You would think that billionaires buy gold because it is such a good financial hedge. One world-famous billionaire who has been called “The Oracle Of Omaha” does not think so highly of investing in gold. Warren Buffett foes not see the value of gold. He once stated that “gold does not do anything, it sits there and looks at you.” Buffet believes that one should only invest in useful things that serve some practical purpose. He may think poorly of gold but he holds silver in high regard. Silver has a myriad of uses from medicine and industrial uses to electronics. Silver does not corrode and it to the best conductor of electricity. Gold on the other hand does not meet buffet’s requirements which is strange considering the wide application of gold in our daily lives. Some of the applications of gold include:

• Dentistry
• Medicine
• Mobile smart devices
• In space
• Food/drink

Even with all those uses listed, gold still does not meet buffet’s requirement of usefulness. Gold is not virtually irreplaceable as silver. Most people think gold is only good for jewellery but for buffet that is all it is good for. In his opinion gold has no inherent value and therefore it is not a viable financial asset. Buffet believes in silver but not in gold. In his annual letter to Berkshire Hathaway, “The Oracle Of Omaha” took a swipe at gold and implores people to buy stocks instead of gold. Before anyone can start dumping gold, it is worthwhile to examine buffet’s argument.

Buffett says that if he began investing in 1942 by buying $114.75 worth of shares in a no-fee S&P500 index fund it would be worth $606,811 today. To protect oneself an investors might have opted to buy 3.25 ounces of gold with the same amount of money. That supposed protection could now be an asset worth$4,200 less than 1% of what you could have realized from an unmanaged investment. So stocks are better than gold?

The problem with his comparison is that in 1942 there was no such things like S&P 500 index funds. The S&P 500 index only came about in 1957 and the first index fund with a basket of shares was also launched in 1976. Before then investors had to pick specific stocks themselves and take more risks. Not a lot of people would have the fortitude and disciple to manage a portfolio to manage a portfolio that would deliver the kinds of returns Buffett implies. The majority of the 500 companies that made up the 1957 index no longer exist, in fact, only 60 remain. Stocks can be worthless over time, but gold shares cannot. That is something Buffett does not tackle. Another point is that the gold price was tightly controlled in the first 30 years covered with the comparison period. During this period, America was clawing its way out of a depression and a war and the economy was booming whilst gold languished. In fact, the government fixed the price between $35/oz. and $42/oz. during 1934 and 1971.

 

Gold is far more reliable. Buffett makes the mistake of looking at gold as just an investment asset. But gold is money. Governments and central banks around the world treat gold as currency, not like they would treat shares in companies.

 

Gold has been safer investment than stocks for decades. During the 70s gold outperformed the S&P 500 by multiples. Maybe the biggest problem plaguing investors like Buffett is expecting gold to be normal, it can’t be.

 

Buffet should broaden his views of stocks and gold to include decades of uninterrupted growth, which could be stymied by events like hyperinflation as the U.S. Dollar follows the well-trodden route if destruction followed by other currencies. Warren buffet cannot expect the last sign decades to repeat themselves. Most of that time was based on borrowed money that was used to propel wall street as well as equity. Borrowed money always needs to be paid back and you can’t really say you’ve made money when you are in debt. Swapping shares for physical gold would be a prudent move for any investor.

 

Sources:

  1. https://www.physicalgold.com/insights/15-uses-gold/
  2. https://www.kitco.com/news/2018-05-08/What-Warren-Buffett-Get-Wrong-On-Gold.html