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ERICOPOLY
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Posts posted by ERICOPOLY
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It's true though: from $30 in 1970 to $960 today. That's a 32x rise in price during a 5.5x expansion in the CPI. CPI is imperfect, but it's not off by as much as 6x over 39 years.
I think people are remembering the run that gold had during the 1970s and hoping their hot little hands will come alive again -- but it won't be anything like they are expecting because we're not starting from a severely depressed terminal point. They'll be lucky to get inflation -- but obviously in the past 39 years they've got far more than that.
Maybe TIPS would make them happier (less volatility) as a CPI hedge. I don't like the tax treatment of TIPS.
Hey is that "Ericopoly" from last time? The one that left a while back? Welcome back if so!
How did you get about to coming back?
Anyways, back on topic.
My feeling is that as long as the government feels free to print a bucket load of money, the gold price isn't going to substantially fall.
Maybe if the economy recovers and Helicopter Ben raises rates, but not in the short term.
I came back because I really love the board.
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Berkshire Hathaway does trade today at 1.36 times book value, but to compare it with Fairfax we should make an adjustment for goodwill. Goodwill at Berkshire is $33.8 billion or 33% of common equity. At Fairfax, it's only $286 million or 6.4% of common equity. Removing the goodwill at Berkshire makes it trade at 2.03 times book value.
This made me think again about goodwill and book values.
I could form an investment holding company and put 100% of the assets into DELL common stock at current market price of approximately $12 per share (which is trading at roughly 5x book). Let's call this holding company "Fairfax".
Instead, let's say my holding company acquires all of the shares of DELL at $12 per share, thereby taking it private. Now, given that we paid 5x book for DELL we need to record a goodwill item on the balance sheet of $9.60 per share. Let's call this holding company "Berkshire".
Is it fair to strip out the goodwill from the "Berkshire" company and compare the book value to the "Fairfax" company? They invested in exactly the same thing, but one of them is going to have a tangible equity value of 5x the other one.
I think Berkshire's goodwill is understated and if anything we should be significantly adding to it before comparing the company to Fairfax. A liquidation of Berkshire isn't a situation where the employees are laid off and the PP&E sold. Rather, you simply find a buyer for each and every operating sub and my thinking is Berkshire shareholders would be getting compensated far in excess of the stated book value (inclusive of goodwill).
I'm glad you are back. If I may, it has been suggested that something I did was the reason you left, do you hold that same opinion?
Yours
Jack River
I'm all sorted out now :)
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As you say, home prices do the same thing in the long run. They pretty much follow inflation exactly (the bubble occurred once they broke from that for at least 6 years). If or until gold breaks to the upside far away from that long term trend I'm hard pressed to think bubble just because of one article.
Let's go back to the height of the housing bubble. At that time, the median house price in the US had fallen by about 66% since 1970, priced in gold.
That's right, you could buy 3 median houses in 2005 for every 1 median house you could afford in 1970 -- if all of your money had been in gold for 35 years.
A lot is said about gold being undervalued in 1970. Yet, just go back to earlier this decade and you'll find that gold has tripled off it's intra-decade low.
That's pretty insane -- tripling within a decade of low inflation? The pendulum can swing both ways and you could have it cut in half in a couple of years -- so I don't see it as a store of value unless you are really patient.
It's true though: from $30 in 1970 to $960 today. That's a 32x rise in price during a 5.5x expansion in the CPI. CPI is imperfect, but it's not off by as much as 6x over 39 years.
I think people are remembering the run that gold had during the 1970s and hoping their hot little hands will come alive again -- but it won't be anything like they are expecting because we're not starting from a severely depressed terminal point. They'll be lucky to get inflation -- but obviously in the past 39 years they've got far more than that.
Maybe TIPS would make them happier (less volatility) as a CPI hedge. I don't like the tax treatment of TIPS.
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Berkshire Hathaway does trade today at 1.36 times book value, but to compare it with Fairfax we should make an adjustment for goodwill. Goodwill at Berkshire is $33.8 billion or 33% of common equity. At Fairfax, it's only $286 million or 6.4% of common equity. Removing the goodwill at Berkshire makes it trade at 2.03 times book value.
This made me think again about goodwill and book values.
I could form an investment holding company and put 100% of the assets into DELL common stock at current market price of approximately $12 per share (which is trading at roughly 5x book). Let's call this holding company "Fairfax".
Instead, let's say my holding company acquires all of the shares of DELL at $12 per share, thereby taking it private. Now, given that we paid 5x book for DELL we need to record a goodwill item on the balance sheet of $9.60 per share. Let's call this holding company "Berkshire".
Is it fair to strip out the goodwill from the "Berkshire" company and compare the book value to the "Fairfax" company? They invested in exactly the same thing, but one of them is going to have a tangible equity value of 5x the other one.
I think Berkshire's goodwill is understated and if anything we should be significantly adding to it before comparing the company to Fairfax. A liquidation of Berkshire isn't a situation where the employees are laid off and the PP&E sold. Rather, you simply find a buyer for each and every operating sub and my thinking is Berkshire shareholders would be getting compensated far in excess of the stated book value (inclusive of goodwill).
Gold Bubble?
in General Discussion
Posted
The terminal points change everything.
My motiviation in discussing the real price volatility of gold is to ensure that people understand this before thinking that they can put money into gold as a store of value until an anticipated inflation storm passes. One day that person will want to switch out of gold and perhaps the price will only be 1/2 of where it is today in real dollar terms, similar to what we saw earlier this decade.
That's what has me thinking about whether TIPS make more sense than gold for store of value. You might not get CPI computed precisely, but on the other hand you aren't taking the price volatility risk. The government marks up the value of the TIPS annually at the pace of inflation, but you get taxed on that as a "gain" (and you have to pay the tax each year, even if you don't sell your holding). So with a 10% rate of CPI gain, you'll wind up with only a gain of 6.5% (at a 35% tax bracket). The tax on TIPS is a reward to the government for driving up the CPI -- I think it is flawed.