Many investors like to invest in gold, for a variety of reasons. Gold is perceived as a 'safe haven asset' that can also function as an inflation (or deflation) hedge. It's also viewed by some as 'real money', and thus also serves as protection against money printing and currency debasement. But what would Warren Buffett think about that?
Warren Buffett is universally regarded as one of, if not, the best investor of all time. Even though he is now in his 90s, Buffett's astute investing practice over more than six decades has resulted in him amassing a fortune of over US$120 billion today. Buffett has famously gotten wealthy by investing in shares. Some of his investments, such as buying Coca-Cola shares back in the 1980s, have become woven into investing folklore.
So what does an investor of Buffett's mythical status think about investing in the precious metal?
Well, not to sugarcoat it, Buffett hates the idea of investing in gold.
Why does Warren Buffett hate gold?
Here's what he said about the yellow metal in the 2011 letter to the shareholders of his company, Berkshire Hathaway:
Gold… has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
In 2009, he told CNN a similar thing:
The one thing I can tell you is it won't do anything between now and then except look at you… 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.
Here's another point Buffett made to CNN in 2011:
I will say this about gold, if you took all of the gold in the world it would roughly make a cube 67 feet on a side… and that would be the whole thing. Now for that same cube of gold it would be worth at today's market prices about $7 trillion. That's probably about a third of the value of all the stocks in the United States. So you could have a choice of owning a third of all the stocks in the United States or you could have a choice of owning that little block of gold, which can't do anything but kind of shine there and make you feel like Midas or Croesus or something of the sort.
Now, for $7 trillion… you could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally… And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven Exxon Mobiles. Just think of that. Add $1 trillion of walking around money… maybe call me crazy but I'll take the farmland and the Exxon Mobiles.
So Buffett's central theme here is that gold, unlike shares, is a non-productive asset. Unlike a company, a property or a farm, it doesn't pay you to own it. And that fundamentally makes it a flawed investment.
Gold does not allow one to compound their money like a company does. What's more, gold actually costs you money to own it. As Buffett pointed out in his 2009 CNN interview, someone who owns gold bullion needs to pay for storage, insurance and other costs. So while you are waiting and hoping for it to increase in value, it's bleeding your bank account.
In stark contrast, a company might be paying you dividends and reinvesting some of its earnings in order to increase its profits and dividends into the future. A property or a farm yields returns in the form of rent and produce. Buffett would call these 'goose eggs'.
An investor can use those eggs – those dividends, that rent, or that produce –to reinvest in other productive assets and become wealthier over time. The owner of gold doesn't have that luxury. Indeed other income will be needed to just maintain that 'investment'.
There's a reason why Buffett's company Berkshire owns hundreds of billions of dollars worth of shares and absolutely nothing when it comes to gold. It's how Buffett got rich in the first place and has managed to compound that wealth over time. This is a lesson that all ASX investors, and especially those that are tempted by the lustre of gold should certainly take heed of when thinking about their own portfolios.
