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By Dan Denning •
February 18th, 2013 • Related Articles
Let's begin the week by congratulating the hardest working
blue chip index around, the S&P 500. It closed up for the week on Friday in
US trading. That's seven consecutive higher weeks for the index. It hasn't
begun the year in such stupendous fashion since 1967. The longest weekly
winning streak, by the way, is 1957, where the index closed higher for a lucky
thirteen weeks in a row.
Hmm...1957. That was one year after Warren Buffet formed his
first investment partnership, and two years before he met his long-time
co-conspirator Charlie Munger. We'll come back to the dynamic duo in a moment.
When you're comparing stocks to other assets (like gold) you
have to include Charlie and Warren.
But first, Australia the brand is enjoying a good run in
America too. The Australia iShares exchange traded fund (NYSE: EWA) is
threatening to break out past its 2011 high of $28.27. When most American
investors think of Australia, they think of iron ore, coal, koalas, and
Crocodile Dundee. They might be surprised to know that 40% of EWA's assets are
in the financial sector, although this would confirm that Australia is full of
poisonous and lethal things.
EWA's Top Ten Holdings
BHP Billiton Ltd (BHP): 12.20%
Commonwealth Bank of Australia (CBA): 10.33%
Westpac Banking Corp (WBC): 8.65%
Australia and New Zealand Banking Group Limited (ANZ): 7.22%
National Australia Bank Limited (NAB): 6.32%
Woolworths Limited (WOW): 3.97%
Wesfarmers Ltd (WES): 3.90%
Rio Tinto Ltd (RIO): 2.94%
CSL Limited (CSL): 2.74%
Woodside Petroleum Limited (WOR): 2.40%
The one hope investors have is to buy shares of a productive business
that can grow your money faster than the authorities can debase it. That is
what 'civilised' people do, if you'll recall the wisdom of Charlie Munger from last year. We thought of Munger
this morning when we saw that the S&P had closed higher for seven weeks in
a row.
In particular, it seemed like a good time to go back and
visit the ratio between the spot gold price and the 'B' shares of Berkshire
Hathaway, the company Munger directs along with his pal Warren Buffett. How is
Berkshire doing relative to gold? Have a look below.
The chart shows you how many 'B' shares it would take you to
buy an ounce of gold. The lower the ratio, the better the 'B' shares are doing
or the worse the gold price is doing. You can see that when the gold price
peaked in 2011 above $1900, so did the ratio. Since then, it appears to be in
decline.
What the chart doesn't show you is that Berkshire's 'B'
shares closed at their all-time high on Friday at $99.77. The gold price,
meanwhile, closed at a six-month low and briefly dipped under $1600. Yet
despite all that, the price action in gold, at least in terms of Berkshire 'B'
shares, has favoured gold since 2002.
Of course what we're really trying to discern is whether
stocks will keep going as a result of monetary inflation. We'll cut to the
chase for today and make a prediction: a combination of falling gold prices and
rising stock prices will drive the ratio down to 14. But let's assume the
worst.
Let's assume that gold does all of the falling while the 'B'
shares stay put. And let's round the value of the 'B' shares to an even $100.
That gives you a gold price of $1400 at a ratio 14.
That's a 12.5% decline in the gold price from $1600. And that sounds about
right. What do we mean by 'about right?' Tune in tomorrow...
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