The Real Crash: What Is Warren Buffett Trying to Tell Us?
Warren Buffett is widely regarded as the greatest investor of all time. Virtually everything he touches turns to gold, helping him become one of the richest men to ever walk the earth. When you read his name in the newspaper, it’s usually about a new business that his company has acquired.
Well, the biggest news of all in the last few months is what Warren Buffett is selling.
The Oracle of Omaha, as he’s known, sent shockwaves to investors when he recently dumped bank stocks and airline stocks. Berkshire Hathaway’s 13F filing confirmed that the conglomerate fully exited four major U.S. airline stocks in Q2, including Delta Air Lines, and slashed stakes in JPMorgan Chase, Wells Fargo, and PNC Financial Services.
But that’s not all.
The ripple of shock continued when it was revealed that Berkshire bought nearly 21 million shares of gold mining giant Barrick Gold, valued at more than $563 million.
In other words, he shifted into gold mining.
Part of the reason that this is so shocking is that Buffett has always talked bad about gold. He’s quoted at saying, “Gold 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.”
This move into gold mining for Buffett says something is really fundamentally changed in America.
Since the 1970’s our country has functioned based on a fiat currency with nothing but perception holding it up. Our faith in the dollar may be our undoing.
Despite inflation fears rising in the US and across the world, the Fed is holding steady on their quantitative easing program—aka printing money.
This is proof that the Fed is more concerned with devaluing the dollar and causing inflation than creating a strong dollar.
Additionally, the Fed has printed more money over the summer than in the first two centuries after its founding. The Treasury Department reported in June that the deficit hit $864 billion—which was larger than the total debt from 1776 through the end of 1979.
Inflation? Or Deflation?
Inflation is an expansion in the money supply, and deflation is a contraction. Clearly, after the Fed’s printing spree to save the economy, the money supply is going way up.
My friend Peter Schiff tweeted, “The U.S. is about to experience one of the greatest inflationary periods in world history. Any credibility the Fed has left will be lost. Federal Reserve Notes soon won’t be worth a Continental.”
Despite fears of inflation, there’s also a prediction that consumer prices will go into a deflationary period. People ask, “Are we going to have inflation? Is the consumer price index, are prices going to go up, or, are prices going to come down? Are we going to have deflation, in that respect?”
Let’s assume you want to measure prices in terms of gold.
If you have an ounce of gold, and you want to buy something with that ounce of gold, that something is going to be cheaper.
Everything is going to get cheaper. Asset prices will get cheaper, stocks, real estate, bonds, works of art. Prices are going to go down in terms of gold—even the cost of living. Food, energy, clothing, medical care. All the things that you buy, if you have gold, you’re going to see prices falling. Some consider this deflation.
When people measure prices in terms of the dying dollar, they think they’re rich because their houses and stocks have gone up but it’s all artificial because of inflation.
The Federal Reserve can print an unlimited amount of money. There’s nothing that stops them, and that’s what they’re doing. They’re going to continue to destroy the value of the dollar. And so, from the point of view of paper money, the price of everything is going to go up.
Price of Gold
As I pointed out when the Fed prints money it makes the stock market go higher—and it makes gold go higher.
So back to the original question, “What is Buffett Trying to Tell Us?”
I believe that Buffett bought into gold mining because he believes that we are going to see inflation—maybe even hyperinflation. Hyperinflation means it could be like the Weimar Republic in the 1920s when pension checks couldn’t buy a cup of coffee. Banks didn’t have enough cash to cover employee’s paychecks so banks closed at 11:00 a.m. Rioting and food shortages spread throughout the country.
With all this said, I think gold can easily go to $15,000. It could even go much higher.
In 1932, the price of gold and the Dow Jones was the same, and again the same in 1980. So with the Dow currently around 28,000, it’s possible gold could go that high.
All of this begs the question, if the dollar isn’t safe, what is?
The short answer is cash-flowing assets.
The investment philosophy for Kim and me is the same as it’s always been. We invest in assets that cash flow and hedge against inflation, things like businesses, real estate, oil wells, and more.
Additionally, we keep our liquid investments in gold and silver instead of dollars. This is because gold and silver rise when the dollar falls. This has worked well for us over the last decade.
For you, what Kim and I do may not be safe. Our investing takes a high level of financial education. You have to decide for yourself where your safe harbor is.
But whatever your financial position, it’s imperative that you continue your financial education and study hard to decide what’s best for you. Those that are financially intelligent will fair much better during these turbulent economic times than those who continue with the old rules of going to school, getting a good job, saving, buying a house, and investing in a diversified portfolio of stocks, bonds, and mutual funds.
Today, savers are losers and the dollar is toast. We want you to be a winner. Dare to think for yourself and take control of your money today. Then, while the world panics, you can prosper.
Editor, Rich Dad Poor Dad Daily