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Warren Buffett on Investing in Gold

Written By Brian Hicks

Posted October 8, 2009

Editor’s Note: For a more updated report on investing in gold from our editor Adam Lass, please click here…

If Baltimore gets hit with a major snowstorm again, my colleague Luke Burgess is one guy I wouldn’t mind getting locked in the office with.

He’s smart. He’s down to earth. And he always does the dishes — even when they’re not his. What’s not to like?

Even still, Luke and I don’t always see eye to eye. . .

You see, for years now we’ve been going back and forth over investing in gold. When you’re talking to a gold bug, this is much like arguing with a priest about religion — it is a daunting task.

But no matter how hard Luke beats me over the head with his arguments, they just don’t sink in. In regards to gold, my opinion is — and has been — a whole lot closer to that of Warren Buffett than to King Midas.

Warren Buffett on Investing in Gold

About the shiny metal Warren once said:

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

You can add me to that list of head scratchers, although I do always keep just enough on hand to bribe the border guards if I had to.

Other metals, on the other hand — like copper, nickel, platinum, and silver — just seem to make more sense.

That doesn’t make gold as trade wrong, mind you. It’s just not quite my cup tea as a long-term investment — even as the price of gold tops $1000.

I bring this up because I received an e-mail from a reader that had this to share about an article I wrote in Wealth Daily last month about investing for retirement.

The letter came from a reader named David W:

Dear Steve,

I am in my 35th year as a CPA and financial adviser to high net worth individuals. Years ago I would have agreed with your assertions.
Today I say keep a minimum cash balance and go long gold and silver in large percentages.


Now first of all, I’d like to thank David for reading and for writing. Because the truth is I welcome others’ opinions, even though I may not always agree with them. After all, I never said I had a crystal ball.

Even still, I just can’t see why anyone would essentially go “all in” on gold and silver these days, especially with their retirement money.

Let’s face it: speculation is one thing, but gambling with money you can’t afford to lose is another thing entirely.

That being said, here’s why I’m not as big on gold as Luke and David are. . .

Gold as a Long-term Investment

Primarily, the “go all in” side of the argument has always represented something of an Armageddon trade to me. Because in order for you to really profit from it in the long term, things would have to fall apart and stay that way.

In that regard, I don’t know that I’ll ever be that pessimistic about the future — even though I understand the dangers of debt, the printing presses, and a devalued dollar. In fact, I’ve written about all of them.

What’s more, I’ve always wondered how the gold bugs planned to cash in on their big payday when it finally arrived. Personally, I would rather own 50 lb. bags of beans and rice.

I also never understood anyone who ever said that gold was a “can’t lose investment” because somehow it’s “real money,” not a fiat currency.

You see, fiat is a word that the gold crowd loves to sprinkle on top of every argument, as if the dollars in my pocket are as illegitimate as crooked third-world dictator. Just because it sounds scary doesn’t make it so.

The truth is gold as an investment is as fraught with risk as any share of stock, bond, or piece of real estate. You can and will lose money on the shiny metal if you buy the highs and hold on to it. It’s just that simple.

If you doubt this fact, just ask anyone who bought gold at the peaks in last gold craze. Thirty years later, the price would have to reach around $2100 today for that person to break even on an inflation adjusted basis. . . and that’s not including the carrying costs.

Keep in mind, gold is a static investment that produces no cash flow.

You Say Gold. . . I Say Stocks

Here’s the real reason I prefer stocks to physical gold: Stocks offer investors, a piece of a pie that grows, not one that will always remain the same size.

That’s the key difference for me — and why I would rather invest in a company with a bright future and dividend than a shiny piece of metal that might be the currency of the Apocalypse.

Now can stocks lose value? Of course they can. Over the course of the last 12 months, most of them have. But I have 5,000 of them to choose from. And if I do my homework, I’ll find more winners than losers over time — my portfolio proves this.

On top of that, I can spread my risk across several different sectors, limiting the downside in markets that aren’t correlated. And this is the real point in writing this article. When I want to sell, the market is always liquid enough for me to make an exit — something that is much more difficult to do with “hard assets.”

I suppose if I were a gold guy. . . if I had to choose. . . I would rather own the miners than physical gold itself.

As for the shiny metal, I do think gold can go higher here without question. In fact, looking at the chart of gold it may be breaking out of a head-and-shoulders bottom, which would entail a price target of about $1300.

Food for thought — especially if what I’m reading about the Chinese demand for gold is true and continues to play out.

In the longer term. . . say the next 10 years. . . who knows.

But as I said earlier, gold really isn’t my thing and I wouldn’t go all-in on it.

Still, this is a trade that bears keeping an eye on. And if it develops, I would be more inclined to go long GDX — the Market Vectors Gold Miners ETF — or an individual miner.

As for my pal Luke, I can’t wait to knock back a few beers with him at the Christmas Party this year.

I just hope we can both remember not to talk about gold. It drives my wife crazy.

Your bargain-hunting analyst,

steve sig

Steve Christ, Investment Director

The Wealth Advisory

P.S. When it comes to precious metals, there is one thing Luke and I definitely agree on: silver has more upside. To learn more about it, click here.