Warren Buffett on Gold

March 8, 2005

According to Warren Buffett’s Berkshire Hathaway annual report, which is hot off the presses, the world’s most successful investor made $1.8 billion on his foreign exchange bet against the dollar last year.

“Before March 2002, neither Berkshire nor I had ever traded currencies,” Buffett writes, “but the evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come - so since 2002 we’ve heeded that warning in setting our investment course.”

“Without policy changes,” he writes, “currency markets could even become disorderly and generate spillover effects, but political and financial. No one knows whether these problems will materialize. But such a scenario is a far-from-remote possibility that policymakers should be considering now. Their bent, however, is to lean toward not-so-benign neglect.”

The US now must take in loans at the amount of $1.8 billion a day from foreign investors to pay its trade and government deficits. This is a 20% increase from a year ago.

“A country that is now aspiring to an ‘Ownership Society’ will not find happiness in - and I’ll use hyperbole here for emphasis - a ‘Sharecropper’s Society.’ But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us,” Buffett warns.

Buffett also believes that the path the Treasury Department and Greenspan have taken us will prove to be futile:

“Policymakers continue to hope for a ‘soft landing,’ meanwhile counseling other countries to stimulate(read ‘inflate’) their economies and Americans to save more. In my view these admonitions miss the mark: There are deep-rooted structural problems that will cause America to continue to run a huge current-account deficit unless trade policies either change materially or the dollar declines by a degree that could prove unsettling to financial markets.”

Last month, Alan Greenspan - for all intents and purposes - called a bottom in the dollar. He said that the dollar had declined so much that the current-account deficit will begin to reverse. Just minutes after these words left his mouth, CNBC ran the headline “Dollar Bottom” at the bottom of its screen.

Things are not fine. The dollar is going to continue to decline.

Yes, it would be nice to think that Alan Greenspan and Bush’s Treasury Secretary would have the courage to reverse the disastrous economic policies of the past 10 years; the policies that have put our country in its current weak state - but that seems like a distant hope.

In the end, as investors we have two choices - align ourselves with the trend and make a fortune or be destroyed by it.

Last year, Warren Buffett made over a billion dollars by betting against the dollar.

This year, he will make more. And you can too.

Things are heating up in the gold market. Gold bottomed just three weeks ago. Gold stocks are now consolidating, moving sideways - fueling up to launch the next wave of the gold bull market. I told you back before the bottom that once it came I expected the gold stocks to go sideways for 6-12 weeks before rallying to their highs.

Monday was interesting because on the open the dollar rose and so did gold. Gold is now starting to ignore green days in the dollar because the short-term bounce in the dollar is over. Up days for the greenback have become nothing but noise.

Remember how back in November when gold was near its top, the dollar was still dropping and yet gold stopped going up? Gold stopped rising because the gold market knew that the dollar drop was near an end.

Now the opposite is happening. Gold is now going up at times even when the dollar does because the gold market now knows that any rise in the dollar, at this point, won’t last.

The gold market is starting to take a life of its own – and that means a little more consolidation – to recharge its batteries.

The action in Gold and the recent news for the dollar has me now convinced that this consolidation phase is going to be much shorter than I imagined.

It is now time to plan for the next gold rally and to begin to position yourself. The profits that are going to be made on Gold this year are going to be incredible.

Goldschläger and Goldwasser are liqueurs containing pure gold flakes.