Warren Buffett's right-hand man, Charlie Munger, agrees with his boss on most things but there's one area they disagree — gold."
"Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939," the Berkshire vice chairman said, "but I think civilized people don’t buy gold, they invest in productive businesses."
I'm reminded here of Terry Pratchett's wonderful Discworld novel Making Money, in which Lord Vetinari maneuvers reformed criminal and current Ankh-Morpork Postmaster General Moist von Lipwig into taking on the job of running the Bank of Ankh-Morpock and the Royal Mint. Lipwig eventually discovers that the 10 tons of gold supposedly in the bank's vaults is now longer there. Panic almost ensues. Naturally, however, Lipwig saves the day, gets the girl, and persuades the citizens of Ankh-Morpock to abandon the gold standard.
In doing so, Lipwig is interviewed by The Ankh-Morpork Times' crack reporter Sacharissa Cripslock, in the course of which Lipwig comes up with what I have always regarded as a compelling argument against the gold standard:
"The world is full of things worth more than gold. But we dig the damn stuff up and then bury it in a different hole. Where's the sense in that? What are we, magpies? Is it all about the gleam? Good heavens, potatoes are worth more than gold!"
"Surely not!," [said Ms. Cripslock]
"If you were shipwrecked on a desert island, what would you prefer, a bag of potatoes or a bag of gold?," [replied Moist]
"Yes, but a desert island isn't Ankh-Morpork!"
"And that proves gold is only valuable because we agree it is, right? It's just a dream. But a potato is always worth a potato, anywhere. A knob of butter and a pinch of salt and you've got a meal, anywhere . Bury gold in the ground and you'll be worrying about thieves for ever. Bury a potato and in due season you could be looking at a dividend of a thousand per cent."
"Can I assume for a moment that you don't intend to put us on the potato standard?" said Sacharissa sharply.
I think that we are in the same situation as the Jews in Vienna in 1939. In other words, it is going to hit the fan in the next few years.
Which calls to mind a passage from Edward McQuarrie's essay Fool's Gold:
In making a rational decision about whether to invest in gold, two possible outcome scenarios must be considered:
- Society does not collapse
- Society does collapse
Gold can only be a winning investment under the second scenario. If society does not collapse-if we continue to muddle through, as we more or less have in the United States for several centuries now-then gold is a losing investment. To see why, we have to explore what it means to be a "store of value."
I'm going to skip his explanation of why gold makes a lousy store of value. Instead, I want to go on to the survivalist argument for gold:
Please run the following movie in your head: society has just collapsed and you, whistling cheerfully, tossing your gold coins in hand, stroll down to the store, shouldering ahead of those wretches with their wheelbarrows of worthless paper currency, to buy a loaf of bread …
What's wrong with this picture? Two things: either you will be beaten bloody, and your gold robbed, before you ever get to the store; or, you will be followed home and murdered in your sleep-and your gold robbed.
First moral: if you are going to buy gold, you have to buy a shotgun too. Under precisely those conditions where gold will finally pay for itself, it will be far too dangerous for an unarmed person to carry gold. If you truly believe that you need to own gold, then it follows directly that you need to own a shotgun too. Bars on the windows and a Doberman wouldn't hurt either. ...
Second moral: under precisely those circumstances where gold would pay off as an investment, you can't possibly trust anyone else to hold your gold for you. And if you are thinking that you will keep your gold in a repository just until things start to look grim…have you ever seen pictures of a run on a bank…it isn't very pretty. Besides, how are you going to get that gold home, without a shotgun-do you really think the repository employees are going to keep mum about this guy in the red Camry, now heading West on Main Street, with thousands of dollars of gold in the trunk? ...
If you are going to buy gold, you must think and act like a survivalist.