Warren Buffett And Gold: Follow What He Does, Not What He Says

Includes: BRK.A, BRK.B
by: Avery Goodman

The so-called "Oracle of Omaha", billionaire Warren Buffett, has been making negative comments about gold for many years. Most recently, in his annual letter to Berkshire Hathaway (BRK.A,BRK.B) shareholders, he indulged in a long dissertation about gold, writing about investments he claims that the company never makes:

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else - who also knows that the assets will be forever unproductive - will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century... This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce - it will remain lifeless forever - but rather by the belief that others will desire it even more avidly in the future...The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative.

Just a few days later, the world has learned that a rather inconsistent event is about to take place. Mr. Buffett is expanding the Richline unit of Berkshire Hathaway by making a significant investment in the future of gold and other precious metals. Richline is buying the precious metals operations of Cookson Group, PLC (OTCPK:CKSNF)

The purchase of jewelry, medallion and gold bar producing factories may not be inconsistent with Mr. Buffett's stated dislike of gold. Jewelers tend to complain about high precious metals prices. When the precious materials cost more it cuts into profit margins until buyers get accustomed to the higher prices. But Buffett is making a very long term investment into the idea that gold is not like copper, iron, or nickel.

Buffett is paying tens of millions of dollars for a company that depends upon the intense human fascination with and desire to possess the noble metals that last forever. The same characteristics that makes gold, silver and platinum so useful for jewelry - small size, ultra-high value, beauty, and non-tarnishability - also cause them to be useful as a store of value.

So, is the "Oracle" having second thoughts? Has he finally recognized that there is something very special about precious metals? In the financial world, it is always very important to "follow the money". It is much more useful to know what your brokerage house is doing with its own money, rather than listening to what it says you should do with yours. The same, it seems, is true with financial "wizards" like Warren Buffett and George Soros.

Buffett and Soros have both been known to diss precious metals while buying huge quantities of them. A few years ago, for example, Buffett bought huge quantities of silver, held it, and sold it for a big profit. Soros has stated that "gold is the ultimate bubble" while buying huge quantities of the yellow metal. He has also now invested hundreds of millions in North American based platinum group metals mining companies.

The rest of us should be doing what these financial wizards do, not what they say.

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