Buffett predicts higher inflation, lower dollar

OMAHA  - 

In the 44 years he's been building a reputation as the world's savviest investor, Warren Buffett has rarely offered any good news on gold. Until now.

The two key messages he delivered to 35 000 shareholders at Berkshire Hathaway's AGM in Omaha over the weekend were inflation is coming back; and the US dollar is headed lower. Both predictions, if fulfilled, are powerfully positive for gold.

Buffett, who has delivered compounded returns exceeding 20% a year to shareholders for more than four decades, did not mention gold by name. But that will matter little to the yellow metal's continuously growing group of supporters. They are sure to interpret this as further evidence that gold's best days lie ahead.

Despite his gloomy forecasts for inflation, Buffett hasn't exactly rushed out to by Krugerrands. Rather, he suggested to Berkshire shareholders their best protection was "invest in yourself; and as a second option, buy stock in a well run company".

Buffett explained that in the wake of the global financial sector meltdown, State officials have been forced to take the world into unchartered territory. Nobody knows the exact impact of unprecedented bailout and stimulation packages.

But he is convinced of one definite consequence: "You can bet on inflation." History suggests that higher inflation is an important trigger for a rise in the gold price.

During Saturday's six hour question and answer marathon, Buffett (78) and Berkshire Hathaway's Vice Chairman Charlie Munger (85) once again belied their advanced years through sharp wit and focused minds. They also referred often to their view the US dollar is headed south - another bull factor for gold.

Buffett believes US government bonds are one of the poorest choices for investors today, especially non-Americans. As he put it: "Anybody who holds (US) Dollar obligations from outside this country is going to get back less in purchasing power in future."

In his view the US is following policies that are bound to have inflationary consequences. Heading these is the heavy borrowing from, especially, the Chinese to fund the bailout and stimulus packages.

Says Buffett: "It's wrong for politicians and others to keep saying they're using (US) taxpayers money. My taxes haven't gone up and neither have yours. What we are doing is borrowing from the rest of the world and building up government debt. The classic way of reducing the impact and cost of foreign debt is by reducing the value of the dollars you're going to repay them with."

He added: "The people who are really going to pay (for the bailouts) are those who are buying fixed interest (US) government bonds that will be worth less when they redeem them. The AIG bonuses," he quipped, "were actually paid by the Chinese."

While warning that shareholders should expect to see "plenty of inflation", Buffett said there was no need to despair: "The best protection against inflation is your own earning power. If you are the best at what you do, you will get your share of the national pie no matter what inflation does. The second best protection is owning a wonderful business that does not need capital. With these guidelines, I'd say invest in yourself. It's always been the best investment you could make."