For years I’ve always said I don’t like gold. I’ve always heard that when sh*t hits the fan, this will be the savior. Every time I heard that I imagined a world like Mad Max and couldn’t figure out why a colored rock would be useful. Nobody could do anything with it. It actually has no intrinsic value. (It’s a very good conductor of electricity, but that’s not important in the Mad Max world). However, I understand that a barrel of oil can be useful.
For the past two years, gold has laughed at my ignorance. It has doubled in price. It has risen from about $2000 per ounce to $4000 per ounce. That’s almost Bitcoinian growth.
So it seems like a good time to revisit the case for gold. To do this, I’m going to highlight three articles that caught my attention over the past month.
Ben Carlson’s blog, A Wealth of Common Sense, is aptly named. At the link above, he analyzes gold’s performance against the S&P 500 in every decade since the 1970s. The 1970s saw high inflation, a weak dollar, and a few other things that caused gold to destroy the S&P 500. In each of the next four decades, gold was destroyed. That’s a big reason why I don’t like gold. For most of my life, gold has been a pretty terrible investment.
However, in the 2020s, gold has outperformed the S&P 500 by quite a bit thanks to its latest run. Ultimately, Carlson stands by his decision because gold’s long-term performance is so terrible compared to stocks.
That brings me to the second article.
Warren Buffett is the perfect example of why investing in stocks is better than investing in gold. He managed to grow his net worth to almost 150 billion by buying and owning a lot of gold.
The above CNBC article discusses what Warren Buffett said about gold at Berkshire Hathaway’s annual meeting in 2011. I’ll quote a lot from it because I couldn’t possibly explain it better than Buffett himself. I’ll break it down a bit because it’s a lot to read (but definitely worth it):
“[There are] three major asset classes. And you need to think very carefully about which category you want to fall into before you start thinking about the choices available within that category.
The first category includes anything denominated in a currency. It could be bonds, it could be deposits in a bank, it could be a money market fund, it could be cash in your pocket.
And the – if you reach into your pocket – I hate to do this, but – and take out your wallet –
You are looking at a historical event. (Laughter)
If you look at this – and, I want to point out, this is one [dollar bill]. Charlie [Munger, Buffett’s long-time late partner] wears one [hundred] —
The back reads: ‘In God We Trust.’ And that is really false advertising.
The – if Elizabeth Warren were here, she would rightly say, “In the government we trust,” because God won’t do anything about that dollar bill, you know, if the government does the wrong things, in terms of keeping it as valuable as it was when you parted with it to buy a bond or put it in a bank.
Every currency-related investment is a gamble on how the government will behave now and in the future…
Almost all currencies have depreciated in value over time. I mean, it may be built into almost any economic system that it will be easier to deal with a currency that is depreciating than one that is appreciating, and the Japanese could reaffirm that here with their experience.
So as a class, currency-related investments, whether in Britain, the United States or anywhere else – unless we are paid extremely well for them – don’t see much point.”
As you can see, he is not a big fan of currency investments.
“The second category of investments concerns things you buy that don’t yield anything, but for which you hope someone will pay you more later.
And the classic case of that is gold.
And I’ve used this illustration before, but if you take all the gold in the world – don’t get too excited now – and put it in a cube, it will be a cube that is about 20 meters long. That would be 165,000 or 170,000 tons.
So you could have a cube – if you owned all the gold in the world – you could have a cube that would be 60 or 70 feet long on a side.
And you could take a ladder, and you could climb on it, and you could say, you know, I’m sitting on top of the world, and I think you’re the king of the world.
You could stroke it, you could brush it, you could do all these things with it. Stare at it. But it’s not going to do anything.
All you’re doing when you buy that is you’re hoping that a year from now, or five years from now, someone else will pay you more to own something that, again, can’t do anything, but you’re hoping that that person will then think that someone else will buy something from them five years later.
In other words, you’re not just betting on how afraid people are of paper money now, but also on how much they think people a year from now will be afraid of paper money two years from now…’
He moves to the third category of assets, which is buying something that will generate returns for you. It could be a farm for food or business. Buffett is not looking for companies that he can transfer to someone else at a higher price. He looks for the money the company creates.
It is also mentioned that Charlie Munger thought it was “peculiar to buy an asset that only really goes up when the world really goes to hell. It doesn’t seem like a perfectly rational thing to do to me.”
I agree with Warren Buffett and that is one reason why I don’t like gold.
Finally, Nick Maggiulli does a lot of analysis and finds REITs and stocks actually do better than gold in times of inflation. That’s definitely worth reading.
All these articles have convinced me that I really don’t need gold in my portfolio. It seems that the professionals who recommend gold are only advocating a small amount after all. So it probably won’t have a big impact anyway.
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