Despite all the reasonable arguments for being gold; Governments are running up huge deficits, gold is a store against uncertainty, gold is a good protection against inflation etc., it is not something a value investor should be investing in. Seth Klarman recently stated that he has never been so worried about the economy in his life. You would think he would be buying gold, since gold does well in times of uncertainty. But Klarman said the opposite, “Near its all-time high, it’s a very hard moment to recommend gold”. Benjamin Graham in The Intelligent Investor also expresses his opposition to investing in gold.
Jeremy Siegel in Stocks for the Long Run writes how gold has barely beaten inflation over the past 200 years. although I would say it makes more sense to evaluate gold returns only after 1971 when the US officially went off the gold standard.
First, by its nature value investing is contrarian. Going with the crowd who keep pushing gold up to higher levels every day is something a value investor should be afraid of. legendary investor Bruce Berkowitz's motto is "ignore the crowd". The best time to buy gold is when everyone is down on it like they were only 10 years ago. If you bought ten years ago you would have about a 5X return on your investment, not bad especially during "the lost decade".
More importantly, gold should altogether be avoided by any pure value investor. It is impossible to put an intrinsic value on gold. Companies can be evaluated in numerous ways based on earnings, assets, growth etc. However, gold is just a metal which has no intrinsic value. Any time you are buying without establishing a margin of safety you are more likely speculating than you are investing.
Value investors should stick to what they do best. Buy stocks at a discount to their intrinsic value. Value Investors should not be dabbling in gold.
Gold is also not a safe investment. A company with a strong balance sheet, moat, and trading at a discount to its intrinsic value can go down a lot in value without any deterioration in the business environment. This is because Mr. Market has its mood swings. You can buy lower and wait for your investment thesis to play out. However, if you buy gold at $1350 an ounce and it drops 50% there is no way to tell if it is trading above, at, or below its intrinsic value. That is why you will have no idea what do to if there is a sharp decline in gold prices.
Below is an excerpt from the interview with Buffett followed by a link to the rest of the article:
The first thing I notice on my most recent visit with Warren E. Buffett, who recently turned 80, is how incredible he looks. He would look terrific for 50; for 80, he looks like Charles Atlas. He's modest about it, as he is about everything. "It all works great," he says. "The eyes, the hearing -- everything works great ... which it will until it all falls apart."
The second thing you notice is that he is so smart it curls your hair.
My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"
"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"