WHY WARREN BUFFETT HATES GOLD
Warren Buffett was on CNBC again this morning making some interesting comments about gold. Buffett really hates gold. He’s discussed this in the past, but elaborated on this in the interview. He said:
“when we took over berkshire, berkshire was selling at $15 a share and gold was selling at $20 an ounce. And gold is now $1600 and berkshire is $120,000. but you take take a broader example. if you buy an ounce of gold today and you hold it for 100 years, you can go to it every day and you could coo to it and fondle it and 100 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, it will produce for you every year. You can buy more farmland, all kinds of things. And you still have 100 acres of farmland at the end of 100 years. You could buy the dow jones industrial average for 66 at the start of 1900. Gold was then $20. At the end, it was 11,400, but you would have gotten dividends for 100 years. So a decent productive asset will kill an unproductive asset.”
Source: CNBC
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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60 Comments
Oh, he hates it indeed. So funny and sad to watch it…. In all his glory and wisdom, he sees nothing more important these days in modern economy to fight against. The cursed yellow metal – source of all our troubles.
Another reason to hate gold: the fanboys.
tough call – recently even hardcore goldbugs are talking about coming “correction”….
Always the same debate… Warren sees it from an accounting perspective: Gold is dead capital with no cash flow, therefore it is a bad investment.
What he always ignores is all the other perspectives investors can have on gold.
First it is not only a shiny metal you can buy to pimp up your girlfriend, it has some critical industrial use. Gold is one of the best conductors for electricity around. Especially with the advances in nanotechnology and electronics, gold will have an increasing importance as a commodity in the next decades and demand for it is unlikely to drop.
If you take a monetary view, we are talking about a finite resource that has been a medium of exchange for millennia. As a finite resource gold is also an excellent store of value. Therefore Gold is definitely money because it fulfills the 2 main characteristics of money: a store of value and a medium of exchange.
I admit that my credit card is a much better medium of exchange than gold, but I also wouldn’t put all my wealth into my current account because it is a poor store of value since cash gets eroded by inflation.
What also needs to be considered is the environment in which the investor finds itself. Are we in an inflationary environment or a deflationary environment? Is population growing? Is GDP growing? Are the central banks printing too much money?
Answer these questions and you will find out if gold is a good investment or not.
Btw, good luck Warren in finding some lucrative investments in this environment. But I guess your banker friends will give you more sweetheart deals and insider info’s very soon so that you can prove us how wrong we were.
Cullen,
First, I’m a fan of your so don’t want to come across too negatively with regard to your role here. But…..
He’s a liar and it gets annoying when people keep giving him a platform. He trades around core holdings…..he does NOT buy and hold 100% of his holdings like he always implies and like he implies here about gold. He needs to be more genuine or honest if he really wants to help. What if my parents or grandparents saw one of his interviews and had chosen to buy and hold enron, worldcom, lehman, aig, etc……you get the picture. You can always cherry pick the companies that worked out with buy and hold, like berkshire.
And I won’t even start about the fallacy of 100 year holding times (“had you bought in 1900….”). Deceitful advisory firms jump on stuff like this from grandfatherly, trustworthy old warren, and sell their clients on the idea. They include 100 year graphs of the dow just to reinforce it all…..I know because I was in the profession. But they don’t go on to tell you that the efficacy of the theory is totally dependent on the timing of your earning and asset accumulation years, in other words, the luck of birth…….his sermon was dead on had I turned 25 years old in 1954 or 1982. Had I turned 25 in 1966 or 1998 it would be disastrous.
Rather than give him a platform, call him on his claims under more realistic, real life circumstances. krb
Only organizations with no natural lifespan (like Berkshire or the Federal Reserve) can talk about 100 year holding times.
Nicely put, KRB. The problem with guys like WB and Charlie Munger is that they assume conditions now are similar to what they faced starting out–gosh, I worked hard and prospered, so why can’t you? They ignore demographics, historical trends, the effect of new technologies, and the unspoken help they received through the families’ connections (WB’s father was a congressman, and he attended Wharton; Munger went to Michigan, Cal Tech, and Harvard). All their lives they benefited from the rule of law and a relatively stable investing millieu while living in a country secure from invasion and despoilation both internal and external. It is telling that a few years ago when someone asked Buffett what he would suggest as a job for an ambitious young lad, he proposed becoming a paperboy. It’s hard to believe he is that out of touch.
For Munger (and by extension Buffett) to blithely call those who hold gold uncivilized exposes a basic lack of empathy for those facing situations vastly different from their own coddled lives. He jests at scars that never felt a wound.
I think Paul Tudor Jones put it best when he said Gold is just an asset like anything else. It has a time and a place and that time is now. It doesn’t mean you buy gold and hold it forever (the 100 year analogy is ridiculous), but in a low growth negative real interest rate environment, gold will continue to appreciate. When the conditions change, gold will be a sell.
Buffett is correct. Gold doens’t pay a dividend. It doesn’t produce anything. But gold is REAL money. In 1980 (1981 ??) 1 ounce of gold bought 1 times the Dow Jones, in 1999 the Dow-gold ratio peaked at about 44. And after 1999/2000 the Dow-Gold ratio went down significantly. Robert Prechter also calls gold REAL money. And Prechter says that after 1999 there was a “”silent crash”" because the dow-gold ratio went down, indicating that gold outperformed the Dow Jones. Some technicians see gold drop down to $ 1000-$1300. When the Dow-gold ratio goes back to 1 (like in 1980) then the Dow Jones goes back to that level as well. Ouch.
In the future I certainly would consider selling my gold and buying farmland (for pennies on the dollar).
Mr. Market
I hope the future was this morning. Gold just broke a 4 year trend line-
LIGHTS OUT on that yellow metal? I say YES.
CCI-looks terrible also.
Warren always acts as if people who like physical gold put 100% of their money in it. Nobody does that. Even hard core gold bugs usually think in terms of 5-20% of assets.
Also, why compare it to farmland? Is it reasonable to assume that most, or even a lot of, people should be buying an asset like farmland? Why not compare it with all the stupid things people do and buy with their money that go to zero, and then it would look wonderful?
The worst indictment against gold is that is has very marginal utility…other than being shiny and rare (great for jewelry), you really can’t do anything with it.
That’s why (as Warren says) productive assets are superior. Any asset that can consistently yield a return will usually out perform gold or silver (regardless of price appreciation)….
I’m glad the commenters on this blog are not pigging out at the Warren buffet.
Gold is not a very good inflation hedge. Gold does not pay a dividend. Gold doesn’t “do” anything. So why hold it?
IMO, the best reason is: because the central banks hold it. The money masters of the world know something most of us don’t. Namely, that gold is the only universally accepted real money and the last money standing.
So, you don’t own gold as an investment. You own it as insurance.
But here’s another question: WHY does Mr. Buffet constantly deride gold? WTF is it to him? I’d really like to know. What, is he a major shareholder in the Federal Reserve Bank of New York or something? What’s his agenda? Or is he just filling air time?
Buffett got a lot of sweatheart deals from the FED/Treasury. So, he thinks he’ll be alright in the upcoming deflationary storm.
I think he derides it because he thinks that a lot of Americans have been suckered into buying a lot of gold that won’t necessarily pay off for them. For most Americans, I think blue-chip stocks are a better long-term bet than gold. My two cents.
Yeah. When it comes to assets, I’m agnostic. But if you want to judge the performance of any asset, to get a true picture you have to base it on returns after taxes, fees and inflation. Even good quality, dividend-paying stocks are not as good as the financial press would have us believe. Especially over the last decade.
But I don’t compare gold to stocks or bonds. Again, IMO it’s best used as insurance. So putting a small percentage of a portfolio into gold bullion is a wise move. Then just hold it forever and don’t sell unless you have to.
BTW: Watching that video can be very harmful to your intelligence. Please don’t listen to those people, whatever your view on gold is. That’s not information, it’s folly.
Gold is money?
Gold is a form of money…Most certainly. Then again, my underwear is a form of money. The problem of money is not designating what is and what isn’t money, but getting others to accept it. So, anyone in the market for a pair of underwear??
Ha! That pretty much says it all. Gold was considered money at a point in the past (and a fairly short period from all accounts) but calling it “real money” is Austrian theory. Its no more “real” than underwear. In fact, in the all out doomsday scenario that many gold bugs invision, you may find that underwear is more valuable than rocks.
Name all the paper money sytems in the history of the world that have lasted more than two hundred years.
Nothing wrong with an insurance policy if you have the jack.
Careful, Cullen.
For someone whose charismatic (if somewhat wonky) iconoclasm has been noted by the likes of the lofty FT (congrats, by the way), who knows what kind of stalker may be lurking on the internet?
will you sign them with a sharpie? BID
Sure, but that will probably reduce their value.
No, used underwear is not money, even in the furthest reaches of fantasy. Once the package is opened no sane person would exchange any goods for used underwear. It has no value, it only has utility.
Gold is money because it fills a human need better than anything else in the world. It is indestructible, easily recognizable, easily divisible, compact, rare, and has no significant industrial uses. These qualities and several others make it the ideal form of money, and that’s why it’s been used as such for thousands of years, and up until very recently (1971) was still officially money in the U.S. and most of the world (even though it was not accessible as money to the common man). In many parts of the world (particularly Asia) it is still money today. In the west it is no longer money, but it’s still the best insurance against bad monetary policy.
Warren Buffet’s diatribes are correct in some ways (there are certainly better investments than gold), but are wrong in many other ways. Gold needs no management or monitoring, while farmland does. If you simply by 100 acres of land and put no effort into it you soon have 100 acres of fallow land that will have lost much of it’s value, after that the land will appreciate at about the same rate as gold, but the trading costs are much higher, and it takes much more time and effort to sell.
Similarly, successful long term investment in business takes a large amount of expertise and knowledge. Sure people can get lucky, but usually the uneducated lose (dumb money) their shirts when they try to invest.
Well, therein lies the problem with my underwear. No one wants it except for Kid Dynamite and my dog.
Gold is seen as valuable for the reasons you mention. In this sense, its “moneyness” is greater than my underwear, but its moneyness in a fiat monetary system is lesser (than fiat) because it’s simply not an effective medium of exchange.
I guess your underwear is also not made out of a finite resource such as gold Cullen. Everybody can make some underwear out of cotton, hemp or plastics or the same material they use to print our dollar bills. But nobody can create gold or replace it with something else.
1. You have no idea what my underwear is made out of!
2. I am not disagreeing with the idea that gold is money so I am not sure what the goldies are all defensive about!!!!
I don’t think I’m being defensive about gold, the main point is that Buffet’s statements are in part true, but entirely misleading, because it’s comparing apples to oranges, and he is also leaving out some critical information (such as farmland requiring a lot of work and management or it loses value), and his examples are very cherry picked.
Of course there can be better ways to increase ones wealth than holding gold, but most people are unable to take advantage of those ways, and in fact are more likely to lose wealth than to increase it were they to try. Gold is best compared to holding cash, or maybe a money market, both of which are inferior in my opinion.
I wonder why Buffet is so adamantly misguiding people, particularly when he doesn’t even practice what he is preaching. The title of the posting asks the same question, but doesn’t provide an answer. Even if you agree Gold is money, WEB does not appear to, he seems to believe only fools would hold it, and it is in fact a bad thing for anybody to do.
Fiat is currency, but not really money, as one of the critical elements of being a money is the preservation of value, which none have been able to do.
What the western governments have tried to do (and fairly successfully over the last few decades) is diminish the “moneyness” of gold, while convincing people that fiat currency actually has “moneyness”. This has happened quite often in the past, and it looks to me like the pendulum is now swinging back the other way and gold’s “moneyness” is on the rise, while fiat currency is waning. While that’s happening, holding / buying gold will increase ones wealth.
Personally I’m happy to have folks downplaying gold, it helps keep the price lower while I’m acquiring.
Yes, I’ve been very clear that I disagree with Buffett to some degree. Gold can serve as a good hedge, but should never, in my opinion, be the cornerstone of one’s investment portfolio….In fact, I probably wouldn’t weight it any heavier than 5%….But that’s just me.
I agree that diversification is critical, but I feel gold can be a cornerstone. I’m personally comfortable in the 25-50% range, but I certainly understand why others may not be!
To each his own! If I were to build a pyramid of portfolio ideas it would be 1) Always invest in yourself; 2) Always invest in human progress & innovation; 3) Establish risk controls (hedges, etc). So gold would fall in the 3rd piece there for me….Not unimportant, but by no means THE MOST important….
The real question here is this – are there circumstances when moneyness of gold can become higher than fiat, and how likely are these to happen. Buffet implies it is impossible. Other people think it is likely. As we all understand, in the end it all depends on the number of people putting gold ahead of fiat.
What is interesting about Buffet thesis though, is that according to his logic and examples, cash is even worse “asset” to hold than gold. The guy should be 100% invested! And yet, he is not. Just look at Berkshire BS – record amount of cash is there. Apparently, he understands that “money” sometimes can be better holdings than “assets”. Yet, in his multiple interviews regarding the subject, he consistently compares gold not to fiat but to “shares” or “land”. Thus is his reluctance to discuss “moneyness” of gold, which might be much trickier than blabing about how good to grow potatoes on your small parcel of productive land….
Buffet is right even though he doesn’t use the best analogy.
Interesting:
Marshall Auerback of Pinetree Capital just said on BNN that if he had Mr. Buffet’s connections to the government then maybe he wouldn’t need to invest in gold either. Timely.
“The problem of money is not designating what is and what isn’t money, but getting others to accept it.”…Exactly !…and as an example, anyone else notice the strange phenomenom of Tide detergent being accepted as currency in the black market..? (no kidding !)
http://www.manufacturing.net/news/2012/03/thieves-target-tide-for-detergent-black-market
Buy (or sell short) Gold to your heart’s content…just have an exit strategy to the number before you enter.
Many people hate gold. It’s already priced in. Last 100 years is not good for gold, because there are less percentage of people who likes gold today compared to 100 years ago. It’s a matter of “will more people hate or like gold in the future?”
Well then what about gold mining companies??
I don’t get the whole debate about gold. Own it if you want, don’t own it if you prefer not to. Who cares? Not sure why the media is fascinated by buffet or anyone elses view on gold. IMHO, it’s a waste of time to talk about it.
Cullen – I’m new-ish to your blog and still trying to wrap my head around a lot of the longer pieces you’ve written. But here’s my question about gold:
Suppose we have a planet with only 2 countries, A and B, and they each have their own currencies (and full mobility of capital/labor/goods/services, no tariffs, etc). If the market expects that country B will print a lot more of its currency while A will not, A’s currency will appreciate relative to B’s.
If the above paragraph is correct, we can define A’s currency as “gold”, define B’s currency as “USD + JPY + SFR + EUR + GBP”, and the case for appreciation in gold is quite strong (if we believe those countries will need to print money).
Leaving aside that I don’t have a good grip on the technical meaning of the phrase “printing money”, am I right?
We sort of have that right now with Europe. Europe’s not “printing money” like many other countries and they’re all embedded in a single currency system. It’s a disaster….And let me know if you have any question grasping the other concepts. I am here to help….
@kafkaesque,
not exactly K. it will depend on the value of the goods and services produced by each country. your example assumes an equality of economies which may not happen. Suppose country A, which doesn’t print, likes to sit on their a$$es and practice birth control, while country B is industrious in both procreation and work and doubles their population. Printing money may simply be necessary to keep up with the goods and services and population explosion, yet result in no depreciation in relation to the other currency.
No matter what currency Zimbabwe chose, it would probably depreciate in value in relation to a country whose currency of choice was backed by real productivity.
Good luck in your explorations! this is a great site to hang around!
best,
rhp
«Suppose country A, which doesn’t print, likes to sit on their a$$es and practice birth control, while country B is industrious in both procreation and work and doubles their population. Printing money may simply be necessary to keep up with the goods and services and population explosion, yet result in no depreciation in relation to the other currency.»
This points to the secret wish of the gold bugs, and at the same time the reason why using a finite-supply numeraire as currency is destructive.
Suppose that both country A and B used a finite quantity of gold as the numeraire. In country B GDP doubles, then all the gain is capture by owners of gold.
Therefore if the quantity of numeraire is fixed, anybody who invests into raising productivity orm production loses all the benefits to those who have hoarded the numeraire, and therefore all investors will only hoard numeraire, hoping that some patsy will improve productivity or production or production for their sole benefit. Which is the goal of goldbugs.
Therefore a well managed country will adjust the quantity of numeraire to productivity and production. Of course this brings into principle the principle that “the price of freedom is eternal vigilance”.
Because like there is no good risk-free returns to be had from absentee ownership, there is no supermagic automatic rule, be it using gold as currency or taxing only land or fantasizing that markets have godlike powers, that will result in a good management of the economy.
It is all about making good calls of judgement, and taking risks. and adjusting the calls of judgement when bad outcomes happen.
Women like to wear gold, so gold can get you laid. That’s its real value, plain and simple.
I work in an industry (electrical connectors) where gold is CRITICAL. The increase in price has been painful.
There is no substitute yet (but we are working on it). Normal folks will see it as a $10 or $20 adder to their iPad or smart phone. In other words, they won’t notice it.
Like most comparers it depends on what dates you choose. If you are choosing this century and had all of your retirement money in stocks not gold you would have some deep regrets. And also isn’t the long-held traditional argument that real estate always goes up over time? But that argument has fully dissolved. In the meantime I would strongly assume if you have been investing in gold especially the metal, far away from the prying eyes of the government, you would be smiling at the Oracle. By the way have you seen a chart of Berkshire superimposed against the price of gold?
And we are still in the early innings of the game. The real drama is yet to come.
So why did BH buy into precious metals?
http://www.marketwatch.com/story/berkshire-unit-to-buy-cookson-precious-metals-unit-2012-02-23“
«Like most comparers it depends on what dates you choose. If you are choosing this century and had all of your retirement money in stocks not gold you would have some deep regrets.»
Buffett has made two different arguments: one is that gold is just a metal, and has no intrinsic value except its industrial uses, and generates no revenue. As to this it is just like cocoa beans or tins of mackerel (both have been used as currencies). Therefore productive assets are in general much, much preferable to gold. That’s absolutely right. It also applies to speculation in housing, not just in gold.
The second argument is that passive, absentee-landlord style ownership of productive assets is a good idea, as the risk-free returns of passively invested buy-and-hold productive assets is good over the long term.
That’s completely false: only carefully managed and looked after productive assets have a good rate of return, which is at most over the long term around 3% real returns.
The reason for that is that passive, absentee-landlord style ownership is a very weak position, and there are many greedy shysters, from stockbrokers and CEOs downwards, working hard full time to relieve absentee owners of whatever fruits of the property, or chunks of the property they can grab.
Buffett earns his significant returns by living, breathing accounting, markets, arbitrage, far from an absentee properietor; and he has said that in his life he has made around 10 critical stock picks, ans they were all essentially macro bets on the fortunes of the USA middle class, and now on the fortunes of the BRIC middle classes.
When he calls for absentee investors to put their money in the stock market and then watch it grow he is entirely misleading them, especially when he uses stock indices; because there are periods of good times, but also periods of bad times, as previous commenters pointed out, and anyhow the indices are grossly inflated by survivorship bias and insufficient adjustement for inflation.
As the saying goes, those are all broker/CEO yachts, where are the investor’s yachts? Well, the stock markets are grossly rigged for the benefit of insiders who skim the cream at the top by very actively, full-time managing of the benefits of their inside positions.
Two of the worst financial crisis in the history of U.S. The Great Depression and 2008 crash. Were there people trading gold for goods and services. I doubt it, but if there were it was rare. More than likely they were trading in their gold at a reduced price for the dollars.
and anything else of supposed value for none other than the dollar.
Gold hasn’t been $20 an oz. since before 1935. $20.68 per oz to be exact. Who is buffet kidding? Leftists like him ride on fiat currency to fund keynsian economics. Gold is th nemesis of that system. Aside from that he is talking a red herring: most people don’t buy gold because it will give the most growth–without inflation it wouldn’t grow at all–people buy gold as a floor against the collapse of the markets. As an example the real estate bubble which I understand mr. buffet had invested in.
Its more Gold vs Cash, not Gold vs the awesome growing asset.
Sure, that’s a valid view.
The more valid version is that which prescribes to the Keynes Beauty Contest argument.
Buffet has a very specific investment style, gold doesn’t fit into it for the reasons he mentinos above.
The mining of gold leaves utter death to the environment it touches.
Poisoning of water and land, people and posterity.
Investors should know what they “OWN”, and accept the responsibility for the results of their actions.
What productive assets have lasted 5000 years….none. “Stocks” are a recent invention even in this country…not the rest of the world which has not been so fortunate. And gold would still sell for $300 an ounce if ours and world debt hadn’t spiraled out of countrol…..now nobody wants to PAY THEIR BILLS BUT KEEP ON SPEND SPEND SPEND….THE MATH IS UNSUSTAINABLE…better hold your gold……ew
oh no what shall The US ever do about its savings er I mean Debt problem
Try this experiment – calculate the price of the median house, the price of an average new car, or the price of a gallon of gas in terms of ounces of gold in 1940, then do the same today. You will find that it would take roughly the same amount of gold to buy stuff in 1940 as it does today (a little more gold for some things, a little less for others).
The point is that gold maintains its purchasing power much better than any paper currency, BUT over the long-term it doesn’t increase in purchasing power.
Owning equities or other assets that generate a return, has, over the very long-term, resulted in an increase in purchasing power, and has been far better than owning gold. This is WEB’s point. Of course, there have been many lengthy periods, such as 1929-1949, 1968-1981, and from 2000-present, where equities have been terrible and it would have been much better to own gold.
So, IF you can invest in a way that will increase your purchasing power, then there is no reason to own gold. Unlike WEB, most investors haven’t shown the abiltity to do this over the long term. If you can’t invest in a way that will increase your purchasing power, then by owning gold, you can at least maintain your purchasing power.
If we had a stable monitary / and government economic policy, there would be no need to seek the safety of gold. But we don’t. So there is.
All wrong…Buffett hates gold because emotionally he is still a teenager, kind of like a savant and he is rebelling against his father (ironically someone Munger considers uncivilized)…Some reporter should just ask Buffett, was your dad out to lunch?
Human Freedom Rests on Gold Redeemable Money
By HON. HOWARD BUFFETT
U. S. Congressman from Nebraska
Reprinted from The Commercial and Financial Chronicle 5/6/48
Congressman Buffett stresses relation between money and freedom and contends without a redeemable currency, individual’s freedom to sustain himself or move his property is dependent on goodwill of politicians. Says paper money systems generally collapse and result in economic chaos. Points out gold standard would restrict government spending and give people greater power over public purse. Holds present is propitious time to restore gold standard.
http://www.fame.org/pdf/buffet3.pdf