Would You Consider Gold As An Investment?

Would You Consider Gold As An Investment? March 1, 2012

While many investors are still asking the question, “is gold a good investment?” some are challenging the idea that calling gold an investment is the right thing to do at all.  One of the most prominent voices to speak against the gold investment argument is none other than Warren Buffett.  Arguably one of the greatest investors of all time, it’s worth listening to what Mr. Buffett has to say about the ‘great gold investment debate.’

Warren Buffett recently reaffirmed his stance about gold when he addressed Berkshire Hathaway investors in his annual letter to the shareholders.  Here’s what he had to say about gold:

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

So obviously Warren Buffett doesn’t view gold as much of an investment.  It’s utility (or usefulness) is weak, the motivation behind gold buyers is fear, and it doesn’t produce profits.  All these reasons make gold an object of ‘speculation’ in Buffett’s mind, leaving no room to call gold an investment at all.

While you might not agree 100% with Buffett, consider where he’s coming from.  He is wired to run companies that produce returns for its investor.  His companies’ profits are generated from sustainable products that fill a need in society.  The demand for these products is based on the wants and needs of consumers – they’re not based on fear and speculation.

The price of gold is constantly moving up and down because of speculation and futures and dividends contracts.  It’s value cannot be pinned to anything more than what someone else is willing to pay for it on any given day.  Gold has no earnings, dividends, or ability to produce more gold.  It is simply a store of value.

Finally, there’s something to agree on: gold is a store of value.  In times of uncertainty, gold has been a safe haven for people to store their money because it could easily be transferred from one person to another.  But, just because something is a good store of value doesn’t mean that it’s a good investment.

So Is Gold Worthless?

Obviously gold isn’t worthless.  It will always command a price – the question is what price.

For investors like Warren Buffett, relying on fear and uncertainty to determine the price of something isn’t a preferred business model.

Finding income producing resources like businesses, farms, and real estate will produce a much more consistent return in the long run.  Businesses like these allow you to make real projections and estimates with respect to profitability, something that gold doesn’t have.

Still Want to Put Your Money In Gold?

If you’re still set on buying gold, ask yourself this one question, “Do I want gold because I think of it as an investment or because I view it as a store of value.”  If you say, ‘both’ you might as well just say that you’re thinking of it as an investment.  Be honest with yourself – if the idea of gold doubling again causes you to want to rush to buy those shiny nuggets, you’re playing a game we call speculation.

Gold is near record highs and may even continue to rise because of uncertainty in the United States and Europe.  If the lure of rising gold prices is your prime motivator to buy gold, you’re viewing it as an investment.

If we’ve learned anything from history and recent bubbles (ex. Internet bubble, housing bubble, tech bubble) we would recognize that gold has the very same characteristics of a bubble waiting to pop.  The problem is that knowing exactly when the bubble will burst is extremely difficult, if not impossible.

For Warren Buffett, he’s staying away from that bubble.  What about you?


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