Charlie Munger: Civilized People Don't Buy Gold

Includes: BP, BRK.B, COP, CVX, RDS.A, TOT, XOM
by: Tim McAleenan Jr.

Charlie Munger, the Vice Chairman of Berkshire Hathaway (NYSE:BRK.B), spoke out against the wisdom of purchasing gold during a May 4th interview with CNBC. In a clip that you can see here, Munger offered this trope about gold as an investment:

"I think gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939, but I think civilized people don't buy gold. They invest in productive businesses."

While I might not have worded it that way, I do think Munger is right in that there are other ways to hedge against inflation than by buying gold, which is traditionally a store of value against so-called "fiat currencies" that are issued by governments without the restraint of being tied to hard assets.

Whenever investors decide to load up on shares of gold, they usually do it for one of two reasons. Either:

(1) They want to prepare for a doomsday scenario when America looks like something out of Cormac McCarthy's "The Road."


(2) They believe that the persistent running of the American printing presses will guarantee that strong inflation will inevitably be a part of the future American storyline, and as the past decade has shown, gold can serve as a resilient hedge against undisciplined government spending.

To comment briefly on the first case- if the United States government collapses and we end up living in a state of nature wasteland, then it's going to take a lot more than gold to survive. At that point, you're entering guns, food, and the grace of God territory. If you're looking to prepare for a collapsed U.S. government, my articles aren't the place to look. You'd probably be much better off by watching the National Geographic series Doomsday Preppers.

The second reason to buy gold is more interesting. If the U.S. government is rapidly printing money that will lead to long-term high inflation, won't gold provide a good hedge against that? The likely answer is that, yes, gold will rise in correspondence with inflation so that a gold investor may maintain the same amount of purchasing power. With that said, this approach to investing does not appeal to me for two reasons-- similar to non-dividend paying stocks, I generally don't want to own something where the only way I can profit from it is by relinquishing my ownership stake. Likewise, it's unlikely that holding gold for extended periods of time (say, thirty years or so) will result in an increase in purchasing power (since the historical function of gold is as a store of value).

Since fighting inflation is a common purpose for gold ownership, I would prefer to fight inflation in a way that would lead to an increase in purchasing power that also allows me to benefit from the ownership of the asset without selling. One of the first assets I would hold to ward against inflation would be the stocks of the supermajor oil companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Total SA (NYSE:TOT), Royal Dutch Shell (NYSE:RDS.A), BP (NYSE:BP), and ConocoPhillips (NYSE:COP). We all need oil, the demand for the product is expected to increase over the coming decades, and the commodity product is also a natural hedge against inflation.

Whatever risks that a firm like ExxonMobil carries over purchasing gold (say, the specter of company mismanagement, falling demand, grossly excessive executive compensation, product liabilities, etc.) is offset by the fact Exxon sells an essential product in the global economy that is a natural hedge against inflation and still offers the possibility of growing profits over time (i.e. the long-term ability to not only maintain one's purchasing power, but increase it over time as well) and the firm has a long record of dividend increases, which means that shareholders of Exxon regularly benefit from ownership in a way that gold investors can only do so by selling their assets.

As investors, we all have a finite limit of resources to deploy into prospective investments. When considering an investment in gold, we should be aware of what we are trying to accomplish. For a lot of people, hedging against inflation is the primary purpose of gold investment. But long-term gold ownership often comes with two significant limitations: purchasing power generally does not increase over multi-decade periods, and the investor does not reap the benefits of gold ownership until he sells it. While companies can go bankrupt in a manner that gold most likely never will, the ability to own shares of companies that sell natural hedges against inflation (like the energy companies) and offer both the promise of increasing purchasing power and the opportunity to benefit from ownership without selling (dividends) leads me to believe that gold is not the most prudent way to hedge against inflation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.