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: Gold is a poor investment because it does not earn or produce anything.
Buffett's lesson is clear: He distinguishes between non-productive and productive assets. This is a crucial concept that all investors should understand.
Instead of parking or freezing money in gold, do what smart investors do: Make money work for you 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 promotor
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 with 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 their money to work 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. 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. There are ways around the shortcomings of gold, but wise and informed No-Worry Investors just give gold a pas
Providing for difficult economic conditions.
Portfolio diversification.
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.
Gold Bugs Miss What Investors Know
Gold can be a great trade but will always be a lousy investment. While gold has its attractions, base your decision to invest in it or not on a thorough analysis of your overall investment strategy, financial goals, and risk tolerance. It's essential to weigh the pros and cons and consider whether gold fits into your investment portfolio. Below are the reasons savvy investors contradict the five common reasons gold bugs cite for owning gold:
1 Gold Traditional Portfolio Allocation
The pro-gold reason: Financial advisors who make money selling gold may suggest allocating 5-10% of your portfolio to precious metals like gold to hedge against inflation and economic uncertainty without overexposing your portfolio to the volatility of gold prices.
Why The Traditional Allocation Doesn't Work:
Low Returns: Gold does not generate income like stocks, bonds, or property (no dividends, interest, or rent), and its long-term returns have historically been lower than the total return of equities.
Opportunity Cost: Allocating 5-10% of your portfolio to gold neutralizes that money, so it does not produce a return or consistently grow asset values. Return-earning assets can compound in value, but gold can not.
2 Gold Risk Tolerance Cover
The pro-gold reason: Gold bugs promote gold for investors with a lower risk tolerance or those more concerned about economic instability or potential market downturns. A standard allocation to cover low-risk tolerance is up to 15%.
Why Gold is a Low-Risk Tolerance Miss:
Volatility: Gold prices are highly volatile in the short term, producing significant portfolio value fluctuations rather than stability and security.
Not Always a Safe Haven: In some economic scenarios, gold may not perform as expected. For instance, during low inflation or deflation periods, gold prices might stagnate or fall. While history is not a perfect guide, gold has an inconsistent record with many associated challenges in the record of providing a safe haven.
3 Gold Market Condition Hedge
The pro-gold reason: During periods of economic uncertainty, such as high inflation, geopolitical instability, or financial market volatility, increasing your gold allocation can provide additional security.
Why Gold is a Market Condition Miss:
Speculative Nature: Gold prices can be driven by speculative trading rather than fundamental economic factors, making it difficult to predict price movements based on market conditions. That is not a good market condition cover. Besides, in every gold price uptrend, otherwise silent promoters aggressively push prices.
Correlation with Market Stress: Gold often rises during economic uncertainty, but it is not a guaranteed hedge. There have been times when gold prices fell during market downturns.
4 Gold For Investment Horizon Stability
The pro-gold reason: Use gold to stabilize portfolio values for your investment time horizon. Gold is typically promoted as a long-term hedge, so a lower allocation might be more appropriate if you're investing with a shorter time horizon.
Gold Misses Investment Horizons:
Poor Performance Over Short Periods: Even gold bugs recognize this reality. Gold's performance can be exceptionally unpredictable for investors with shorter time horizons, leading to potential losses or missed opportunities for gains in other asset classes. Consider your investment timeline.
Liquidity Concerns: Physical gold has many handling and security challenges and can be less liquid than other investments, leading to potential difficulties in selling quickly without discounting or losses.
5 Gold for Diversification
The pro-gold reason: Gold should be part of a diversified portfolio.
Gold is a Diversification Miss:
Better Alternatives: Assets, such as inflation-protected securities (e.g., TIPS), commodities, or diversified equity investments, may provide better diversification benefits with higher potential returns. At best, gold has a mixed record of providing inflation protection.
Storage and Insurance Costs: Physical gold requires secure storage and insurance, which adds additional costs and complexity to your investment strategy. Gold is very heavy, awkward to handle, difficult to move, and costly to secure.
The Pitfalls of Investing in Gold
Instead of succumbing to the allure of gold, take a closer look at why it may not be the optimal investment choice. By exploring the reasons why there are superior alternatives, you can make a more informed investment decision. Consider the following factors before committing to gold, and explore the potential benefits of alternative investments.
No Yield, Income, or Cash Flow
One significant drawback of gold is its lack of income generation. Unlike stocks that pay dividends, bonds that yield interest, or property that earns rent, gold remains stagnant. This lack of regular cash flow can make it less appealing, particularly if you're seeking investments that provide steady income. Understanding this risk is crucial before considering gold as an investment option.
Bad Performance History
Gold often underperforms when the economy is doing well, which is most of the time! During these periods, investors tend to move their money into stocks and other growing investments. Over the long term, stocks usually have a much higher average return than gold.
Opportunity Cost
When you invest in gold, you might miss out on the potential for higher returns from other investments like stocks or real estate. Historically, stocks have generally outperformed gold over the long term, suggesting that exploring these alternatives could lead to more favorable overall returns.
Inflation Risk
Some people buy gold to protect against inflation, but the poor track record against inflation over the long term shows gold prices only sometimes rises with inflation. Investing in productive assets like stocks usually produces better returns.
Market Volatility
Gold prices can be very volatile, changing quickly due to political events, currency fluctuations, and central bank policies. In contrast, other investments like stocks and real estate tend to offer more stability and security, making them a more reassuring choice for investors.
Economic Growth
Gold tends to perform poorly when the economy is growing. In good economic times, typically during bull markets, gold may underperform, leading to lower returns than other assets, including stocks, which most often outperform gold.
Awkward and Costly Storage and Insurance
Owning physical gold means you need a secure place to store a heavy and difficult-to-move item that takes up space. That can be expensive. You must also insure it against theft or damage, adding more costs that reduce your overall returns. Additionally, transaction fees from brokers and dealers steadily add up, irrespective of prices, reducing gains or increasing losses.
Speculative Nature
Gold prices are often driven by speculative trading rather than actual demand, making them less predictable and adding the risk of sudden price drops.
Political and Tax Implications
Political events, such as wars, national elections, changes in laws, taxes, or government policies, can affect gold ownership, prices, and reduce your net returns from gold investments. In some locations, gold attracts higher capital gains taxes than other investments.
Bad or Worse Returns
While a shield or market downturn protection should move in the opposite direction to market prices, historical data shows that gold prices sometimes rise in downturns, but not always, and even less often, when markets are doing well. That gold price unpredictability adds to the risk of gold investments, which does nothing to improve returns.
Valuation Conflict of Interest Risk
Rather than the market, several banks, an oversight committee, and a panel of internal and external chair members determine gold prices. They render judgment based on the supply and demand figures in the gold futures derivative markets to establish averages for both spot and fixed prices.
Before Buying Gold, Consider the Consequences
Before considering gold as an investment, it's crucial to understand the potential drawbacks and the downsides. Factors like no yield, storage costs, market volatility, and opportunity cost can make gold a less appealing option. By gaining a comprehensive understanding of these pitfalls, investors can feel more empowered and informed in their investment decisions, whether they choose to include gold in their portfolio or explore other options.
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 Tracyin 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.
- Warren Buffett explains the investment value of gold.
- Investors must buy productive assets.
- Gold bugs mistake the monetary value of gold as an investment.
- Gold value: 2011, $1750, 2019 $1419, 2021 #1843.
- Gold trades but does not produce any return.
- Productive farmland is a far better value than gold.
- Companies like cows produce and therefore have investment value.
- Gold remains a lousy investment.
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