The Case Against Gold
When it comes to investing, Warren Buffett is one of the most successful investors in the world. So, when he says that gold is a bad investment, it’s worth paying attention to. In this article, we’ll examine why Buffett doesn’t invest in gold and whether or not you should follow his lead.
Gold doesn’t produce anything
Gold doesn’t produce anything.
This might seem like an odd statement, but it’s important to understand that gold is not an investment in the traditional sense. Investing, by definition, is the allocation of capital to generate a return. That return can come from dividends, interest payments, or asset value appreciation. Gold does not generate a return. It costs money to store and insure gold. The only way to make money from gold is to sell it for more than you paid.
That’s not to say that gold can’t be a valuable part of an investment portfolio. For example, gold can hedge against inflation or market volatility. But investors should view gold as a speculative bet, not an investment.
Gold has no intrinsic value
Gold has no intrinsic value. That means it doesn’t have any real value. It’s not like a company that makes money or a piece of land that can be used to grow crops. Gold is just a metal.
Now, don’t get me wrong. Gold is a nice metal. It’s pretty, it’s scarce, and it doesn’t rust. But there are lots of other elements that have those same qualities. So why is gold worth so much more than, say, silver?
The answer is that gold is worth whatever people are willing to pay. That’s why it’s called a “precious” metal. It’s precious because people believe it is.
And people only believe it is because we’ve been taught to believe it is. Our ancestors have told us that gold has been valuable for thousands of years. They’ve told us that gold is rare and has special powers. They used gold to make jewelry and coins, and statues. And we’ve seen these things, so we believe them.
Of course, nothing is stopping us from believing something else. We could decide tomorrow that silver is more valuable than gold. Or we could decide that rocks are more valuable than gold. It would be silly, but we could do it if we wanted to.
Gold is a speculative asset
Buffett has called gold a “mirage” in the past, and his views haven’t changed much. Gold is a speculative asset with no intrinsic value; he told CNBC in an interview in 2017.
To Buffett, speculation means you buy an asset, such as gold, based on the hope that someone else will pay you more. An intrinsically valuable asset produces cash flow or has some other utility, such as a stock or bond.
Gold doesn’t produce cash flow or earn interest, which means it doesn’t have any utility. You can’t do anything with gold except hold it or sell it to someone else who hopes to sell it to someone else for a higher price at some point in the future.
Why Warren Buffett Doesn’t Invest in Gold
Gold is often considered a safe investment, but Warren Buffett disagrees. In this article, we’ll explore some of the reasons why billionaire investor avoids gold.
Buffett’s investing philosophy
Warren Buffett believes that gold is a “nonproductive asset” that doesn’t generate cash flow or earnings.
In October 1998, Buffett wrote an essay for Fortune magazine titled “Order in the marketplace.” He explained his investing philosophy by finding companies with a durable competitive advantage.
“I look for companies with a Moat,” Buffett wrote. “The wider the moat, the better … But just because something has a wide moat today doesn’t mean it will keep its position forever.”
He went on to say that economic principles always apply, even in investing. “There is one and only one logical conclusion,” he wrote. “Any investor who can’t know why a given investment is taking place or his recent purchases have been successful has no business buying marketable equity securities.”
In other words, you should only invest in something if you understand why it’s a good investment. And if you need help understanding why an investment is a good idea, you shouldn’t put your money into it.
This is why Warren Buffett doesn’t invest in gold. He doesn’t believe there’s a compelling reason to buy it.
Buffett’s view on gold
In an interview with CNBC in March 2014, Buffett said that gold “gets dug out of the ground in Africa, or someplace. It has no utility. Anyone watching from Mars would be scratching their head.”
Buffett’s views on gold investing were further elaborated in his annual letter to Berkshire Hathaway shareholders in February 2015. He stated that gold “doesn’t produce anything” and dismissed it as a commodity that is “hoarded.”
Buffett’s investment strategy
Warren Buffett is one of the most successful investors of all time. His investing strategy is to buy good companies and hold them long-term. He doesn’t believe in speculation, which is why he doesn’t invest in gold.
Buffett has said that investing in gold is a “waste of time” and doesn’t produce anything. He prefers to invest in companies that produce goods and services and have a competitive advantage.
Gold has no inherent value, so its price is based on supply and demand. When demand is high, the price goes up. But when demand is low, the price falls. That makes gold a volatile investment, which isn’t what Buffett is looking for.