Warren Who? Gold Bugs Still Think They Have Right Idea

One expert is going against Warren Buffett and Bill Gates by saying that gold is the investment to make right now because the stock market is going no where and investors need something that will preserve their purchasing power. Michael Pento of Pento Portfolio Strategies expects gold to continue to hold its place as an inflation hedge.

By: Jeff Cox
Published: Monday, 7 May 2012
CNBC

It's not everyday you can find people to take the opposite side of a trade from Warren Buffett and Bill Gates, but then gold is not your average trade.

Gold bugs are known as some of the most passionate investors, so not even high-level slams from the Oracle of Omaha and the founder of Microsoft [MSFT 30.65 -0.33 (-1.07%) ] can cool their fire.

"Absolutely I would take the other side of that trade," says Michael Pento, founder of Pento Portfolio Strategies in Holmdel, N.J. "The stock market has gone nowhere in nominal terms in 12 years. It makes sense as a default under the current conditions of negative real interest rates to own something that keeps you afloat, that preserves your purchasing power."

Pento is the former senior economist at Euro Pacific Capital, the firm run by noted gold enthusiast Peter Schiff. Pento has nailed the trajectory of gold's price for the past three years running.

Primarily because of the Federal Reserve's weak-dollar policies, Pento expects gold to continue to hold its place as an inflation hedge, as well as a safe-haven asset to buffer against global debt contagion.

For 2012, he thinks gold should be able to hit $1,900 an ounce.

"I would ask Mr. Buffett if he could own a lone share of a representative of the S&P 500, or would he rather have the equivalent of an ounce of gold?" Pento says. "Which investment has done better over the last dozen years? The answer is clear: Gold."

Buffett and Gates primarily don't like gold because of its lack of intrinsic value. It's not the same as holding shares in a company that has a clear revenue stream and business model, which in turn make it comparatively easy to value. (Buffett's right-hand man at Berkshire Hathaway [BRK.B 82.47 1.53 (+1.89%) ], Charlie Munger, has been less diplomatic, suggesting in an interview Thursday that no "civilized person" should own gold.)

Rather than being cowed by Buffett's legend as a buy-and-hold investor, some gold advocates instead consider him out of touch with present-day conditions.

"His track record since 2008 has not been very good," says Kathy Boyle, president of Chapin Hill Advisors in New York. "He might be the Oracle of Omaha for the long-term, but short-term since 2008 his trades have not been that great."

Boyle owns gold through the iShares Gold Trust [IAU 15.96 -0.04 (-0.25%) ], an exchange-traded fund that tracks the daily prices of bullion.

"Most of the typical advisers out there and money managers don't look at gold as an investment — they don't look at it as a tradeable asset in their portfolio," she says. "There's going to be a flight to quality and a flight to safety. The dollar will go up, gold will go up and Treasurys will go up."

The safe-haven theme is a popular one, boosted by the notion that Europe's sovereign debt crisis is setting off a national recession that ultimately will spill to the U.S. shores.

Capital Economics in London has established a $2,200 per ounce price target by the end of the year for gold, though the firm thinks investing in the metal will not be profitable in 2013, when the price slips to $2,000

"Gold is still likely to benefit from safe haven demand and the continuation of ultra-loose monetary policy, including in the US," Julian Jessop, Capital's chief global economist, said in a note. "We suspect that gold would still do better than the dollar in a scenario where the issue is not just sovereign defaults but the very survival of the euro, and that in this scenario it would revert to a negative correlation with equities."

Jessop said a mass break-up of the European Union could send gold as high as $5,000, while a scenario in which Europe stays united and the global economy recovers could kick gold down to $1,000. However, he sees neither extreme scenario as likely.

To be sure, the sentiments of Buffett and Gates have support in the markets.

The agreement comes primarily from those who believe that the US economy can survive and grow independent of Europe's problems, allowing stocks to keep pushing higher and negating the need for the rainy-day sentiment behind gold investing.

"Businesses have dramatically improved their balance sheets, there's a horde of cash out there and companies are slowly starting to deploy some of that cash," says Chip Cobb, senior vice president at Bryn Mawr Trust in Bryn Mawr, Pa. "There's a far better place in equities than in gold or fixed income."

Even a breakdown in Europe might not drive gold higher, as an economic slowdown would not produce inflation, argues Gary Clark, commodities strategist with Roubini Global Economics in London.

Clark says his firm — and its famed namesake, "Dr. Doom" Nouriel Roubini — remains neutral on gold with a near-term price target of $1,700 an ounce.

"Fundamentally, we're in a disinflationary environment for the moment. We see inflation decelerating for the rest of the year in many developed markets," Clark says. "On top of that I would say with the votes against austerity for Greece and France, that provides upside for the U.S. dollar. These are all downside risks for gold prices ahead.

Hedge fund manager Dennis Gartman, who authors the widely followed Gartman Letter, says he's a "tad skeptical" about gold — which he owns in euros — but understands its allure.

"One should own a bit of gold but one shouldn't be enamored of gold. It's nothing more than a hedge against Armageddon," he says. "The best one can say is the (chart) trend seems to be in very broad terms from the lower left to upper right. That's the best one can say, and anything more than that will make you look foolish."

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