Does Gold Have a Place In Your Portfolio? Warren Buffett and I Say No

There is perhaps no other asset more closely associated with wealth, opulence, and success as gold. It's shiny. It's beautiful. If you dropped it on your toe, it would hurt (a lot, because it's heavy). It's also an inflation hedge, a commodity that behaves somewhat like a currency, and a staple of the diversified investment portfolio. Right?  


Fools, its time we banish gold from the lexicon of value investments. 

Why buy gold in the first place?
I've written about this before, taking a deeper dive into what actually drives the demand for gold. Click here for the background. Here is the short version.

  • Reason 1: Intrinsic Value -- Gold does have use in our economy. Jewelry is the most visible example, but gold also has a place in dentistry, technological components, and other industrial applications.
  • Reason 2: To Hedge Inflation -- Perhaps the most widely accepted function of an investment in gold is to protect your hard-earned wealth from the ravages of inflation. Unfortunately, history doesn't really bear this out. Adjusting for inflation, gold has traded recently at half its value from 1980. If your investment is going to lose 50% of your principal, then I think it's safe to say that the hedge failed, no matter what happened in the currency markets.
  • Reason 3: As a Liquid Alternative to Cash -- Gold is a unique asset, in that in many ways it behaves very similarly to a currency. Many successful currency traders have made a career out of arbitrage trades between gold and various other currencies (for example, buying gold in Japanese Yen and the selling it in in U.S. dollars. If conditions are right, this style of trading can be very, very lucrative).

For many investors, its a combination of reasons Nos. 2 and 3 that attracts them to gold. The metal's liquidity is advantageous to that of equities because gold is a real physical asset -- recollect the pain it would cause your toe. A stock certificate? Not so much. So gold is an asset that is kind of like a currency, can't be destroyed by a weekend bankruptcy filing, and can be converted back to cash essentially instantly. I get the appeal. I really do. 

But I'm not buying gold. Not happening. Bull, bear, or apocalypse, there won't be any bullion in my safe or any units of the SPDR Gold Shares  (NYSEMKT: GLD) ETF in my portfolio. 

The Oracle of Omaha Speaketh
In Berkshire Hathaway's  2011 letter to shareholders, Warren Buffett spoke directly about gold. Buffett is not a fan. In his own words, Buffett explained his thinking:

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 ExxonMobils (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?

The entire point of investing is to spend dollars today to buy something that will create more wealth in the future. It can be through cash flow and net income that lead to dividends and retained earnings. It can be through price appreciation in the markets --value driven or speculative. 

I'm firmly in the value-driven boat, and gold simply does not create value. It historically has been a store of value, but will be in the future only so much as the collective psychology of the markets continues to view gold as a near-cash, psuedocurrency, inflation hedge.

Why not hedge inflation with value creation?
Berkshire Hathaway's per-share book value has increased 19.7% annually from 1965 to 2012. Over that same time period, average inflation maxed at 13.5% in 1980. Inflation averaged more than 10% just four times -- 1974, 1979, 1980, and 1981.

And just like in Buffett's example in 2011, Berkshire Hathaway is clearly a "pile 2" type of investment choice. Gold is still just gold, while Berkshire is now a moneymaking machine reporting a total gain for shareholders of $24.1 billion in 2012. And it should be noted that Buffett considered this $24.1 billion as "subpar." Gold zero, Berkshire $24.1 billion.

Buffett is not alone among the very smart market followers. Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee in July that "nobody really understands gold prices and I don't pretend to really understand them either."

All that glitters is not gold, and I don't even want the gold
People will always need goods and services. They need food, shelter, clothing, and services. Businesses will always arise to meet those needs. And businesses will always arise to meet the needs of other businesses. Gold, however, will always just be gold.

And that's why I'll never invest in gold. 

The article Does Gold Have a Place In Your Portfolio? Warren Buffett and I Say No originally appeared on

Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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