How Many Warren Buffett’s in a Bar of Gold?

As you should know by now, we’ve had a fairly simple view on gold.

Don’t hassle around with it.

Don’t dwell over when you should buy it.

Just buy it and be done with it.

But that doesn’t mean we aren’t thinking about gold and the gold market. From time to time something catches our eye.

That happened yesterday. It reminded us of the way to help tell no more the gold bear market…as well as Warren Buffett’s role in determining it…

Yesterday the World Gold Council released its quarterly Gold Demand Trends report.

Given the absolutely brutal performance of gold in recent months, we were keen to flick through it soon after this arrived in our inbox.

To be honest, for most of the past three years we’ve barely paid any attention for this quarterly report. But this period we thought it was worth a minimum of a few minutes of our time.

And we’re glad we did because i was stunned by what we read…

Selling Document Gold to Buy Real Gold

We’ng cut the following table from the report and circled the key figures. What it shows you is that total precious metal bar and coin demand strike 507.6 tonnes during the quarter.

By contrast the demand from gold exchange-traded funds (ETFs) was -402.2 tonnes. In other words, the ETFs were internet sellers of gold:

Source: World Gold Council

The fact that ETFs were internet sellers doesn’t surprise all of us. Especially when we read the newest news about famed hedge account manager John Paulson selling half his fund’s holding in the main All of us gold ETF.

What really stunned us was the size of the bodily bar and coin demand. We knew from personal encounter that there was a long collection the last time we bought gold bullion about three months ago. So the figures make sense. But it still surprised all of us.

But that table only tells part of the story. It only gives you the numbers. It doesn’t interpret the numbers into useful information. For that you need to speak to a respected precious metal analyst.

That’s why we asked our old pal Greg Canavan, editor of Sound Money, Sound Investments, to chime in with his take on the figures. Here’s what he told us:

‘In an ETF, you are able to only get access to the bodily gold if you’re an “authorised participant”, which are generally the banks. As a small investor, a good ETF only gives you “exposure” in order to gold. That isn’t just like owning gold…especially if you find out the “authorised participants” have drained all the precious metal from the ETF and you can only redeem your gold “investment” in equal US dollars. Those stats show an increasing realisation that the recent gold price plunge had been more about selling in the paper gold market, rather than the physical precious metal market.

‘Also, it shows just how much actual demand there was for bodily when the price fell. The bullion banks (authorised participants) are the main intermediaries in the worldwide physical gold market. The fact they’re taking lots of gold out of the ETF’s means there’s strong demand for it elsewhere. ETF’s don’t lose bodily metal just because the price falls. That’s not how they function. The silver ETF, for example, has hardly shed any gold even though silver’s price overall performance has been much worse.

‘So I’deb say this confirms that investors prefer real, limited supply physical gold, not abundant document gold.‘

So, gold has taken a drubbing. Paper gold traders are selling out. But real gold investors are buying in. That’s the main thing. If you’re interested in buying gold at a good price, has become the time?

Gold v Stocks

For the answer to that question we had to turn to another of our old pals, Dan Denning. (We’re happy to admit that we don’t understand a quarter of what these guys learn about gold, and so we tap their marbles for info.)

Some time ago all of us remembered Dan telling us that he had a different way to many people of judging when it would be a good time to buy gold. He or she doesn’t just look at the precious metal price, he looks at gold’s relative price.

In this case, the actual price relative to stocks…and one stock in particular – Berkshire Hathaway [NYSE: BRK/B].

Berkshire Hathaway is of course billionaire investor Warren Buffett’s listed investment vehicle. Buffett is the man who famously says that gold is about because pointless an investment as you can get.

We don’t agree. But that’s by the by. The point is whether gold is now at a price that makes it worth buying when compared to stocks (Berkshire Hathaway).

As Dan sees it, it is. Dan’utes view was that gold would find support when it was trading at 14-times the cost of Berkshire Hathaway ‘B’ shares (currently USD$116.57 for each share), but only after precious metal had over-corrected through that level.

It’utes now at 11.9-times Berkshire ‘B’ gives as you can see on the chart below:

Source: StockCharts.com

Of course, this isn’t just about the gold price falling. It’s regarding stocks hitting an all-time higher too.

As far as Dan is concerned, as he told us yesterday, ‘Move complete, rally to commence.‘

The hedge fund guys are selling big chunks of their gold ETF positions, but the physical gold demand has nearly doubled compared to the previous 12 months.

If you’ve put off buying gold for fear it could fall further, everything we’ve protected today could be reason enough in order to tempt you into the marketplace.

Then again, as we mentioned at the top of this letter, we try not to consider gold too much…we just purchase it whenever we feel like it.

Cheers,
Kris+