[Editor’s Note: Sorry about not getting an article last week. I’m hoping to get another out later this week while I’m on vacation to make up for it.]
For years, I’ve always said that I don’t like gold. I’ve always heard that if the sh*t hits the fan, it will be the savior. Whenever I heard that, I pictured a world like Mad Max and couldn’t figure out why a colored rock would be useful. No one would be able to do anything with it. It has essentially no intrinsic value. (It is a really good conductor of electricity, but that’s not significant in the Mad Max world). However, I can see how a barrel of oil could be useful.
Over the last two years, gold has laughed at my ignorance. It has doubled in price. It has gone from around $2000 an ounce to $4000 an ounce. That’s almost Bitcoinian growth.
So it seems like a good time to revisit the case for gold. To do this, I’m going to highlight three articles that caught my attention over the last month.
Ben Carlson’s blog, A Wealth of Common Sense, is aptly named. At the above link, he breaks down the performance of gold vs. the S&P 500 in each decade since the 1970s. In the 1970s, there was high inflation, a weak dollar, and a few other things that caused gold to destroy the S&P 500. In each of the next four decades, gold got destroyed. That’s a large reason why I don’t like gold. For almost my entire life, gold has been a pretty terrible investment.
In the 2020s though, gold has outperformed the S&P 500 by a decent amount thanks to its latest run. In the end, Carlson stands by his decision because the long-term performance of gold is so terrible compared to stocks.
That brings me to the second article.
Warren Buffett is the perfect example of why investing in stocks beats investing in gold. He didn’t grow his net worth to nearly 150 billion by buying and holding lots of gold.
In the CNBC article above, it covers what Warren Buffett said about gold at the 2011 Berkshire Hathaway annual meeting. I’ll be quoting a lot of it, because I can’t possibly explain it better than Buffett himself. I’ll break it up a bit because it is a lot to read (but well worth the time):
“[There are] three major categories of investment. And you ought to think very hard about which category you want to be in before you start thinking about the choices available within that category.
Now, the first category is anything denominated in a currency. It could be bonds, it could be deposits in a bank, it can be a money market fund, it can be cash in your pocket.
And the — if you will reach in your pocket — I don’t like to do this, but — and pull out your wallet —
You’re watching an historic event. (Laughter)
If you look at this — and, I might point out, this is a one [dollar bill]. Charlie [Munger, Buffett’s long-time late partner] carries a [hundred] —
On the back of it, it says, “In God We Trust.” And that’s really false advertising.
The — if Elizabeth Warren were here, she would say, quite properly, it should say, “In Government We Trust,” because God isn’t going to do anything about that dollar bill, you know, if government does the wrong things, in terms of keeping it as valuable as it was when you parted with it to buy a bond or put it in a bank.
Any currency-related investment is a bet on how government now, and in the future, will behave…
Almost all currencies have declined in value over time. I mean, it may be built into almost any economic system that it will be easier to work with a value of currency that declines in value than a currency that appreciates in value, and the Japanese might reaffirm that here with their experience.
So as a class, currency-related investments, whether they are in the UK, or the United States, or anyplace else — unless we’re getting paid extremely well for having them — we do not think make much sense.”
As you can tell, he’s not a big fan of currency investments.
“The second category of investments regard items that you buy that don’t produce anything but that you hope someone will pay you more for later on.
And the classic case of that is gold.
And I’ve used this illustration before, but if you take all of the gold in the world — don’t get too excited now — and put it into a cube, it will be a cube that’s about 67 feet on a side. That would be 165,000 or 170,000 metric tons.
So, you could have a cube — if you owned all the gold in the world — you could have a cube that would be 67 or 68 feet on a side.
And you could get a ladder, and you could climb up on top of it, and you could say, you know, I’m sitting on top of the world, and think you’re king of the world.
You could, you know, you could fondle it, you could polish it, you could do all these things with it. Stare at it. But it isn’t going to do anything.
All you are doing when you buy that is that you’re hoping that somebody else a year from now, or five years from now, will pay you more to own something that, again, can’t do anything, but you’re hoping that the person then thinks that somebody else will buy something five years later from him.
In other words, you’re betting on not just how scared people are now of paper money, you’re betting on how much they think a year from now people will be scared two years from then on…”
He goes into the third category of assets, which is buying something that will produce for you. It could be a farm for food or business. Buffett doesn’t look for businesses that he can flip to someone else at a higher price. He looks for the money that the business creates.
It also mentions that Charlie Munger thought it was “peculiar to buy an asset which only will go really up if the world really goes to hell. It doesn’t strike me as an entirely rational thing to do.”
I agree with Warren Buffett and that’s a reason why I don’t like gold.
Finally Nick Maggiulli does a lot of analysis and finds that REITs and equities actually do better than gold during inflationary times. That’s well worth a read.
All of these articles have convinced me that I really don’t need to have gold in my portfolio. It seems like the professionals who recommend gold only advocate for a small amount anyway. So it’s probably not going to make a huge impact anyway.
