Warren Buffett is famously not a fan of gold investing. Why? Because he doesn’t like the fact that it doesn’t create a yield (i.e., return, like a stock dividend) and one must pay to store the physical product.
Buffett does admit that gold has served some investors well, particularly during times of high inflation, but he, himself, prefers to invest in ‘productive’ assets like companies that pay its shareholders annual dividends.
Buffett discussed this very issue in his 2011 letter to Berkshire 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.
"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-aroundmoney (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
"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."
So, instead of ‘nonproductive’ assets such as gold, Buffett prefers productive assets like farmland or companies that generate cash flow for shareholders -- companies like Exxon Mobil, Coca-Cola (a NITK Top Tip DRIP) and Procter & Gamble.
And he clearly explains why:
"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).
"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."
Whereas it’s hard to argue with the Oracle of Omaha on this point philosophically, I’m sure he’d be the first person to say insurance is a prudent product to purchase. After all, isn’t the car insurer Geico one of his favorite investments? And one more question - does Warren Buffett's investment history cover a time of high (even hyper) inflation? No, not really.
Ultimately, you need to decide whether your want this type of insurance product in your portfolio.Home > Commodity Investing > Buffett & Gold