The 'Hamburger Theory'

2008-SEP-01

Years ago Warren Buffett asked an amusing question in one of his annual letters to the shareholders of Berkshire Hathaway. He noted that he was perplexed by people's mood swings in relation to stock prices. He wondered why people were happy when the stock market was high and somber when it was low because he believes it should be the other way around.

To explain his point he asked the following question. If you ate only hamburgers your entire life, would you want the price of hamburgers to be high or low? Clearly, you would want the price to be low because in that way you would obviously maximize the purchasing power of your dollars. So too with stocks. When their price is low, you get more stocks for your dollars.

I believe that this insight also applies to gold and silver. When their price is low, you are able to exchange more overvalued dollars for undervalued gold and silver. Consequently, my approach to the precious metal markets over the past several years has been based on one simple premise. Namely, continue to accumulate the precious metals month after month after month. Some months the price will be high; some months the price will be low. But consistently take that portion of your income you save every month and save sound money. Don't save dollars; save gold and silver instead.

Then by the time this bull market finally ends, you will have accumulated a meaningful amount of physical metal because gold bull markets span decades. Importantly, with this simple strategy you will have avoided the emotional roller-coaster ride that can come from looking at the market day-to-day and from reading newspaper headlines. Leave the daily, weekly and monthly price swings for the professional traders to worry about, and instead be a wealth accumulator, buying the precious metals month-in and month-out.

I mention this point purposefully because we all know from the newspapers and watching TV that gold and silver were 'trashed' in August, with gold dropping -9.3% in the month while the ever volatile silver fell -23.3%. However, these news accounts ignore that gold is up 23.2% over the past twelve months while silver has climbed 12.8% during this same period. The charts appended below show that the major uptrend of the precious metals remains intact against the world's major currencies.

In short, in spite of what happened in August, gold and silver continue to be among the world's best performing asset classes. It is a distinction the precious metals have held throughout this decade, regardless of the occasional bumps along the road like the one this past month - and interestingly, like the one just a year ago. My alert on August 17, 2007 referred to and quoted an alert I had written back on October 5, 2003 recommending to 'stay the course. Continue to accumulate gold, as declines like the one seen on [October 3, 2003] enable you to get more metal for your dollars. And given the growing uncertainty about the dollar and its bleak prospects, gold is still the place to be.'

Only time will tell whether August 2008 will mark an important turning point for gold this year just as August 2007 did last year. But regardless, the problems with fiat currency are getting worse. Inflation, banking problems, trade imbalances, etc. are symptoms of a global monetary system on the brink, which is a reality that makes gold and silver ever more important. So continue to accumulate the precious metals because saving sound money makes good sense.

Note - GoldMoney provides charts of gold and silver in terms of the major world currencies at the following link:

http://www.goldmoney.com/charts.html