David Einhorn on gold

Hedge fund manager extraordinaire and 2007 Lehman Brothers doubter David Einhorn had a few thoughts to offer on the barbarous relic gold the other day in a speech delivered to the Value Investing Conference. The entire text(.pdf) is available at Reuters and Rolfe Winkler had some additional comments also.

Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonalds and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess.

However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

For some of us, this is simply stating the obvious, while, for a good number of those attending this conference it was probably akin to a clergyman announcing he was now an atheist.

It's funny that the issue of "sound money" never comes up these days in anything other than an occasional Wall Street Journal editorial, about every other Ron Paul speech, and in gold bug circles, this fundamental issue being touched on only briefly in Einhorn's speech.

But, that's what is really at the heart of the matter.

A few weeks ago, the Office of Inspector General called out the Treasury Department for misrepresenting the position of the banks last fall. The Treasury’s response was an unapologetic expression that amounted to saying that at that point “doing whatever it takes” meant pulling a Colonel Jessup: “YOU CAN’T HANDLE THE TRUTH!” At least we know what we are dealing with.

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

Yes, the argument about gold earning no interest and providing no yield seems to have taken on a whole new context now that it is about on par with the interest and yield on many other assets that, suddenly, look much riskier than gold.

Mr. Einhorn favors the physical metal rather than any of the paper varieties and in a Q&A session following his speech he reportedly said that his stash is not far from where he was speaking in New York city.