Why Warren Buffett Won’t Invest In Gold

May 9, 2012 at 17:41


Warren Buffett, Chairman of Berkshire Hathaway, again expressed reservations about gold as an investment on Monday on CNBC’s Squawkbox:

“When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000. Or you can take a broader example. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.

Why do you think gold bugs get so irate? Because they really do come out. If you go on CNBC and say that bonds are kind of a poor investment, people don’t get mad at you. You don’t hear from the Treasury. You can knock almost any investment and nothing happens. But when you talk about gold it’s different. Of course that says something about their motivation for ownership. They want people to agree with them. They want everybody to get so scared they run to a cave with gold. Caves might be a better investment than gold. At least they’re not producing more caves all the time. So they want people to be as afraid as they are. Incidentally, they’re right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money. But where they run to is the mistake.”

If you just look at the numbers comparing gold and Berkshire Hathaway, the outcome depends on the period you choose. If you look at the entire life of Buffett’s ownership of Berkshire Hathaway, it was, as Buffett says, much more profitable to invest in Berkshire.

The same is true if you take a 20 year perspective: gold has increased 376 percent as compared to Berkshire’s 1330 percent.

However if you look at the ten year time period, the opposite is true: Berkshire increased 62 percent whereas gold has increased 416 percent in that period.

The averages however conceal valleys and mountains. If you invested in gold at a time of economic anxiety around 1980 when it peaked at about $800 per ounce, you would have suffered a quarter century of losses, before the anxiety caused by the financial meltdown of 2007-2008 once again fueled the rise in gold price. The shape of the gold price curve of from 2006 to today today looks ominously like the shape of the curve from 1972 to 1980. Unless more investors can be frightened into investing more in gold, its price may have peaked and we are looking at another long period of decline in the gold price.

Essentially gold is a trade, just like Berkshire shares however Warren Buffett likes to think he is not in the business of such financial speculation and, like Charlie Munger, looks hypocritically at a society that is so oriented.

Berkshire likes to think it is not simply about making money but about creating about productive businesses that add value to society. Under the guidance of Warren Buffett, Berkshire has been remarkably successful in doing so and, in the process. making a great deal of money. In some ways, Berkshire can be seen as a precursor to the Creative Economy. Time will tell if that continues to be the case.