Home > News & Commentary > Why Warren Buffett Doesn’t Like Gold, and Why I Do (GLD, GDX)

Why Warren Buffett Doesn’t Like Gold, and Why I Do (GLD, GDX)

Warren Buffett

Warren Buffett

Warren Buffett is a strictly a long-term investor with a holding period of “forever”. The fact that he is an investor prevents him from investing in gold. Gold will never earn any money, nor will it ever pay out dividends to its holders.

The only thing gold can do is precisely why I have been buying; it works extremely well as a store of value. An average automobile in 1950 would have cost the equivalent of approximately 30-40 ounces of gold. The same holds true today at the recent spot gold prices above $1000. Had you instead decided to hold cash, you would not even have enough money to pay for the down payment.

The most common reason cited by people bullish on gold is inflation and although it is certainly a contributing factor, I do not feel that this is the most important issue affecting gold prices. Instead, I believe that there are three other overarching trends taking place right now that are exerting much more upward pressure on the price of gold.

1.) Overall Depreciation of Currency
Normally if one government prints a lot of money, the currency will drop relative to other currencies. However, in situations like we have today when many governments are printing money (and some are managing their currencies to subsidize exports like the Chinese), you get a situation where fiat currencies as a whole become worth less relative to other stores of value such as gold and other commodities. There is only so much gold on this planet and it is usually pretty hard to get to which helps fundamental elements of supply and demand.

2.) Excess Liquidity and a Truly Damaged ‘Real Economy’
Despite the recent stock market rally, the real economy is still hurting badly and even though unemployment has been improving, we are still a long long long… pause… long way from adding jobs. Governments are also intervening in the markets in very unprecedented ways in the form of legislative overhauls, a massive stimulus bill that served mostly pork-barrel interests and the new role of the Government/Federal Reserve as the biggest lending facility in the world.

The poor state of the economy, along with the extreme uncertainty regarding the future business landscape and poor availability of lending facilities, it is not surprising that investors and entrepreneurs aren’t rushing into the real economy. They are instead putting their money into stocks, bonds, gold and commodities hoping to make at least modest return while also preserving the value of their money as central banks around the world flood the markets with liquidity.

3.) There is no Price Ceiling on Gold Prices
People in general don’t buy gold as an investment. They buy it because they feel they need to in order to avoid losing something; in this case, it is to protect investors and central banks from depreciating global currencies, inflation and political instability. The price they pay for this protection is simply whatever they can buy it for.

David Goldman (ironic last name) pointed out in a piece from a few weeks ago that Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. If central banks were to increase their gold holdings by just one percent, it would require approximately 48,000 tons which is more than 20 times annual mining production.

If the planet is about to be hit by a meteor and there is only enough room for 100 people in an underground bunker; the people who have the most cash (or the biggest guns unfortunately) are going to end up in the bunker.

I don’t think gold will begin to fall again until we have incontrovertible evidence that the situation in the real economy is on the mend. Until then, I will try to have at three to eight percent of my portfolio in gold through the actual commodity (GLD, purchased @$99.65 on 10/5) and gold miners (GDX, purchased @$48.64 on 10/8). I hold a small legacy position in Barrick Gold Corp. (ABX) that I see no reason to sell, but I also see few reasons to buy it. I will be doing further research into gold mining stocks in the future.

Gold is very volatile and I recommend gradually easing into positions on dips if you are going to play in this area.

-MJB

Disclosure: Long: GLD, GDX and ABX

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  1. November 17, 2009 at 2:45 AM

    Are you a writer? Do you allow guest posts? Nicely done, Steven.

  1. January 11, 2010 at 11:00 PM

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