet- as is confectionary - biscuits and treats but basically anything that is consumed on a daily basis is a good bet. If push comes to shove you will eat first and pay bills second
Pearls to pigs perhaps (no offence intended) but to those who think things through - Wars will be fought over 3 things = Energy,food and water. Two are the things you won't last 4 days without, end of argument. but what would I know? Not on anyones radar ........... I think it is
http://www.spiegel.de/international/...606937,00.html
I am and always will be a long term investor. {slowly slowly catch the monkey}

"buffet's bearish on commodities...'

ha! had to read this 2 times before i figured out it's from 3 years ago... when gold sold for $550. ha ha ha!

if this doesn't prove the wisdom of sticking to what you know, nothing does.

also a reminded... ej stuck his neck out then... said gold 'not a bubble' when most said it was, except the gold bugs of course...

[blazespinnaker]

Re: Buffet bearish on commodities (isn't gold a commodity?)

Yeah, interesting. Though to be fair, he was mostly right .. just wrong about gold. Silver certainly dropped lower.

Anyways, he *is* sticking to what he knows. That's the whole point, I think..

[metalman]

Re: Buffet bearish on commodities (isn't gold a commodity?)

Yeah, interesting. Though to be fair, he was mostly right .. just wrong about gold. Silver certainly dropped lower.

Anyways, he *is* sticking to what he knows. That's the whole point, I think..

what? are you kidding?

oil went from 60 to 147 after he went 'bearish on commodities' in jun 2006.

silver from 10 to just under 16.

hello? the guy was f&cking 100% wrong.

[GRG55]

Re: Buffet bearish on commodities (isn't gold a commodity?)

what? are you kidding?

oil went from 60 to 147 after he went 'bearish on commodities' in jun 2006.

silver from 10 to just under 16.

hello? the guy was f&cking 100% wrong.

Not completely.

Although he professes to dislike commodities, he [actually Berkshire] bought $500 million of Petrochina shares [11% of the company] in 2006 and sold most of them through September and October of 2007. The estimated profit on the trade was $3.5 Billion.

Now some will criticise him for "selling too soon" given what happened through the winter/spring of 2007/08. But then how many of us can truthfully say we can buy at the exact low and sell at the exact high. A seven-bagger ain't bad...

[metalman]

Re: Buffet bearish on commodities (isn't gold a commodity?)

Not completely.

Although he professes to dislike commodities, he [actually Berkshire] bought $500 million of Petrochina shares [11% of the company] in 2006 and sold most of them through September and October of 2007. The estimated profit on the trade was $3.5 Billion.

Now some will criticise him for "selling too soon" given what happened through the winter/spring of 2007/08. But then how many of us can truthfully say we can buy at the exact low and sell at the exact high. A seven-bagger ain't bad...

fair enough, but how does a 11% bet on a commodity co. square with 'bearish on commodities' call?

[GRG55]

Re: Buffet bearish on commodities (isn't gold a commodity?)

fair enough, but how does a 11% bet on a commodity co. square with 'bearish on commodities' call?

It doesn't.

My take:

For a very long time Buffett's doctrine was "use the [Berkshire] float to buy companies that can consistently generate cash in business sectors that don't require significant re-investment of new capital". Commodity production companies don't fit that last part because production depletes the reserve base, thus requiring the "recycling" of significant amounts of the free cash flow to replenish the reserves.

Buffett entered the energy sector by investing in the utility portion of the business, most notably through MidAmerica Energy, a gas pipeline operator/distributor and power generation company. But as the FIRE economy matured in the decade of the 1990s the companies that fit Buffett's criteria [like Coke & Gillette] got bid up well beyond historical valuations and Berkshire started piling up cash. It would appear he was pretty well forced to look into "non-traditional" [by Buffett standards] investments. He raised a lot of eyebrows with his 1998 [?] purchase of silver bullion.

The interesting thing about lots and lots of cheap money is that, in addition to the traditional FIRE interests, it also benefits the capital intensive companies...which is the main reason oil, mining, and other resource sector companies started to perform as Greenspan opened the spigots after the tech bust and 9/11. The PetroChina purchase and sale was a remarkably short duration holding for Berkshire, but maybe indicative of his recognition that the investing world has changed. Most interesting is that he sold, because in the late 1990's as the market was skyrocketing he didn't divest of any of Berkshire's overvalued public company positions...and he mentions in one of his subsequent letters to shareholders "What was I thinking?".

[DaveBrown42]

Re: Buffet bearish on commodities (isn't gold a commodity?)

fair enough, but how does a 11% bet on a commodity co. square with 'bearish on commodities' call?

Buffet's actions are frequently wiser than his words. I'm not accusing him of trying to manipulate other investors, exactly, but he's a high-profile figure and he knows it. I pay a lot more attention to his investments than I do to his speeches.

Having said that, I think in this case he just got lucky with PetroChina. He probably bought for the long-term originally, but when it went through the roof he decided to take his profit and get out.