12/11/2009 - 00:00

Buffett buys a $34bn ticket on the coal train

12/11/2009 - 00:00


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Two different financial plays in the past week share a similar view of the future.

BUY coal. Buy gold. It’s not often that you get two clear buy signals from such totally different sources, especially as one of them is environmentally incorrect, and the other is politically incorrect.

The coal tip comes from Warren Buffett, widely considered to be the world’s smartest investor. Earlier this month he launched his biggest-ever takeover bid, a $US34 billion offer to buy a US railway.

Widely seen as a way of gaining exposure to economic recovery in the US, Mr Buffett’s big bet was really a punt on the US dollar and coal.

The dollar because the biggest part of the business on the Burlington Northern Santa Fe line is hauling bulk commodities, such as coal, to export ports, and the low dollar makes the US more competitive as an exporter.

Coal because as the global economy recovers and oil demand (and price) rises, Mr Buffett will own a business which is largely coal-powered, just as the rest of the world discovers that renewable energy such as wind and solar cannot fill the gap, a classic back to the future moment that will signal the rise (again) of coal.

Mr Buffett’s railway punt is a classic win-win. He hauls coal to the coast for export and he runs his railway off relatively cheap coal-fired power.

If coal is a throwback commodity despised by the environmental lobby, then gold falls into a similar category for Western world economists and politicians who hate the stuff, arguing that it is a historic relic and ought to be replaced by the paper money printed by governments.

India does not agree. It has placed a $7.5 billion bet on gold either retaining its traditional role as an investment sheet anchor, stabilising a portfolio, or in reclaiming its role as the ultimate reserve currency.

Important as the Indian decision is to buy 200 tonnes of gold from the International Monetary Fund, there are numbers behind the deal that are just as important.

Firstly, the extra gold merely lifts the Indian central bank’s gold stockpile from 4 per cent to 6 per cent of total foreign exchange reserves. Secondly, China’s gold stockpile represents 1.9 per cent of its foreign exchange reserves.

Other countries are also low on gold, relative to India’s enlarged position – especially Britain and Australia, which might be reconsidering their ill-timed gold sales in the 1990s for less than half the current price of the metal.

However, the critical questions are when will China move to boost its gold holdings, if only to match India’s actions, and when will you?

Bystander’s faith in gold is not absolute. It is an inert asset that pays no interest.

But it is an asset beyond the reach of any single government, and given that the US intends to hold interest rates near zero for years to come, the difference between gold and money on deposit (in the US) is not great.

There is also, lurking in the background, the near certainty that the world will eventually suffer a servere outbreak of inflation, the final act in the global financial crisis.

Gold and other hard commodities will, in theory, stand apart from the global inflation crisis that might even be encouraged by the US, which can then watch its debts to the world ‘inflated away’ – code for repaying what it owes China today with dramatically depreciated (inflated) dollars tomorrow.

For Australia, the actions of Mr Buffett and India are a reminder of just what a lucky country we really are, and why some of the best investments today are in two of the world’s oldest (and most despised) commodities, coal and gold, both of which are among Australia’s top exports.

My, my a mess

Forgive Bystander for indulging in an immodest “I told you so” by reminding readers of an early October warning to stay away from the Myer float because it was just another exercise of fat cat financiers taking money off mum and dad investors.

If any good is to come from the Myer experience, in which shares were sold out of a private equity syndicate at $4.10 and opened for trading on November 2 at $3.88, and continue sinking, it is that next time novice investors will know better.

In essence, the Myer float resulted in the transference of about $400 million in mum and dad savings to investment banks and their rich clients, who probably don’t need the money.

The next warning is to take great care before plunging into the flood of floats lining up at the Australian Securities Exchange.

At last count there were 11, and just for a little light entertainment Bystander ran a quality ruler over them and found about three that looked to be reasonable, four that were questionable, and four that barked when called, as most dogs do.

Moral of the story, at this stage of a stock market evolving from a crash and trying to find a new normal, keep a padlock on your cash.

Some musically talented reader might even care to set to song the ballad of how ‘Myer killed the new float game’ set to the pop classic of the 1980s ‘Video killed the radio star’.

Come again

A FINAL thought on quality, and a lesson all business people should learn. It’s all about pampering your customers so they return and it comes from the chief executive of the ultra-chic hotel chain, Ritz-Carlton.

According to chief executive Simon Cooper, all staff (and that means all) have the power to spend up to $US2,000 to make a customer’s stay memorable, without referring to senior management.

The best examples were the hiring of a carpenter to build a shoe tree for a guest, and a waiter who overhead a guest lament that his wheelchair-bound wife couldn’t get to the beach in front of the hotel. The next day a temporary wooden walkway and ramp had been constructed, with a tent on the beach where the couple could have dinner.

That’s service!

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“One should always play fairly when one has the winning cards.” Oscar Wilde



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