The Seminar Standard

Warren Buffett released his annual shareholder letter this week. Among the facts and ramblings was an interesting opinion on gold:

“…Gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”

(You can find the letter in its entirety here)

Clearly, Warren prefers his gold to pay a dividend.

Also, this week noted investor John "5 Billion Dollar Man" Paulson told his clients that his own money comprises over half of his Gold Fund which has over $1.2 billion in assets. The main reason is because Paulson still believes we are going to see inflation which he feels will lead to appreciation in the precious metal.

Gold definitely has some divergent opinions surrounding its place as an asset class in a portfolio.

• Some view it as a hedge against inflation because the price of gold spikes during years of higher inflation.
• Some view it as a hedge against a weak dollar because there is a strong negative correlation between the US Dollar and the price of gold.
• Some view it as a “crisis commodity” because it tends to outperform other investments during periods of global tensions

Personally, I agree with Warren Buffet on this matter. I prefer assets that I can value from a cash flow perspective.

What I can say about gold is the number of seminars, commercials, reality TV shows and pitch artists selling gold is astonishing. I can remember when seminars on Film Production Limited Partnerships were all the rage in the 1980's. Then in the 1990’s, the seminars were all about day trading. Facilities were literally set up for people to come in and hyper trade their own account. This was followed by seminars on how to use your IRA to buy Residential Real Estate in the 2000’s. We all know how, "The Devil Take the Hindmost" on these supposedly exciting and sure fire ways to make money. Now, I await the calls from clients who say they want to pull some money out and try the latest techniques they learned in a seminar.

What's worse, rather than allocating responsibly and consistent with their time horizon many investors want to "double up to get even” during current economic strains. This leaves them exposed to chasing returns and in some cases scams (like this one in Florida).

I have a pretty solid idea of how this will end. The only question for me is, “when will it end?” I am often surprised at how long irrational players can hold on to irrational positions. Let's face it, if the technique pitched in these seminars produced the short term gains promised, then the pitch artist wouldn't need to hold seminars. Unless, these pitch artists have an act of benevolence towards us “ordinary folks” that trumps their desire for personal gain.

I don’t have a crystal ball to see where the price of gold is headed. Indeed it could go higher if people believe there is someone else out there willing to buy it from them at a higher price. What I do believe is the "seminar standard" might just actually crack the "gold standard.”

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Tim Phillips, CEO – Phillips & Company