Why Warren Buffett Hates Gold

When the Oracle Of Omaha speaks, investors tend to listen. In his latest prophecy, Warren Buffett makes the case for why stocks deserve a place in your portfolio over gold any day. His criticism of the precious metal stems from his definition of investing; which is foregoing consumption now in order to have the ability to consume more in the future. Buffet offers an insightful overview of the investment landscape, splitting up the financial universe in three categories: currency-based investments, nonproductive assets, and productive assets [see also Doomsday Special: 7 Hard Asset Investments You Can Hold In Your Hand].

As you may have already guessed, the Wall Street legend rightfully classifies gold under the nonproductive label. Because barsof gold don’t pay a dividend, and no matter how long you safeguard them for they won’t ever produce anything, the precious metal lacks luster when it comes to utility. Buffet points to a rather simple explanation for why anyone would ever invest in such an asset; he states that owners of gold are compelled by an expanding pool of buyers, believing that in the future (hopefully) others will desire the lifeless asset even more. Although industrial demand for gold is most certainly one of the price drivers, the precious metal is largely influenced by fear and speculation [for more gold news subscribe to our free newsletter].

Not So Shiny

Buffet goes onto propose a compelling example which illustrates his criticism of the shiny metal. He offers investors a hypothetical choice between two piles; the first pile is all of the gold in the world, about 170,000 metric tons, worth an estimated value of $9.6 trillion. The second pile is worth an equal amount, which could buy approximately 400 million acres of U.S. cropland, 16 Exxon Mobils, and still have about $1 trillion left over [see Seven Reasons To Hate Gold As An Investment].

Which would you rather have? A pile of gold that will forever remain unproductive, or more than a handful of assets which can generate current return in addition to capital gains. Buffet drives his point home with a clear-cut look at what a $100 investment in 1965 would be worth today. If you had invested in short-term Treasuries, your $100 could have turned into $1,336. And now for the real comparison; if you had invested in gold, you would have $4,455 today, versus $6,072 had you invested in the S&P 500.

Ways To Play

Investors who agree with Buffet’s criticism of the precious metal, but are still lured by it timeless store of value, can opt for exposure to related productive assets. More specifically, investors who wish to avoid holding physical bullion, but are confident that the businesses who mine for the metal will continue to generate cash flows, may wish to own shares of publicly traded commmodity producers [see The Complete Guide To Investing In Gold].

Some of the world’s biggest gold mining companies include Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM). Investors who wish to access the space through a more broad-based approach can utilize several exchange-traded funds; the Van Eck Market Vectors Gold Miners ETF (GDX) is the biggest and most popular fund available. However, investors should be aware that this ETF includes exposure to several firms which are involved in silver and platinum mining as well. Those who wish to gain “pure play” exposure to the gold mining industry ought to consider the Global X Pure Gold Miners ETF (GGGG); this fund allocates its assets only to companies which generate the vast majority of their business from gold mining.

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Disclosure: No positions at time of writing.

Photo courtesy of Bjørn Christian Tørrissen.