Warren Buffett wrongly criticized investors who believed in the maxim that “cash is king.” Buffett said that during 2008 this maxim was applied incorrectly by investors who did not put money in the stock market and thus missed out on large gains. However, over a little longer time frame cash has been the best asset class.
Buffett simply picked one very short window in time to discredit the notion that “cash is king.” What he fails to acknowledge is that the S&P index has not had any gains over the last decade. Investors have been subject to a tremendous amount of volatility and they have not been rewarded for taking risk in the stock market. Over the course of the last decade you can certainly say that cash has been more favorable to financial stocks. Even more preferable to cash has been gold bullion. The lack of investment alternatives and the terrible volatility is why gold is a good investment.
Of course everybody would prefer to invest in productive assets rather than invest in gold bullion. Who wants to hoard gold in a safety deposit box in Switzerland? Of course people would rather live prosperous times with monetary stability.
The fact of the matter is that investors need to recognize that the massive leveraging cycle over the last 40 years has come to an end. The results of the end of the leveraging cycle is that government and financial institutions find themselves in a dark hole. The unintended consequences of some of the actions by the policymakers in the United States and Europe means that chaotic times are ahead.
Obviously investors would prefer an environment of higher interest rates, low equity valuations, peace and stable currencies. Obviously under that type of environment there would be productive assets that investors could target rather than putting money into gold. Unfortunately the reality that Mr. Buffett does not recognize is that there are negative interest rates, wars, and poor policy decisions being made daily. In addition, there is a massive the deleveraging cycle that is still to unfold. Under this circumstance it is highly likely that gold will outperform some of the financial companies that Mr. Buffett has invested in.
What makes penny stocks special is that they do cost next to nothing, but they are high risk so the potential is there that you can net a huge profit from them as well. You just have to make sure that you’re trading in the right way.
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