Over the years, Warren Buffett (Trades, Portfolio) has made it quite clear that he does not like gold as an investment.
While he did own silver at one point, a trade he made to take advantage of what he believed was a significant disconnect between supply and demand in the market, he has never, to my knowledge, owned gold in any considerable amount.
No practical use
Buffett has stated that he believes gold has no practical use. While there is some evidence that shows the price of gold keeps up with inflation over the long term, it does not provide any other return.
What's more, if you are going to be buying physical gold, you will have to pay to store the commodity as well, which might eliminate any profits over the long term.
Buffett's views on gold as a utility apply to other assets as well, and by flipping these ideas around, we can get a good idea of the sort of assets the Oracle of Omaha believes are the most attractive.
At the 2005 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders, Buffett declared that rather than investing in gold, "I would much prefer owning a hundred acres of land near here in Nebraska, or an apartment house, or an index fund."
As he went on to explain, since 1900, the price of gold had moved from around $20 to $400 at the time of the meeting. Over the same time frame, the Dow Jones Industrial Average rose from 60 to "13,000 -- 12,000 or whatever."
Investors in the Dow Jones would have also received dividends over this timeframe, while gold owners would have had to pay out insurance and storage costs.
After outlining these returns, Buffett declared, "it's really not a store of value."
Gold as a hedge
But what about as a hedge against inflation? Gold is a popular hedge against inflation and the erosion of the value of paper money.
From this perspective, Buffett seemed to be less hostile towards the yellow metal. He went on to add, "you know, it makes a lot of sense to worry about paper money over long periods of time, but it's just about -- you know, it's just about the last thing I would want to own under those circumstances."
Instead of gold, Buffett recommended owning an asset that has a utility, such as a farm, apartment, or stocks.
Gold vs. shells
Another argument gold bulls have is that gold is an excellent alternative to fiat currency. If civilization collapses, they argue, the dollar will lose all of its value, and gold will be the number one currency.
Buffett also had a response to this argument. He said that he'd "rather have the ability to sell people a pound of candy 20 years from now," than own gold because even if "they're dealing in seashells," Berkshire will "get an appropriate number of seashells instead of paper money for it."
This will be the same for any other business that has a utility. If consumers want a good or service, they will use whatever currency is available to them. Gold does not have to be exclusive.
Buffett summarized his views on the yellow metal with the following statement:
I forget whether we're turning about three- or four-thousand tons of gold a year. And, you know, we take it out of the ground in South Africa, and we put it in the ground at Fort Knox or someplace, you know, or in the New York Fed. I mean, and it doesn't do much along the way, for anybody.
So those are the CEO of Berkshire Hathaway's views on gold and companies that he prefers as an alternative to gold. Even though he is worried about the erosion of the value of paper money over the long-term, Buffett does not believe that gold is a good substitute.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Warren Buffett: Avoid Self-Destructive Behavior
- David Einhorn and Brighthouse: Cheap, but the Stock Could Stay That Way
- Buffett: Ignore the Macro, Concentrate on 'What Is Knowable'
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