Warren Buffett explains the investment value of gold. He points out the key difference between productive and non-productive assets. Wealth building investors buy productive assets. But gold is not a productive asset for investors.
What you learn:
This lesson teaches an essential of investing success, the difference between productive and non-productive assets. For investing success, focus on buying productive assets to build your portfolio which can make you wealthy.
Frequently Asked Questions about Warren Buffett explains gold
Is gold a good investment?
No, gold is not a good investment. Warren Buffett explained it well to teach us that gold is a poor investment because it does not earn or produce anything. His lesson, in one of his shareholder letters, points out the difference between non-productive and productive assets. That explanation is quoted in this linked lesson. Instead of parking or freezing money in gold, do what smart investors do. Make money work for you. Do that by buying wealth-building productive assets that make more money.
What are the reasons to own gold?
Gold gets promoted as a store of value, a hedge against inflation, or insurance against declining currency values. However, any quality productive investment soundly beats the no-return performance of gold. Gold bugs do push rarity as a value of gold but it is always available. Gold also gets sold as fear and uncertainty insurance and diversification protecting against deflation and geopolitics. However, money used to buy gold falls into a deep unproductive sleep. And any amount of it is heavy, awkward, and difficult to handle.
What is the best way to invest in gold?
There are many ways to own gold, including traditional gold bars ranging from a few grams to 400 ounces. You can buy from gold and coin dealers, pawnshops, and major banks in Canada. Gold is available as jewelry, gold receipts, derivatives, gold-holding ETFs, mutual funds, or stocks of gold mining companies.
An ETF holding gold is secure, low-cost, and easy to buy, own, and sell.
Anyone considering gold bars or coins should know gold comes with complications. It is heavy and has handling, storage, and security issues. In some jurisdictions, there are tax implications.
It is essential to recognize that gold is an unproductive asset that yields no return, making it an unfavorable investment.
Why is investing in gold a bad idea?
Gold is a poor investment because it doesn't generate returns or contribute to productivity. However, traders can earn profits by speculating on the price movements of gold in active markets. In most markets, gold does little or nothing.
The linked lesson quotes Warren Buffett's advice explaining the difference between non-productive assets like gold and productive assets that build wealth.
Gold is expensive and difficult to store and handle, has a volatile price history, and has a poor record as a hedge. Since it's always available, there's no need to buy it for storage. Real long-term investors do not need it. Leave it for speculating traders and gold bug promotors.
How much gold should you own?
Serious investors seek productive assets that grow in value while producing returns. Gold is a non-performing asset, making it a poor investment.
Gold lovers keep between 5% to 10% of their portfolio in gold. As a result, they put that money to sleep! The records show that gold is a poor inflation hedge and has a spotty record as a store of value.
Investing in quality assets is better than keeping money idle in non-performing assets. Savvy investors want to keep their money working for them, so they give this romantic relic of history an investment pass.
What are the pros and cons of investing in gold?
Three pro-gold arguments include:
The potential hedge against inflation.
Providing for difficult economic conditions.
Portfolio diversification.
However, in recent years, gold has not paced inflation.
As for the cons, as Warren Buffett said about gold, "It doesn't do anything but sit here and look at you."
The con-gold arguments include:
Gold produces no return.
Gold is a lousy diversification choice.
Gold has a long inflation-lagging price record.
Handling gold is challenging, expensive, awkward, and complex.
Fear spikes gold's value, but buyers suffer poor outcomes.
Gold is a cash-flow-sucking money sterilizer.
Storing gold has costs and risks.
Gold attracts taxes.
There are ways around the shortcomings of gold, but wise and informed No-Worry Investors just give gold a pass.
Gold bugs see magic money
Good investments grow; they produce. We need to plant good investment seeds in our portfolios. Those are our well-researched producing positions. Then we carefully attend to and monitor our portfolio to keep it growing.
Gold produces nothing and investors need assets that produce a return. So there is no need for gold in any investment portfolio. Without a doubt, the rarity of gold gives it value as money. That has been the case for centuries. No technology can disrupt the rarity by discovering or overproducing it. It does not evaporate, burn or radiate or poison the holder. Gold is malleable into coins, bars, and bricks.
Economist John Maynard Keynes called gold a “barbarous relic” or an artifact of the past. In our time of cashless transactions, now make this even more true. But in our digital age gold can not disappear in a click. Still, it produces nothing. It is not an investment.
When an investor asked, “Why do you call gold a lousy investment?” The best answer I know is provided by Warren Buffett. His answer appeared in the letter to shareholders in 2011. The key point he makes is investors buy productive assets. That is the key essence of investment success. Gold produces nothing.
The following quotes from that Buffett letter which is the best response I know. Enjoy the read.
From Warren Buffett’s 2011 letter:
Warren Buffett says gold produces nothing.
The following is from Berkshire's timeless letter to shareholders. "Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be $9.6 trillion. Call this cube pile A.” [Gold @ $1400 Sept. 3, 2013, but overall point remains valid.]
"Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
[Inserted note: July 4, 2019, the price had rocketed to $1419.10 making the point that gold does not produce any investment return!]
Productive land grows wealth
"A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
"Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).
Agriculture land produces crops
"I believe that over any extended period of time this category of investing will prove to be the runaway winner… More important, it will be by far the safest."
A newsletter article by Chad Tracy in The Street Authority newsletter quoted the Warren Buffett letter which reminded me of this wisdom-packed letter. That is why I share it with you in this lesson.
Gold - an expensive doorstop
Key investment principal
As the article points out, productive assets generate enormous wealth. Gold is pretty and valuable but generates nothing. It just hurts your foot if you drop it or stumble over it.
That is key. To grow wealth, money needs to produce. Put it to productive use; do not let it sit as an expensive doorstop. That is an absolutely core investing principle. Don’t let the gold bug bite you.
What do you think of buying gold? Do you own any? Do you agree with how Warren Buffett explains the investment value of gold? My only gold holding is a 4-decade old band on my finger which is far more valuable to my heart than my wallet. Let me know about your attitude towards gold.
Is gold a good investment - answered!
Knowing gold is an asset but not a productive one tells you gold can be a store of value but not an investment. This teaches an essential fact of investing success, by learning the difference between productive and non-productive assets, you can open the door to investing success and wealth building. So buying productive assets is the key to building wealth.
Lesson takeaways, Warren Buffett explains gold
Warren Buffett explains the investment value of gold and the difference between non-productive and productive assets. Smart investors build wealth by buying productive assets essential for investing success. Gold is not a productive asset.
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