Buffett's Aversion to Gold Could Cost Him

Warren Buffett’s position on gold is well known, if a little difficult to fathom. This is from Buffett’s appearance on CNBC’s Squawk Box on March 9, 2009, but could have been taken from any of his commentary over the last fifty years:

BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?

BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.

Then there’s this comment from Buffett on the relative performance of Berkshire Hathway (BRK.A) book value and an ounce of gold over fifteen years in the 1979 letter to shareholders:

One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.

Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold.

For tis the sport to have the enginer
Hoist with his owne petar.

Comments

[User 376349:]

I think the point is that gold *could* have gone the other way, and there's not much anybody could have been doing about it. WEB's active investing, on the other hand, saw his experience being dynamically applied to a changing world. Has gold outperformed him over 40+ years? Will it over the next decade? I kinda doubt it.

Nov 10 07:44 AM

[Roger Knights:]

"Has gold outperformed him over 40+ years?'

Gold is not a buy-it-and-forget-it investment, but one that has good periods and so-so or worse periods. Up until now, betting on the US economy was a better long-term bet than betting on gold.

"Will it over the next decade? I kinda doubt it."

The tide has turned, and the US economy is on a long-term decline, like the UL's before it. It's possible equities will outperform gold, but that's not the way to bet, because equities have a greater downside--45% vs. 15% (IMO).

Nov 10 08:54 AM

[Ricard:]

"Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold."

Look at the ten years following. Just because gold and oil had bubbles during your fifteen year period does not mean that it outperforms when those bubbles deflate.

You could make the same argument taking choice time periods of any asset class and comparing it to Berkshire Hathaway, and say something like 'look, Buffett was off his rocker during that time period'. Such an argument would be as unsound as the argument presented in this article.

Nov 10 11:03 AM

[U338129:]

Gold is the worst investment you can make other than buying stocks in the auto and airline industries. It doesn't matter if you use the dollar, gold, silver, or fish bones for trading purposes...when you sell a product that people want you will always get a portion of their income for your products. Look at all the fools that invested in gold all these years while Buffett invested in great companies that produce cash flows for Berkshire day after day, month after month, quarter after quarter, year after year, decade after decade. Gold's a joke and the only time people invest in it is when this "fear of the declining dollar" is preached by pundits on TV who aren't nearly as qualified as Buffett (i.e. nowhere near as successful at it) is to discuss proper investing strategies.

Sorry, but I can't walk into a store and offer them gold for my groceries. However, I can walk in there with dollars I earned from owning great companies and get whatever I need. Buffett's point is that he investd in great companies for the long haul because they provide better payback for you than gold ever could/can/will.

I guarantee you that all those that ran to gold during this period will end up a lot worse off than Buffett (and those of use that did the same thing) who focused on buying great businesses at reduced prices.

Nov 10 01:46 PM

[ff4444:]

Buffet is a great investor, I laugh and laugh when pundits suggest that he is finally making a big mistake. That said though gold is in Buffet's blind spot, but it is an intentional and carefully cultivated blind spot that allows him to focus on what he is good at. If you are not a macro or commodities investor then you will just under-perform when you play that game.

Historically speaking if Buffet had sold equities and bought cash and gold at the times when he has complained about no good values - instead of just going to cash, then BRK would have had a smoother and even more profitable investment history. If Buffet had told the 8th graders "I would buy gold if I think it is a good value" then he would be a more well rounded investor. But no one is qualified to give him that advice ;)

Nov 10 05:50 PM

[RK:]

Second guessing Buffet is a favorite topic in SeekingAlpha. It is fair to critique on his buys. It is a little harder to criticize him for his non-buys. Actually this is true for any investor.

There is no way to replay history. If he had bought gold, then Berkshire would have gone in a completely different path and maybe gone bankrupt in a different arc of history. We would never know, would we?

Nov 10 08:42 PM

[The Recusant:]

Is this a screwy age or what?! Everyone wants to take an opposing irrefutable side in every argument. Sure Buffet could have made a killing with gold if he wanted to, just as he did with stocks. These things are just investments and each will be profitable in its own cycle under the right conditions. To say either is a foolish investment is foolishness itself. Someone investing in gold over the last six months and selling right now is making a killing, more so than many, many stocks that have fallen in value. And it's quite likely that holding onto gold for too long will lose one money, again, just like many stocks. They are all just things we put our own value on at different times.

Nov 10 09:23 PM

[auto44:]

Buffet made a killing in the silver market. He is normally a buy and hold guy and is aware that buying and holding physical gold has a lot of costs that he can avoid in other buy and hold situations. You have to consider the times you are in and right now with the worlds printing presses whirring non stop and a lot of doubts abou the worlds financial situation and political uncertenty gold is doing very well. At this point in time I would be very hesitant to sell my GLD no matter where the price goes. Right now one share of brk.a will buy a lot of gold like what, 100 ounces or so.

Nov 11 12:02 AM