A Value Investor Buys Gold

Summary

• Value investors have traditionally avoided gold due to the superior long-term economics of owning pieces of businesses in the stock market.
• Despite the attractive long-term returns of equities, acceptable returns do not exist at any price, which requires investors to hold parts of their wealth in stores of value at times.
• Federal reserve activity in response to the pandemic has been aggressive and follows nearly twenty years of increasingly aggressive policy actions that have devalued cash and near-cash stores of value.
• Given the backdrop of an expensive stock market, prudence now seems to require investors to hold part of their wealth in investments leveraged to gold as a hedge against further central bank money printing.

The plague of 1592 closed London's theaters and sent playwright William Shakespeare working from home. Among his compositions during this time was the poem Venus and Adonis, in which the goddess Venus tries to woo Adonis despite Adonis showing much greater interest in hunting than romance. In pleading her case she tells Adonis, "Foul cankering rust the hidden treasure frets, but gold that's put to use more gold begets."

The advice of the goddess of love is that Adonis should not let his beauty go to waste but risk it in the hopes of creating something even more beautiful. Gold is used as a metaphor but taken literally it is one of the chief reasons why many value investors have eschewed buying gold and other precious metals.

Source

Productive Assets vs. Stores of Value

The 2008 book The Snowball: Warren Buffett and the Business of Life by Alice Schroeder quotes Warren Buffett as saying, "Life is like a snowball. The important thing is finding wet snow and a really long hill." Given a range of options, Buffett has a vast preference for owning productive assets, particularly strong businesses where earnings can be reinvested over time at high rates of return like a snowball rolling down a hill.

Consider how Berkshire Hathaway (BRK.A) (BRK.B) was built over the years. Starting with the excess working capital of a textile business, other businesses were acquired, such as National Indemnity and See's Candy. Those businesses then produced huge amounts of excess cash that were used to purchase other businesses. By owning productive assets and investing in more productive assets, a small pool of working capital was transformed into a collection of entities that now generate $30 billion - $40 billion in economic value every year.

Of course, when capital is invested in productive purposes, not only

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.