Monday, July 11, 2011

How Would Jim Cramer Have Done Against Tulips?

Jim Cramer on Warren Buffett and Gold (H/T to Liberty for the link):

Now, since he suggests you should ask Warren Buffett "how have you done in the past 10 years against gold?" lets get an idea... Gold, went from about $265/oz to north of $1,500/oz. The book value (which, can help you gather intrinsic value) of Berkshire Hathaway, went from just under $63 billion to almost $163 billion. Obviously, the price of gold far out preformed BRK by almost any metric you use. However, the problem here, is that it is possible to calculate the intrinsic value of Berkshire Hathaway, and almost impossible to calculate that of gold.

To me, the intrinsic value of gold should be roughly whatever price a logical market would assign to it only if it was used for wealth creating activity. For example; wiring houses (if it got cheap enough, you could add it to copper), use in electronics, jewelry, dentistry and the like. If gold is only an inflation hedge, and is a true store of value (which, a lot of people argue never changes) then there is presently not much in terms of real "wealth creation" stemming from gold, unless you consider somebody buying it for more than you did, in a ponzi-scheme of sorts, sustainable form of real wealth creation (which wreaks of the logic of the housing bubble a few years back).

In light of the ridiculous question posed by Cramer, I will ask this: "Why doesn't anybody ask Jim Cramer how he preformed against tulips during the Tulip Bubble?"

The logical answer, is simple: Jim Cramer didn't compete with tulips a few centuries back and Buffett doesn't compete against gold. When investing with Buffett, you are essentially looking at the returns Berkshire can generate, which, Buffett can directly influence (he needs to weigh sitting on cash, or allocating it). When looking at gold, you are essentially only looking at what other people are willing to pay for it in the future; the price of gold doesn't perfectly reflect exactly what central banks and such do, but rather, what a whole lot of people think might happen, and even then, there is nothing to make sure that they are right.

It's kind of like apples and oranges. They are both sort of round and are fruit, but really, are quite different. Conversely, while you can buy both gold and Berkshire in a securitized form, at the end of the day, gold is a metal which can only occasionally be used to generate cash- and generally only at the sale of the asset. Berkshire is a company that almost always generates cash (most of the time, on a daily or even minute by minute basis) and has the infrastructure to continue generating said cash.

Besides, if things get so bad that Berkshire (in it's present form, so as to throw out any spin off or potential debt scenarios) implodes and ceases to exist and gold goes through the roof due to some unforeseen event, I would imagine that most people won't be able to collect on their gold due to government seizure or counter party risk. So, in a doomsday scenario (which is what a lot of gold investors say they use it for), would it really make a difference?

Now, to Jim Cramer's credit, at the end of the video, he suggests that people should just admit that they "don't get" gold. Well, I will... I don't get gold; I don't understand why people pay for something that they generally can't see or hold (a lot of the gold ETFs, anyone?), I don't understand crowd or central bank psychology well enough to make an informed decision about the demand for gold, and I certainly don't see why we dig it up in some third world country, just to bury it in a rich one... and that is why I will never invest in gold at anything close to this price.

Disclosure: None. But, I am ready for a bunch of angry emails that defend Jim Cramer and call me an idiot. ;) Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

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