Buffett Simply Doesn’t Get Gold

Here are a few recent Warren Buffett quotes regarding gold (h/t Kid Dynamite):

“A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil ($XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A {the gold cube}  will compound over the century at a rate far inferior to that achieved by pile B {the farmland & 16$XOM plus walking around money}.”

 

I have always admired Warren Buffett and idolized him as probably the greatest investor to ever live. However, the guy simply doesn’t understand gold ($GC_F $GLD). It’s almost as if he has a blind spot which he refuses to acknowledge or show a willingness to understand the other side of the story.

Perhaps it has to do with the fact that for the majority of Mr. Buffett’s life gold was pegged at a specific price; therefore, if one owned gold it just sat there and lost its purchasing power alongside the dollar. Then there was the late 70′s metals rally which ended in tears for precious metals bulls after Fed Chairman Volcker got serious on inflation and aggressively raised interest rates in the early 80′s. It is quite understandable for someone who has made hundreds of billions of dollars through investing in businesses to be prejudiced against an inanimate object which has performed terribly as an investment and/or inflation hedge throughout much of his life.

The key point that Mr. Buffett appears unwilling to acknowledge is that gold is not in competition with private/public equity investments or farmland – gold is a cash alternative/substitute with a low correlation to other important portfolio asset classes such as bonds ($TLT) and equities ($SPY). I believe that gold has a place (5-15% depending upon ones risk tolerance and investment objectives) in most investors’ long term portfolios.

Finally, Mr. Buffett has repeatedly stated that the US dollar will become “worth less” over time (lose purchasing power). Which means that the dollar is not a good store of wealth, yet Mr. Buffet continues to advocate saving in US dollars rather than gold despite overwhelming evidence that gold has proven to be a far superior store of value over virtually any time frame. Moreover, Buffett seems to hold this misconceived notion that people own gold because they are “fearful”. Well I can say emphatically that I own gold and I am not fearful – in fact I am very bullish on America and American business. I simply understand that holding US dollar cash is a poor long term store of value and owning an uncorrelated asset which offers flexibility as a cash alternative is a far superior choice to holding cash at sub 1% interest rates.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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