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What Warren Buffett Gets Wrong On Gold

Kitco News

(Kitco News) - Warren Buffet, CEO of Berkshire Hathaway, is known for his pernicious views on gold but his latest bout of negativity misses the point of yellow metal’s true investment value, according to some analysts.

The Oracle of Omaha made some ripples through the gold market over the weekend as he compared the precious metal to the S&P 500. During his presentation Saturday at the Berkshire Hathaway's annual meeting he compared a $10,000 investment in gold to a $10,000 investment made in the S&P 500 Index in 1942 – he acknowledged that the S&P 500 didn’t exist in 1942.

He said that an initial $10,000 investment in the stock market index 76 years ago would be worth $51 million today. Meanwhile, during the same time frame, $10,000 in gold would be worth $400,000.

"In other words, for every dollar you could have made in American business, you'd have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines," Buffett said in his presentation.

"While the businesses were reinvesting in more plants and new inventions came along, you would ... look into your safety deposit box, and you've have your 300 ounces of gold. And you would look at it, and you could fondle it, I mean, whatever you wanted to do with it. But it didn't produce anything,” he added.

However, according to some commodity analysts, Buffett’s comments, while correct, misses the point of why investors should invest in gold.

Colin Cieszynski, chief market strategist at SIA Wealth Management, described Buffett’s view on gold as a “little too simplistic.”

He added that the Berkshire Hathaway CEO is not wrong, but the gold market is a lot more nuanced. Comparing gold to the stock market is like comparing apples and oranges, he said.

“Gold is not in a portfolio to make money,” he said. “It’s a hedge against inflation; it’s a hedge against currency devaluation; it’s a hedge against crises. It doesn’t generate wealth, but it is a store of wealth.”

Todd Horwitz, chief market strategist of BubbaTrading.com, said that investors should not ignore gold’s value as a safe-haven insurance policy. He added that while he is an advocate of holding physical gold, he said that investors shouldn’t be wholly invested in the metal. It is meant to be a portfolio diversifier.

“There is no better investment in the world than the stock market. There is no better place to compound your investment” he said. “You will never get true value out of gold, but you will get a good night sleep knowing you have it. Gold will carry its value forever.”

Horwitz added that he advocates investors hold up to 10% of their portfolio in the physical metal as a store of wealth.

Phillip Streible, senior market strategist at RJOFutures, equated gold to home insurance. He added that insurance doesn’t add value to a home, but it does protect it when it’s built on the side of a cliff.

Streible said that gold is a tactical asset to own in the midst of a crisis and during specific periods it has shown to outperform equities.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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