Warren Buffett Is Right (And Wrong) About Gold

Warren Buffett is right – and wrong – about gold. And many others are, too.

Among their various characterizations of gold are the following:  it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.

And, of course, they are right.  Up to a point.  But they are right only because they are wrong.  And they are wrong because they view and analyze gold as an investment.  Gold is NOT an investment.  Gold is real money.

Even a majority of those who are favorable to gold, and should understand this distinction, don’t.

Hence, we see and hear statements similar to these:  1) “Gold should do  well under Trump” 2) “Investor optimism is hurting gold.” 3) “Higher interest rates will lead to lower gold prices” 4) “Deflation is good for gold” 5) “crisis in mideast will lead to explosive move upward in gold” 6) “gold will do well in a strong dollar environment”

The statements above are so totally wrong on so many counts that it is comical.  Ironically so, too, since they came from those who are primarily favorable to gold and supposedly understand it. Some are even considered experts.

But even if they were factually correct, there is only one thing we need to ask when talking about gold:  What is happening to the US dollar?

Gold’s value is not determined by world events, political turmoil, or industrial demand.  If you have in mind a particular scenario or series of events that you think are critical or important with respect to gold, then you need to reconsider them carefully as to what specifically would be the effect on the US dollar.  Nothing else matters.

The US dollar is the world’s reserve currency and gold is priced in US dollars.  If the US dollar continues to strengthen, then gold prices in US dollars will continue to decline.  If the US dollar weakens, then gold’s price in US dollars will go up.  It can’t be any other way.

None other than the highly respected and very successful Warren Buffett said the following in reference to a category of ‘investments’ which included gold:

“This type of investment (…assets that will never produce anything…) requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it more avidly in the future.” — Warren Buffett Feb2012

Mr. Buffett also said:

“Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire…” — Warren Buffett Feb2012

And during that same time period (1965-2012), gold was up a ‘staggering’ 4800%.

Is there any ‘investment’ of any kind that is up 4800% over a 47-year period that can reasonably be called ‘non-producing’?  And even if the term is technically correct, who cares?

So how did Mr. Buffett’s ‘productive assets’ category (stocks, real estate, farmland) do during the same time-frame?  From 1965 to 2012, the S&P 500 was up only 1400 percent.  And real estate was in the throes of a devastating crisis.

Admittedly, the S&P 500 figure does not include dividends reinvested, which makes a substantial difference over time.  That brings the total rate of return to closer to 6000%.  And, of course, since the time of Mr Buffett’s article, the numbers have widened considerably in favor of stocks.  But…

That reinforces my earlier statements.  Gold is NOT an investment.  It is real money.  And, even at its current price of $1200/oz, gold is up over 3500 percent since 1965.  Whereas, the US dollar continues to decline/lose value.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!