1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

I Am With Warren buffett On Gold

Ben Stein author of The Little Book of Bulletproof Investing, Yes, You Can Time the Market!, How Successful People Win, among many other booksrecently interviewed Warren Buffett. The main talk of the conversation was about gold. Recently I have been thinking about how many value investors are recommending gold. At the recent Value Investing Congress, several speakers advocated buying gold. It is nice to hear from the Oracle that at least one great investor is advising people not to buy gold.

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?"


Disclosure: None


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 4.7/5 (28 votes)


Mo77 - 7 years ago    Report SPAM

Buffett said this about Gold on CNBC back in 2009:

I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot — and it's a lot — it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.

Mo77 - 7 years ago    Report SPAM

What a great article. Unfortunately it won't catch on with regular folks because it makes too much sense.

I came across online that all the gold above ground comes to approx 5 billion ounces.

At $1400/oz that comes to 7 trillion.

At the conference did anyone discuss or give thoughts on how leveraged they thought the gold trade was?

From my understanding of financial history with almost any bubble (housing bubble of 2007, tech bubble of 2000, the panic of 1907) there needs to be some form of leverage involved to get an asset to a ridiculous price.

Sivaram - 7 years ago    Report SPAM

Mo77: "From my understanding of financial history with almost any bubble (housing bubble of 2007, tech bubble of 2000, the panic of 1907) there needs to be some form of leverage involved to get an asset to a ridiculous price."

I personally don't think you need leverage for there to be a bubble. Many stock market bubbles have little leverage. Yes, you see margin debt go up near the peak but very few of the stocks are purchased with debt yet we see stock market bubbles. Similarly, commodities were in a big bubble (including gold) in the late 70's/early 80's and there was little leverage involved (as far as I know).

The most important thing that marks bubbles is valuation! If assets are wildly overvalued, they will likely fall whether it is backed by debt or not.
AlbertaSunwapta - 7 years ago    Report SPAM
In the 1970's Buffett was downbeat on stocks as inflation rose. Asked why he held so much in equities he said:

"Partly, it's habit"..."Partly, it's just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices." - Warren Buffett in 1977
Jonathan Poland
Jonathan Poland - 7 years ago    Report SPAM
Very good point about intrinsic value on gold. The only problem is that stocks traded in America are denominated in dollars (fiat money) not gold. However, the numbers don’t lie.

Gold’s Performance:

1975: $175 an ounce

2010: $1,350 an ounce

Total: 831% (6.01% annualized)

S&P 500 Performance

1975: $70 for the index

2010: $1,184 for the index

Total: 1,591% (8.42% annualized)

The choice is pretty clear right? And, if you can outperform the S&P by just 5% a year, you’d be looking at 8,000% since the 70’s. Time is truly the friend of the investor, but gold has not done as well as the market over the long term. Could this change? Maybe…

Yswolinsky - 7 years ago    Report SPAM
Interesting point Johnathon does that number for the S&P include dividends.
Jonathan Poland
Jonathan Poland - 7 years ago    Report SPAM
Unless I am wrong in how they [S&P] calculate the performance, yes, they include dividends. Which is still much higher historically compared to gold. Now, if you listen to guys like Peter Schiff or Jim Rogers, you might not only want to get out of the country, but you'd be buying all commodities hand over fist. That's not really my game. The comment above from Mo77 puts a good figure on the total market for gold, which is interesting because that is still less than half the total market for homes in the United States.

Homes in the US: 114 Million (estimated)

Average home price: $150,000

Total Market: $17,100,000,000,000

This is a very rough estimate, and maybe the majority of homes shouldn't be worth what they have appreciated to, yet given the choice between all the gold in the world or half the homes in America, I might be tempted to take the homes. The real problem here is the debt piled up from a misunderstanding of Keynes theory of economics, which I suppose was bound to happen. I'm a big fan of the Austrian school personally, but that means we'd have an even smaller government... not likely.
Yswolinsky - 7 years ago    Report SPAM
I wish the average home price where I lived was 150K, it is more like 500K for a small three bedroom plus 12K in property taxes. No wonder so many people are moving from New York.

Superguru - 7 years ago    Report SPAM
As I have missed the boat on Gold, I will agree with Buffett too. Further decline in USD may prove us wrong again.

Gold should be compared against holding cash and treasuries and not stocks. Risk profile is different.

Fact that gold has given 6% annualized from 1975 versus SP500 8.42% shows gold is an excellent investment given the high risk with stocks.
LwC - 7 years ago    Report SPAM

From Wikipedia

Money illusion:
[i]"…modern fiat currencies have no inherent value and their real value is derived from their ability to be exchanged for goods and used for payment of taxes."

In these discussions about gold that crop up every now and then I have seen it argued that gold has no intrinsic value since very little of it is actually used for jewelry or industrial processes or whatever. I guess that means that if gold were not acquired for store of value purposes by many people, the demand for gold would be quite small relative to the supply, and therefore gold would have a price that generally depends on the cost of production, distribution, and the required return on investment that is necessary to produce the gold, etc. The effect of inflation on the price of gold would be no different than that of other industrial commodities. Under that assumption it is the demand for gold as a store of value that drives the price way above the price that would be assigned to gold if it were a strictly industrial commodity.

My question (rhetorically speaking) is: if gold is acquired for store of value purposes, presumably primarily to be exchanged for goods and services, or to pay taxes, in the future (probably indirectly by first exchanging it for government issued fiat money), then isn't gold really a form of fiat money? Should the variable price of gold in US Dollars over time be viewed as being any different from the variable price of US Dollars over time as denominated in other government issued fiat money (ie. foreign exchange rates)?

It appears to me that if over the past 35 years the S&P 500 provided a better long term price protection against inflation than gold, as reflected in the above analysis that shows that a dollar invested in the index would be worth more than a dollar invested in gold for that period of time; then perhaps the assumption that gold is the superior store or value, or in some people's opinion the only store of value asset, should be questioned.
Superguru - 7 years ago    Report SPAM
with SP 500 P/E at 21.52, I personally would not invest in either sp 500 index or for that matter most US stock mutual funds.


What SP did in last 35 years is completely immaterial. US had a great stock bull market from 1979 to 1999. Chances of it repeating is pretty low. Though if does happen I would be very happy as I am long only with no hedge.

I do not care if stocks are relatively cheaper than Bonds and gold does not have cash flow. With most bonds I buy if I hold till maturity there is a very good probability I would get my principal back with interest. (At this point I am not buying bonds and gold either.)

I will be buying beaten down stocks like NOK (when below 9).

Mevsemt - 7 years ago    Report SPAM
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".

Perhaps it's a good time to buy natural gas (or a related E&P company)?

-MEvsEMT, www.mevsemt.blogspot.com
Superguru - 7 years ago    Report SPAM
You cannot make buying decision based on what S&P did from 1979 to 1999.

You need to look at current valuations of various assets. Valuations at which you buy is important. Which asset is better depends on among other things its current valuation.

I am in same camp as Seth, Hussman, Grantham and Tilson that based on current valuation US stock returns going forward does not look attractive at all.

LwC - 7 years ago    Report SPAM

I hope you don't mind if I jump in here. I have followed natural gas markets for more than 25 years. IMO betting on natural gas prices is speculation, not investing. I'm confident that there are traders that make money doing that, but I am not a trader so I don't make pure bets on the future price of natural gas.

The price of natural gas crashed in the mid eighties and didn't really recover until the late nineties. During that period the supply was first described as being in "surplus". Then, after the surplus didn't shrink for several years but instead continued to grow, it was called the gas "bubble". After a few more years of supply growth, and shrinking prices, it was called the gas "sausage" to symbolize the elongation (continued growth of the supply) of the "bubble". During that period there were numerous market prognosticators predicting that the surplus was going to start shrinking any time now - but it didn't. A lot of investors and speculators lost money during that time. Betting on the future price of gas, or any commodity or stock, is risky indeed.

I'm not saying that history is repeating itself now; but as the old saying goes: history may not repeat itself, but it does tend to "rhyme". As a case in point, I noticed in a recent article about the current natural gas market that the author used the term "bubble" to describe growing surplus. I don't know if that marks the bottom of the current market price, or if it is an indication that the industry is beginning to accept the surplus as being a reality for some time to come. But it does sound kind of familiar!

Regardless, IMO investing in natural gas E&P companies, MLP's, or Royalty Trusts can be rewarding if it is within one's circle of competence. If an investor can identify such companies with the confidence that the company can make a minimum acceptable profit in the current price environment, then IMO there is a good chance that such a company will make well above average profits when the gas market price recovers and the investor will be amply rewarded. It just could take a while.

IMO knowing the business model is key to success.

Good luck.

Sivaram - 7 years ago    Report SPAM

Fact that gold has given 6% annualized from 1975 versus SP500 8.42% shows gold is an excellent investment given the high risk with stocks.

I would beg to disagree. This is just my opinion, and contrary to the market consensus, but if you believe gold may be in a bubble and closer to a peak than a trough, then this comparison is misleading. One is simply looking at gold after a big run-up while looking at stocks close to historical valuation.

At the peak, almost anything looks good--not just in the short-term but also the long-term!
Superguru - 7 years ago    Report SPAM
I do not think Gold is in bubble. I think both Gold and SP500 are overvalued.
Mo77 - 7 years ago    Report SPAM
According to CNBC a few months back the biggest individual holders of gold are Central banks, International entities and governments are believed to account for approximately 20.5 percent of the world's gold, holding about 29,787 tons (900 billion oz) .

They also listed for virtually all of them, what % of their foreign reserves they accounted for.

US 8966 tons

Germany 3754.3 tons (66% of total foreign reserves)

IMF 3311.8 tons

Italy 2,702 tons (65% of total foreign reserves)

France 2,684 tons (65% of total foreign reserves)

China 1,162 tons (1.6% of total foreign reserves)

Switzerland 1,146 tons (27% of total foreign reserves)

Japan 843.2 tons (2.5% of total foreign reserves)

Russia 706.4 tons (5.1% of total foreign reserves)

Netherlands 675 tons (53.4% of total foreign reserves)

India 614.6 tons (6.9% of total foreign reserves)

ECB 522.5 tons (25.2% of total foreign reserves)

Taiwan 466.8 tons (4.1% of total foreign reserves)

Portugal 421.5 tons (85.% of total foreign reserves)

Venezuala 397.6 tons (36.8% of total foreign reserves)

Mo77 - 7 years ago    Report SPAM
The above listing was when gold was 1245 per oz. I mention this because I list the % of foreign reserves.
Sivaram - 7 years ago    Report SPAM

I do not think Gold is in bubble. I think both Gold and SP500 are overvalued.

So, another way of saying that is... cash is undervalued?

Just curious... why do you say the S&P 500 is overvalued? Investors such as Warren Buffett have said stocks are attractive but there are many bears out there too.
Superguru - 7 years ago    Report SPAM
What I heard Buffett saying - compared to bonds (treasuries) stocks are attractive. It is relative attractiveness.

Others (Seth and Grantham) are talking about absolute returns.

Both are most likely right.

Gold is hedge against devaluation of USD.
Kfh227 - 7 years ago    Report SPAM


Gold's primary use is in jewlery. Not sure how much of it is just stuffed into a safe. Probably more in a safe somewhere. But in terms of jewlry, that industry is driven by what women want and what men are willing to pay to give it to them in many cases. Point is, jewelry is highly irrational. No one looks at a diamond or gold and thinks, gee what did it cost to extract, design, build, transport, etc to get it into this jewlery store. Even in that end market that is no rationalization of price/value. Just percevied value.

Sorry for spelling errors, in a bit of a hurry ....

Please leave your comment:

Performances of the stocks mentioned by Jacob Wolinsky

User Generated Screeners

dosowsky1Fast Revenue Growth
Kbannon77All Stocks US
Kbannon77All Stocks
opadovaniP median2
carter2u2Small Cap No Debt
bkw82Predictable/ebitda 10/52 week
pbarker46Hist. High Yield
andrewgu999valleylink - gogogo
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat