Why Buffett is Dead Wrong on Gold

Gold investing is one of the most popular aspects of the commodity world. In recent years it has established a cult following that swear by the hard asset as one of their favorite capital allocations. But for every gold bug that exists, there is someone else who writes the precious metal off completely. One of the biggest gold-haters our there is Warren Buffett, as the Oracle of Omaha has been adamant about his lack of interest in the asset as well as its complete lack of use to him as an investor [see also Three Reasons Why Gold Is Overvalued].

Buffett once stated that gold is “dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head”. He also famously compared the precious asset to a goose saying that companies like Coca-Cola will be making money, or be the geese laying eggs, while gold will be the “goose that just sits there and eats insurance and storage and a few things like that”.

Buffet has also laid out 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 also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

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. Buffett 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.

When Warren Buffett makes a statement, the entire investing world tends to listen, as he has amassed a fortune that few of us could even conceive of. He is, without a doubt, one of the greatest investors in history as well as one of the sharpest minds that the business world has ever seen. That being said, Commodity HQ will have to respectfully disagree with Mr. Buffett on the topic of gold, as we believe that it has a number of uses that make it a key asset for the portfolios of many [see also The Different Types of Gold Futures Compared].

Why Gold is Worth its Salt

All of the arguments that Buffett makes are very true; gold will never make any money, will never pay a dividend, and we certainly dig it out of the ground just to store elsewhere under ground. But the key concept behind all of this is that gold is worth what someone is willing to pay for it, and there will always be someone willing to buy gold. The asset acts as a nice inflation hedge and is widely agreed to be one of the last safe haven investments on the market. Also, recent market behaviors and a more widespread popularity for the asset have turned it into a prime trading instrument that can be used to make speculative plays on various parts of the economy.

And speaking of the economy, what is going to happen to the value of the dollar and euro if our current global hardships continue to get worse. What is going to happen to all of those Exxon Mobil’s when the world economy takes another nose dive, will it really preserve your capital, or just eat into it?

With our nation sitting on a massive debt pile, it isn’t too far-fetched to assume that the dollar may have some hefty depreciation coming its way; what better time to own gold than when the dollar fails. As far as protecting the value of your capital is concerned, gold is your best bet. Sure it will never pay a dividend or report stellar quarterly earnings, but that is the very reason that gold is so useful in the first place; it is almost entirely separate from so many of the issues that plague a standard equity investment [see also Is Gold Overvalued? The Bearish Case vs. The Bullish Case].

So while we can certainly respect Mr. Buffett’s stance on the precious metal, we will have to disagree with his view on gold, and stand by our principles in saying that gold can have a place in anyone’s portfolio.

Ways To Play

Those of you looking to make a play on gold have a number of options available to you, which we outline below.

  • SPDR Gold Trust (GLD): One of the most popular funds in the world, GLD tracks physical gold bullion making it perfect for long-term investors. The fund also has a very active options market, which also makes it ideal for traders.
  • Gold Futures: The COMEX offers a wide variety of gold futures contracts, but be warned that futures may be over the head of smaller investors.
  • Market Vectors TR Gold Miners Fund (GDX): This ETF measures a series of gold mining companies, giving a nice equity spin to your gold allocation.

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Disclosure: No positions at time of writing.

This entry was posted in Actionable Ideas, Asset Allocation, Commodity Futures, Gold, Precious Metals and tagged , . Bookmark the permalink.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

6 Responses to “Why Buffett is Dead Wrong on Gold”

  1. [...] Back-and-forth trading was the dominant theme yesterday as investors digested Ben Bernanke’s testimony before congress along with quarterly corporate performance results. Selling pressures kicked off the day as anticipation surrounding a possible announcement of QE3 intensified leading up to the Chairman’s testimony. Markets were quick to change direction, however, as investors re-focused their attention on better-than-expected results from bellwethers Goldman Sachs and Coca-Cola. Buying pressures were also bolstered by encouraging home builders index data, which came in at 35 versus last month’s reading of 29 [see also Why Buffett Is Dead Wrong On Gold]. [...]

  2. [...] The Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) was one of the worst performers, shedding 3.64% on the day. Increased confidence after three bellwether stocks reported better than expected earnings helped market volatility to cool off, forcing this ETF to turn even lower after Bernanke made no indications of any further stimulus actions [see also Why Buffett Is Dead Wrong On Gold]. [...]

  3. [...] The Van Eck Market Vectors TR Gold Miners ETF (GDX) was one of the worst performers, shedding 1.39% on the day. Alongside gold’s lackluster performance today, this ETF gapped significantly lower at the open, only to slide sideways with a downward bias for the rest of the trading session [see also Why Buffett Is Dead Wrong On Gold]. [...]

  4. [...] Stocks ended the session in green territory yesterday as investors were reassured by better-than-expected data on the homefront along with fairly encouraging comments from Chairman Bernanke. “At this point we don’t see a double-dip recession — we see continued moderate growth,” said Bernanke in his testimony to Congress, while at the same time leaving the door open for future stimulus from the Fed if deemed necessary. Solid housing starts data also helped bring back the bulls on Wall Street; housing starts in June came in at 760,000 versus the previous reading of 711,000, marking a healthy uptick [see also Why Buffett Is Dead Wrong On Gold]. [...]

  5. [...] The Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) was one of the worst performers, shedding 2.33% on the day. Strong earnings reports overshadowed poor economic data today, helping market volatility to cool off. After an early morning rally, this ETF started heading south, inching lower throughout the day [see also Why Buffett Is Dead Wrong On Gold]. [...]

  6. [...] There have been conspiracy theorists about gold/silver manipulation since the dawn of time, but they were often written off for being overly paranoid. Silver has been especially at the forefront as there have been very blatant shreds of evidence throughout U.S. history to prove that some sort of market manipulation was occurring. So what happens to the value of these two precious metals if it is discovered that they truly were manipulated? Prices would likely take a nosedive until finding what the market feels is a more reasonable level to sustain, but where that bottom lies is nearly impossible to predict. A dip in prices would destroy the savings, positions, and even retirement funds for a number of individuals around the world [see also Why Buffett is Dead Wrong on Gold]. [...]

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