1 Quote for Why I Don't Own Gold

With more than $70 billion in net assets, SPDR Gold Trust (NYSE: GLD  ) is a monster when it comes to gold as an investment. It also stands to reason that the folks marketing the trust would highlight some of their sharpest research on gold.

And yet, while reading the a recent filing from State Street's senior portfolio manager Chris Goolgasian, I was reminded in the space of 11 words exactly why my portfolio contains no gold. But I'll get to that.

Buffett missed the boat
If you're a gold-focused manager and Warren Buffett takes time in his much-read annual letter to Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) shareholders to bad-mouth your asset class (yet again), it makes sense to address that for your current and potential investors.

Buffett did give gold a good working-over in his annual letter. He referred to certain asset classes as those that are "purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future." Not an auspicious start, particularly since he goes on to use Dutch tulip bulbs as an example of how such asset classes can get out of control.

Zeroing in on gold in particular, Buffett presents the case in his no-nonsense approach, describing a choice between two piles. In pile A, you have the following:

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.

Meanwhile, in pile B, which has roughly the same current price as pile A, there's the following:

For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 [ExxonMobils (NYSE: XOM  ) ] (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).

In so many words, Buffett concludes that no investor in his or her right mind would choose pile A over pile B.

Harsh words. But in Goolgasian's note, he points out that Buffett has missed out before, and he may well be missing out again with gold: "While [Buffett] won't own gold, he also never owned [Apple (Nasdaq: AAPL  ) ] (up around 1,500% since January of 2000) or [Google] (up 530% since August of 2004) or shorted subprime mortgages."

He additionally points out that gold has clobbered Berkshire over the past decade-plus, saying, "while Berkshire Hathaway has gone up a very respectable 105% since January of 2000, Gold has increased nearly five-fold during the same period."

Is it productive?
Goolgasian's logic of "he missed good investments before, so he could be missing out now" isn't totally unreasonable. Of course if we look at Buffett's shareholder letter, he doesn't simply compare gold to the stocks that he's owned at Berkshire. Rather, he compares gold to "productive assets, whether businesses, farms, or real estate." 

In other words, while I hesitate to put words in Buffett's mouth, even though tech stocks aren't really his thing, if given the choice, Buffett would prefer Apple or Google -- both productive assets -- to a pile of gold any day.

As for the performance of Berkshire, the comparison period of the past decade or so is particularly kind to gold -- its value has surged while Berkshire's growth has chugged along at a reasonable rate (roughly 9% per year for its book value per share).

That said, I found this gem in Buffett's 1979 letter to Berkshire shareholders:

One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce.

At the time, gold was in the middle of a huge run that would continue on into the next year. But what's taken place since then? Today, the per-share book value of a Berkshire share is $99,860. And that half ounce of gold? Right around $850 as I write this. It's not tough to tell which side the math favors there.

Those 11 words
At the beginning, I mentioned that there was one single quote in Goolgasian's run-down of gold that reminded me exactly why I don't bother with the metal. In the note, Goolgasian discusses three of what he considers the most legitimate ways to value gold, but then concludes the discussion with 11 very simple words: "it is worth what others are willing to pay for it."

I don't invest in art. I don't invest in baseball cards. Nor do I invest in beanie babies, bottles of wine, antiques, or muscle cars. In fact, I have a tough time using the word "investing" with anything that can be described the way Goolgasian describes gold -- I think "speculation" is much more fitting. To tap Buffett one final time, on speculation, he wrote back in 1992 that it's "neither illegal, immoral nor -- in our view -- financially fattening."

I'm sure there are plenty of folks who will vehemently disagree with my view here, but I'll reiterate that this is why -- as the title says -- "I don't own gold." To be sure, I don't deny that some people have gotten fabulously wealthy through speculation.

However, if you're on board with me and are looking for solid income-producing assets to own, you'll definitely want to check out The Motley Fool's special report "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can grab a free copy by clicking here.

The Motley Fool owns shares of Apple, Berkshire Hathaway, and Google. Motley Fool newsletter services have recommended buying shares of Google, Berkshire Hathaway, Apple, and ExxonMobil. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On March 09, 2012, at 1:52 PM, menelyik wrote:

    precisely.

    In the whole of man's recorded history, stretching back at least 6,000 years, men have been willing to trade wheat, firewood, sheep, flax, woven materials, spices, pottery ... in short, whatever they have been able to produce of value, for gold ... in fact, many, many men have traded their lives in an attempt to get it.

    Now, look back a mere 100 years ... to the DOW 30 of 1910 ... of the stock in those two there are only two which can still be traded for gold, all of the shares of all of the other 28 are worthless now ....

    Buffett is a buffon, and when he dies his company will disintegrate (if not before that ....)

  • Report this Comment On March 09, 2012, at 1:54 PM, NeedaClue7 wrote:

    Good article with a lot of good points. The only thing you left-out is the very real probability that gold is enjoying a "bubble" and those who jump in or hold-on are likely in for a fall. Unfortunately for many, "buy-high/sell-low" is an endless phenomenon that fuels and bursts one bubble after another across almost all asset classes.

  • Report this Comment On March 09, 2012, at 2:13 PM, gains222 wrote:

    OK, but imagine this scenario. Ten different tribes live on a remote island. This island has about 100 pounds of a shiny rare metal.

    The various tribes make coins out of this rare metal, and use it as currency. This way, the wealth of the island could be represented by something rare and tangible. (which could in turn be used to store wealth, and to buy goods from other tribes) As hundreds of years pass, this system works, and the shiny metal never changes or loses its luster.

    Although these tribes dig and dig, they are only able to find a total of an extra pound or so of this metal every year, no matter how high the demand on the island is for more.

    One day, one of the tribal leaders (lets call him Ben) invents a copy machine. He found that it was much easier to just print pictures of the metal on paper instead of working long hours to acquire the real thing.

    Pretty soon all the tribes are just printing out pictures of the shiny metal, and using that as currency instead of the actual metal itself.

    Who could guess that soon this system started to fail, as each tribe just kept printing and printing. In fact, the ones who didn't print as much found that the goods they produced became too expensive for the other tribes to buy. So, they had no option but to print more pictures to try to keep up.

    Pretty soon it took a lot of photo copies of the metal to buy just a little bit of the real thing.

    You see, the islanders were creating "currency," not "money," as they were not magicians or alchemists.

    that is why i own gold.

  • Report this Comment On March 09, 2012, at 2:35 PM, Turfscape wrote:

    menelyik wrote: >>In the whole of man's recorded history, stretching back at least 6,000 years, men have been willing to trade wheat, firewood, sheep, flax, woven materials, spices, pottery ... in short, whatever they have been able to produce of value, for gold<<

    More precisely, man has continually given up gold in exchange for useful items, such as woven materials, food stuffs, shelter, etc...

    And, I'll point out that people have also traded their lives trying to get Black Friday deals at Wal-Mart. So, don't put too much faith in that factoid.

    Buffet has continually stated that his favorite holding period is "forever". If gold is a store of value, why would he hold it? It doesn't grow!

    Buffett continually talks about why BERKSHIRE doesn't own gold. Why do gold investors feel the need to chastise those who don't find gold to be an appropriate investment for themselves? Personally, if I think precious metals and commodities are looking good for a particular time period, I'd rather own stock in a solid mining company than physical gold. But, that's what's right for me.

  • Report this Comment On March 09, 2012, at 2:35 PM, whereaminow wrote:

    Berkshire Hathaway will one day go to zero. Not this year, not next year, but at some point.

    And we should ALL hope it does. That's how the market works. You want all companies to eventually fail, because you really need competition to have a growing prosperity. By contrast, in 70 years, the Soviet Union never saw a single firm fail.

    That doesn't mean you should short BH or anything like that. I'm merely pointing out that the gains made from stock investments should be greater than those found in a commodity that will never go to zero (or at least, it has never in human history) because of the risk.

    So comparing stock investments to gold is apples to oranges. Warren knows this. He just feels he needs to justify his firm's recent poor performance. Turn your own ship around, Warren, before you lecture me on my gold holdings.

    David in Liberty

  • Report this Comment On March 09, 2012, at 3:37 PM, TMFAleph1 wrote:

    <<And, I'll point out that people have also traded their lives trying to get Black Friday deals at Wal-Mart. So, don't put too much faith in that factoid.>>

    Classic rebuttal!

  • Report this Comment On March 09, 2012, at 3:56 PM, MfromG wrote:

    Buffet's problem with GOLD is more of a daddy issue than anything else. His father was a gold bug and Warren wasn't a big fan of his dad's so he still has a chip on his shoulder about GOLD to this day.

    harveybirdman is long gold.

  • Report this Comment On March 09, 2012, at 4:56 PM, war2 wrote:

    I personally own physical gold. That was before I stared invesing in stocks. If I had put my money at that time in stocks I would have gained at least some money from the dividents. Now with my gold - I do not have anything, but some useless metal, that does not bring any value...

    It was the reason I started investing in stocks :)

  • Report this Comment On March 09, 2012, at 5:10 PM, whereaminow wrote:

    On March 09, 2012, at 3:37 PM, TMFAleph1 wrote:

    <<And, I'll point out that people have also traded their lives trying to get Black Friday deals at Wal-Mart. So, don't put too much faith in that factoid.>>

    Classic rebuttal!

    ------------------------------------------------------

    How in the world is it that you managed to land a gig writing on economics when don't even comprehend the basics of the field? That would be like me getting my job and not understanding the TCP handshake. It's unreal that you are this clueless about your field of work.

    What Turfscape just described is something called exchange. Humans make exchanges based on their utility scales. There's nothing bizarre about trading anything to get a better spot in a Black Friday line if the two actors rank the items differently on their utility scales. Same goes for people exchanging gold for wheat, firewood, etc.

    In fact, the reason gold became the standard commodity to trade for those things was because it was durable, funglble, easy to transport, and was valued by other trading parties (among other reasons.)

    That this concept seems like voodoo magic to you is very telling.

    David in Liberty

  • Report this Comment On March 09, 2012, at 6:16 PM, CaptainWidget wrote:

    I'd take Buffet on that bet.

    Let's turn back time to 1960. Buffet buys all the US cropland and Exxon Mobile. I buy all the gold in the world.

    We both retire and go sit on the beach talking about how smart we are until 2012. At which point we call up our brokers and check on our investments.

    Exxon is out of business because no one was running it and all the cropland is destroyed due to over-farming. And I've still got all the gold in the world. Nuclear winter could come and I've still got all the gold in the world. If Chevron invents a fusion reactor that costs $1 to build, Exxon goes out of business the next day. And I've still got all the gold in the world.

    Gold is a store of value. It's not meant to do anything, it just responds to inflation. It's just a rare commodity that goes up in value when Bernanke prints more money.

    Exxon and farm land, on the other hand, are assets that need to be optimally managed and cared for to yield an increase in value. If they're not optimally managed, they will cease to have value. Period.

    This is the old Adam Smith Diamonds and Water paradox. Water is more useful than Diamonds, so why aren't they more valuable? Adam Smith could never figure it out. The answer is simple. There's lots of water, and not lots of diamonds. The marginal value of diamonds is much greater. The slow rate at which they yield value to the market, combined with their high marginal value, is very comforting to investors. The same with gold. It doesn't matter how "useful" something is, if the marginal value is low, it's moot. If the marginal value is low AND it's depreciates over time, that makes it a much more violate investment than a commodity like gold.

    We could VERY easily change this scenario around. In 1960 Warren Buffet could have bought all the farm land in Africa and Eastman Kodak and Fokker Aircrafts. Time travel 50 years, and guess what Buffet, you're bankrupt. And I've still got all the gold in the world.

  • Report this Comment On March 09, 2012, at 6:46 PM, PostScience wrote:

    When society collapses, your paper money will be worthless. Only gold will still have value.

    Except that the people with the guns will take your gold.

    So... invest in guns? Is there an ETF for that?

  • Report this Comment On March 09, 2012, at 7:15 PM, TMFBiggles wrote:

    @ CaptainWidget -

    But if you owned all the gold in the world, how would anyone else know to treat it as either medium of exchange or store of value? Seems like both you and Buffett would wind up with equally worthless hoards under that scenario.

    - Alex

  • Report this Comment On March 09, 2012, at 8:52 PM, CaptainWidget wrote:

    I'm assuming that I don't have the capability of wiping clear the memories and record books. In some unrealistic, unfeasible scenario where I could hoard all the gold on earth and simultaneously consume all new gold production before it hit the market, people would still remember what gold was, and remember what their utility towards the metal.

    More realistically, if I bought all existing gold, all demand for new gold would skyrocket due to the miniscule supply of new gold pulled out of the earth every year. More realistically if I bought A LOT of gold (because no one could ever corner the gold market, the marginal value of the last unit of gold is astronomical. I'm sure there's someone out there who would be willing to pay 10 million dollars an ounce for gold if they knew it was all going to disappear) to hoard, I would make the unhoarded value of gold shoot up by decreasing supply.

    On the other hand, whether you buy all the farm land, or one acre, you still have to maintain that asset for it to keep it's value (the value is in the work accomplished by the farmland, not the base acreage price). I don't have any do anything to my gold to for it maintain it's value other than keep it in a safe.

    Gold is by default a store of value, simply because very little of it exists and many people want it, if for no other reason than it's intrinsic beauty. Farmland is not, because the source of it's value is in it's productivity. If that productivity ceases, so does the store of capital.

    Don't get me wrong, I'm not arguing AGAINST productivity. I think it's the corner-stone of our civilization. But there's some argument to be made in liquidible, fungible, universal, and rare commodities to store value, and utilizing them as a part of your portfolio.

  • Report this Comment On March 09, 2012, at 10:34 PM, CluckChicken wrote:

    I am not sure where I heard this but I was once told "Never invest in things you do not understand." To me this does not mean that I have to understand how an item works or is made but that I should understand what it is used for, who would use it and why they would want it or in other words what gives it value.

    I do not understand gold. I understand the concept of store of value, I just do not understand why today gold is such a great store of value. I am trying to understand, reading 'The Power of Gold'.

  • Report this Comment On March 09, 2012, at 11:52 PM, Misesfriend wrote:

    Buffett is a pragmatist and a realist. Of course, gold has inherent value in a purely economic world. But we don't live in a purely economic realm. Politics and the printing press rule the modern world. True enough, gold is a store of value and medium of exchange; this is an economic axiom that ultimately supersedes all political action. When governments become overextended, as they are now, gold will rise, always has and always will. However, eventually inflationary pressures clear and markets adjust to the new reality. Those holding equities are rewarded while gold falls back to reflect its relative value in the new reality. Like Buffett said, people will always want to eat, travel, communicate, live in homes, etc. Gold, or any other medium of exchange, is a means to an end. Whoa unto those who see it as an end unto itself. The common fate of Silas Marner and the Spaniards.

  • Report this Comment On March 10, 2012, at 12:25 AM, sciencedave wrote:

    The real truth is gold is "high -risk" today, yesterday, 5 years ago and 20 years ago. It will always be. Not a good long-term investment choice. But it can be fun speculation, just like day -trading. However speculation is not one of Warren's moves. Good strategy for contrarians though ---and economic doomsayers.

  • Report this Comment On March 10, 2012, at 12:30 AM, rmhjah wrote:

    "Buffett continually talks about why BERKSHIRE doesn't own gold. Why do gold investors feel the need to chastise those who don't find gold to be an appropriate investment for themselves?"

    -Turfscape

    The reason people who invest in gold chastise those who do not invest in gold is that gold investors need people to demand gold. Higher demand equals higher price. Gold much like a baseball card is only worth what someone else is willing to pay. I would strongly recomend people read Milton Friedman. He much like Warren Buffet is a pretty smart man.

  • Report this Comment On March 10, 2012, at 12:32 AM, CaptainWidget wrote:

    <<The real truth is gold is "high -risk" today, yesterday, 5 years ago and 20 years ago. It will always be. Not a good long-term investment choice. But it can be fun speculation, just like day -trading. However speculation is not one of Warren's moves. Good strategy for contrarians though ---and economic doomsayers.>>

    How? Gold beat the DOW by about 500% over the course of the last decade.

    The only thing that will derail the price of gold is strict monetary control (ala Voelker). Once you hear the fed utter the words "raising interest rates" sell off everything you have. Until then, it will keep moving uphill.

  • Report this Comment On March 10, 2012, at 7:07 AM, devoish wrote:

    We both retire and go sit on the beach talking about how smart we are until 2012. At which point we call up our brokers and check on our investments.

    Exxon is out of business because no one was running it and all the cropland is destroyed due to over-farming. And I've still got all the gold in the world. - CaptainWidget

    With all the cropland destroyed, how much is the last can of spaghettio's worth? I'd suggest the worlds last meal is worth more than every oz of gold in the world. You and every other gold owner in the world can bid all you want for it, but I know I am going to be hungry tomorrow night, so I am keeping the spaghettio's and you can keep the gold.

    I don't think that you made your case with that idea. I think you made Matt's case against gold.

    Best wishes,

    Steven

  • Report this Comment On March 10, 2012, at 7:11 AM, miclombardo wrote:

    To tap Buffett one final time, on speculation, he wrote back in 1992 that it's "neither illegal, immoral nor -- in our view -- financially fattening."

    That quote comes from Graham, Buffett's mentor. It's in that splendid book, The intelligent investor, last revision published in 1972.

  • Report this Comment On March 10, 2012, at 8:01 AM, itsallluck wrote:

    Who, person or single entity, owns the most physical GOLD and why?

  • Report this Comment On March 10, 2012, at 8:06 AM, itsallluck wrote:

    And if this person or entity sold off this GOLD, how much could be paid down on its DEBT?

  • Report this Comment On March 10, 2012, at 12:57 PM, Chgallos wrote:

    In the fiction of farmlands failing and Chevron creating a cheap fusion reactor you are stacking the argument to one side. What happens if mining asteroids for gold becomes 100 times cheaper than Earth-mining, or if Dow Chemical finds a way to turn lead (or sand for that matter) into gold.

    You are now in a fictional world of nearly worthless gold instead.

    The whole idea of time passing in the blink of an eye degrades the quality of your argument. Someone could have stolen every last gram of your gold stocks while the farmland was being over-farmed.

  • Report this Comment On March 10, 2012, at 1:00 PM, steltek wrote:

    I don't own gold, but my take on this article is that it's a preemptive strike, an attempt to make enough noise about something else so the attention is elsewhere. Perhaps they don't want us to compare the TMF average return since inception vs. gold?

    There is definitely some wonky anti-gold sentiment woven into the culture of this company.

    Gold is a decent investment for the foreseeable future for one reason alone -- China is buying it.

  • Report this Comment On March 10, 2012, at 1:10 PM, portefeuille wrote:

    If you want to "beat gold", "beat Buffett" and beat most index funds, hedge funds and private equity funds you might want use my "open source" fund as a starting point, hehe.

    http://caps.fool.com/Blogs/fund-trades/716433.

  • Report this Comment On March 10, 2012, at 1:10 PM, steltek wrote:

    I hate this posting system. It loses every other post I make.

  • Report this Comment On March 10, 2012, at 1:53 PM, lovesaves wrote:

    Berkshire is first an insurance company. I don't think that insurance creates value. The insurance business seeded and supports the rest of Berkshire investments. Coca Cola is more than one-fifth of the value of these investments. I don't think that Coca Cola produces value. Coke is a fad, albeit a long one, and one day it will not be a drink of choice. When Berkshire stops buying KO its stock price is done. On any given day I would prefer to own a mountain of gold as opposed to a mountain of Coca Cola built on a foundation of insurance.

  • Report this Comment On March 10, 2012, at 2:02 PM, TMFAleph1 wrote:

    @steltek

    The posting application doesn't lose any of the posts you make. However, there is sometimes a lag between the point at which you hit 'Post Your Comment' and the comment actually being displayed (I think the lag can be as long as 15 minutes.)

    Otherwise, posts that did show up and and "disappear" may have been removed due to the nature of their content.

  • Report this Comment On March 10, 2012, at 2:06 PM, VolkOseba wrote:

    Seriously, comparing the tulip bulb bubble (or any other asset bubble) to the current increase in gold? Isn't it funny that most everyone who thinks they can spot a gold bubble now with no evidence except the soaring price missed ACTUAL bubbles like the one we had in housing? (Isn't it also funny that the inflated housing prices during the bubble seem to have convinced Buffett that housing is bottoming now, and should be a good investment?)

    I'd suggest sending a copy of this book to Buffett... maybe some day he'll be half as smart as his father, who had befriended Murray Rothbard. http://mises.org/store/Early-Speculative-Bubbles-and-Increas...

  • Report this Comment On March 10, 2012, at 2:11 PM, TMFAleph1 wrote:

    <<I don't think that insurance creates value...I don't think that Coca Cola produces value.>>

    You may not think so, but that doesn't alter the *fact* that both create value.

    <<When Berkshire stops buying KO its stock price is done.>>

    It's been years since Berkshire has bought KO shares in any significant quantity. Berkshire is *not* the sole source of demand propping up Coca-Cola's stock price.

  • Report this Comment On March 10, 2012, at 2:16 PM, 48ozhalfgallons wrote:

    In a rational market (read rational political leadership) I lean toward Buffet. However, this market is dependent upon massive cash infusions from banks borrowing at fairy tale interest rates just to stay where it is. True market value acknowledging the real value of capital, interest, and solvency would place the Dow at about 4000. Until reality is established, Gold as unproductive as it is, will reign supreme.

  • Report this Comment On March 10, 2012, at 2:25 PM, kbeck02 wrote:

    "it is worth what others are willing to pay for it"

    Is not this true of EVERYTHING you could possibly buy in the stock market? That is the whole name of the game, seems to me.

  • Report this Comment On March 10, 2012, at 2:53 PM, nadgerz wrote:

    People keep mentioning that gold has 'beaten' the DJIA five-fold in the last decade.

    That's great if you bought in 2000.

    But given this chart...

    http://en.wikipedia.org/wiki/File:Gold_Spot_Price_per_Gram_f...

    for a fairly fixed global volume of the metal (perhaps 2500 extra tonnes a year)... where, really, is gold going to go from here?

    Up to $11,000 an oz in 20 years?

    That's with just a 9% increase a year from now.

    Let's say you bought gold in 1980 and sold in 2000... not looking so good. And if you *don't* sell at *some* point, like any stocks, it's not worth a whole load. Of course you can pass it on to your kids.

    So unless you understand *why* gold is at an all-time price now, you *are* speculating.

    Of course if you bought in 2000, good for you!

    I'd think of selling soon though.

  • Report this Comment On March 10, 2012, at 3:47 PM, repae2 wrote:

    Has anyone looked at a long term chart of gold vs the DOW?

    http://www.macrotrends.org/1333/gold-and-silver-prices-since...

    http://stockcharts.com/freecharts/historical/djia1900.html

    Don't put all your eggs into one basket. Be diversified in uncorrelated asset classes.

    When paper assets fall out of favor investors will try to preserve wealth wityh gold, but when paper assets do return to favor gold will fall.

    Gold takes the stairs up and the elevator down. Be careful.

  • Report this Comment On March 10, 2012, at 4:24 PM, wolfmansbrother wrote:

    Personally, I think gold is a perfectly reasonable investment...at the right price.

    However, whenever any asset is trading "near record highs" I run the other way. Bubbles always burst eventually. When this one does, chances are I'll try to buy some. Until then, I'm sticking with equities.

  • Report this Comment On March 10, 2012, at 4:25 PM, hudsondusters wrote:

    Don't forget the companies that fall off the Dow 30 don't always just disappear. General Foods was throwing off 4.00 dollar plus dividends in the 30s and eventually was bought by Altria. Texas Gulf Sulphur was bought by Elf Aquitaine. Texas Company (Texaco) was bought by Chevron, Standard Oil of California, Standard Oil of NJ is Exxon Mobil. Even the ones that went bust paid dividends for years.

    Exxon alone has returned 400x since 1970. And the annual dividend on your original basis is many times what you paid. Same for Johnson and Johnson, Mmm or Proctor and Gamble just since 1981. Gold isn't up even 40x since 1970 if I recall correctly.

    You can also simply sell components as they come off and buy the new ones. Not the best strategy but at least you wouldn't have rather silly arguments that you'd always ride the original 30 (since 1929) to zero.

  • Report this Comment On March 10, 2012, at 4:39 PM, AvianFlu wrote:

    There will be a time to dispose of gold holdings. That time is not now.

  • Report this Comment On March 10, 2012, at 5:00 PM, DOA1551 wrote:

    OK Three points bought 10oz of gold in I986 believe for about $ 167.00 Second when paper money fails or get devalued (inflation)people want gold. (see Germany 1930's)Third if gold is such a bad investment why is China buying so much of it, and why are they planning to open a new gold exchange I believe in Shanghi (2014?)

  • Report this Comment On March 10, 2012, at 5:03 PM, CaptainWidget wrote:

    <<With all the cropland destroyed, how much is the last can of spaghettio's worth? I'd suggest the worlds last meal is worth more than every oz of gold in the world. You and every other gold owner in the world can bid all you want for it, but I know I am going to be hungry tomorrow night, so I am keeping the spaghettio's and you can keep the gold.

    I don't think that you made your case with that idea. I think you made Matt's case against gold.>>

    I do hope you recognize that all American farmland =/= all farmland on earth. Other countries produce food as well, much more than the US.

    If America ceased to produce food, there would still be food. If exxon stopped producing gas, there would still be gas. But in our fiction, once I get all the gold, it's gone forever.

    And that still doesn't change the fact that farm management is work. It's a job. Running a oil company is a job. There's aren't things you can possess and sit passively in your portfolio and ignore for the rest of your life (the same should be true of any company).

    That's not gold. Gold has instrinsic value, it will never go to $0 or anywhere close to it. And it's a pretty damned good hedge against other assets in the same class. Your dollar going up? Your gold is probably going down. Hedge! what a concept

  • Report this Comment On March 10, 2012, at 5:09 PM, ershler wrote:

    PostScience,

    Firearms are just tools, you still need people who have the skills to use them. But if someone from the NRA is reading this you may have given them a great fundraising idea.

  • Report this Comment On March 10, 2012, at 5:12 PM, CapngainerII wrote:

    When any investment ( precious metals, oil, tech stocks, utilities, S/P 500, Treasury bonds, etc, etc, is in a bull market, IF YOU WANT TO MAKE MONEY, JOIN IN. Don't waste your time debating ambiguous justifications and pontificating about your investment style purity.

    The market is always more knowledgable and possesses exponentially more information than you do. Try to identify bull markets early rather than late, and if the market changes it's mind, so should you.

    For an author to explain that following one quote has seen him disdainfully ignore a 500% bull market in a major asset class, makes him look, at least to me, stubborn and financially pig-headed.

    Not what I'm looking for as I peruse the internets for quality investment advise.

    At any rate, good luck to all. Keep an open mind.

  • Report this Comment On March 10, 2012, at 5:16 PM, jm7700229 wrote:

    There is a lot of misunderstanding of basic economics in this thread. Most importantly, gold is not a "store of value." Rather, it is DEEMED to be a store of value. A hamburger has intrinsic value. Gold does not. Using an earlier example, if I had a monopoly on the food on the island, food would be a store of value. At some point everyone would NEED it. Not true of gold; leaving out its utility in manufacturing, no one NEEDS gold. In fact, there is nothing that people on the island wouldn't trade for my food nor is there any price at which they would refuse to buy it.

    If I had the last food on the island, not for your gold, or your land, or your sister would I trade it.

    Which leads us to the problem with gold as an investment: what is its value? I don't know what Exxon Mobile will earn over the next ten years, but I can do a lot of homework and come up with a reasonable guess based on known conditions, and this estimate will be in a currency. With that information, I can arrive at an expected value for Exxon Mobile in that same currency. Even if there is no one who wants to buy my stock, I still have the flow of earnings to keep me warm; I'm not limited by the expectations of others. Gold is only worth what you can sell it for.

    The pro gold people posting here seem to be saying that gold will go up because it has in the past, or because it has limited production. But it has also gone down in the past, and limited production only means producing less than people are willing to buy. If demand slackens, so will the price; in fact, since it has no intrinsic value, the price could theoretically drop to zero. That will never happen with food.

  • Report this Comment On March 10, 2012, at 5:28 PM, Riskybyz wrote:

    The writer choose speculation over investing when referring to gold. Speculation presupposes intellectual effort whereas gambling is blind chance. I consider owning gold gambling.

  • Report this Comment On March 10, 2012, at 5:39 PM, DOA1551 wrote:

    Alot of you are missing the point. Gold is a protection against inflation. Inflation is comming along with that is higher prices for everything. 14 trillion in debt, Gold is just another assest class, we speculate everyday on good companies and bad ones. Buying long, selling short. Gold is just another assest.Like I wrote before in Germany 1930s I wonder if the people would of rather owned Marcs or gold. To buy a loaf of bread

  • Report this Comment On March 10, 2012, at 5:51 PM, itsallluck wrote:

    If Gold is such a non-value commodity, why does the United States of America possess so much? And why did the Federal government confiscate it in 1933.

  • Report this Comment On March 10, 2012, at 5:56 PM, xetn wrote:

    For those of you who think gold is in a bubble, here is what real bubbles look like:

    http://www.caseyresearch.com/sites/default/files/Historical%...

    I don't view gold as an investment or a store of value; it is money, real money, and has been so for several thousand years. Money is a medium of exchange and nothing more or less. In that regard, fiat currencies are also the same as gold. The big difference is that fiat currencies can and are created out of thin air with the click of a mouse. Gold has to be mined, which means you have to spend large sums to find and extract it and refine it.

    Since it does not grow very much per year, it can not be total gold supply cannot be increased at will like fiat currencies.

    That is why this chart is so meaningful:

    http://www.the-privateer.com/chart/g-multi.html

  • Report this Comment On March 10, 2012, at 6:02 PM, hbofbyu wrote:

    Some pretty stupid arguments are being made here. Gold is a hedge against inflation and a falling dollar.

    It is not a hedge against the complete collapse of society and civilization.

    Some worship gold, some worship Warren Buffet. To each his own.

  • Report this Comment On March 10, 2012, at 8:49 PM, devoish wrote:

    I do hope you recognize that all American farmland =/= all farmland on earth. Other countries produce food as well, much more than the US. - CaptainWidget

    I do hope you realize we can all read that you did not say "American farmland", you said "all cropland" in your reply.

    Be that as it may, If American Farmland became unproductive, the value of the remaining and suddenly scarce food production would embarrass the gains from gold, work required or not.

    As you can probably guess, to me, silicon on my roof is a better investment than gold in a basement.

    Best wishes,

    Steven

  • Report this Comment On March 10, 2012, at 10:48 PM, rmondave2 wrote:

    OK Motely Fool SMARTY PANTS: WHAT ARE YOU WILLING TO PAY FOR "CURRENCY" PAPER THAT A SPENDTHRIFT, CORRUPT, DESPERATE TO STIMULATE GOVERNMENT PRINTS OUT OF FLIPPING THIN AIR? PERHAPS YOU SHOULD RETHINK YOUR THESIS CONSIDERING THE WORLD, INCLUDING THE USA HAS OVER DONE THEIR DEBT AND THAT PAPER MONEY IS TOILET PAPER TODAY. If the 12 Year performance of PM is not convincing enough for you, coupled with the bankruptcy of the USA, then nothing will be. Talk about Buffett worship. All superstars decline in the end, and BUFFETT will be no different. He is now nothing more than a political shill for Obama.

  • Report this Comment On March 10, 2012, at 10:58 PM, ariel6363 wrote:

    Let's play today : Scissor - rock - paper.

    Next day it is Doomsday now we have to play:

    Gold - food/water - gun.

    If I have the gun,I'll first I take the food and water take my time a bit and than go get the Gold.

    As the Golden rule say: who ever owns the gun owns the Gold ,or is it who ever owns the Gold -rules. just too confusing.

    Conclusion get the Guns - First and plenty of ammo too,

  • Report this Comment On March 10, 2012, at 11:03 PM, CaptainWidget wrote:

    <<I do hope you realize we can all read that you did not say "American farmland", you said "all cropland" in your reply.

    Be that as it may, If American Farmland became unproductive, the value of the remaining and suddenly scarce food production would embarrass the gains from gold, work required or not.>>

    I do hope you realize that Warren Buffet said "all American cropland" and I was merely paraphrasing.

    Be that as it may, America does not make most of the world's food, or even a significant percentage of it. If you remove subsidies corn from America's food production (little of which is actually turned into consumable human food) America make a fairly insignificant amount of food relatively to the amount of arrable land in this country.

    Would it affect food prices? Yes. It would cause them to go up, making imports from other countries more attractive. Food would flow straight out of the poor bangladeshish's mouths and right into yours. You're still fed.

    And me...I'm in an even better situation. I own every single iota of gold on earth. I think....just maybe.....I could convince someone to trade me a few potatoes for the (now, in my hypothetical scenario) most expensive element on earth.

    Now if the question is "would you rather have all the gold on earth or all the food" I think the answer is obvious. But that wasn't the hypothetical scenario. It was all the gold on earth vs all the food in America. Since the marginal value of gold is much higher, the relative increase in the price of food would be dwarfed by the increase in the price of gold. The marginal value of the LAST unit of food is much greater than the last unit of gold, but until that point, food is still pretty cheap. And as long as there's no monopoly on food, gold is the better investment.

    Again this is all good and well into fantasy land. But in a realistic world, if you were going to buy a few thousand dollars of some asset and ignore it for 20 or 30 years, i think you could do a lot worse than gold. Ignoring the last decade, yes Exxon would have probably beat gold over 30 years (of course, if you choose to include the last decade, Gold crushed almost everything). But Eastman Kodak didn't fare so well. No one can predict the market 20 years in advance. Some stock you buy may go to 0. But Gold never will. Never.

  • Report this Comment On March 11, 2012, at 3:12 AM, knighttof3 wrote:

    I read all 35 comments on this post. I demand that Motley Fool pay me for my enormous waste of time. Half gold, half BRK stock.

    In all seriousness. Own gold. For diversification, for hedging against runaway inflation, and because it is so shiny and pretty. And keep it to at most 5%-10% of your total wealth, because if you are like 99.9999% of people who depend on commerce (supermarkets, the electric company, etc) to survive, there are darn few companies and stores that will accept your gold as an acceptable means of payment.

  • Report this Comment On March 11, 2012, at 9:09 AM, hudsondusters wrote:

    Menelyik, there weren't 30 stocks in the Dow Industrials in 1910. And from the 30 in 1929 they didn't all but 2 go to zero. Many were bought by other companies (at huge multiples of the 1929 price) or changed names. And paid large dividends for years. My mother holds stocks from the '50s that pay her several times in dividends each year than her original cost. That doesn't happen with gold, which has no return but capital appreciation, as the article says, what someone else will pay you for it (right now, quite a bit). Exxon bought in 1970 for $10,000 with dividends reinvested pays over $80k a year in dividends presently. Every year. Not to mention its capital appreciation. Now worth $3.6 million roughly. Ten thousand dollars of Proctor and Gamble bought 30 years ago today with dividends reinvested pays 18 thousand annually in dividends and is worth over 500 thousand. Johnson and Johnson, coca cola, MMM, McDonald's, IBM, Honeywell, United Technologies, Altria, Merck, etc, similar stories to varying degrees.

    Sure, some you could ride to zero, but there was usually plenty of advance warning before Kodak or GM went bankrupt.

    Gold is up about 5x in 30 years. Not too shabby. But pitiful compared to the blue chip stocks mentioned above. Heck, Altria pays you 14.9x the adjusted basis every year for what you would have paid in March 1982.

    As Einstein said (well, probably not but it sounds good) the most powerful force in the world is compound interest.

  • Report this Comment On March 11, 2012, at 9:27 AM, hudsondusters wrote:

    Ten thousand dollars worth of gold bought March 11, 1982 is worth about 50 thousand today. Ten thousan dollars in coca cola stock bought March 11, 1982 is worth over a million dollars today. And pays over 30 thousand in dividends annually. Two years of dividends is worth more than the entire gold appreciation for the last thirty years.

    And yet some of you think Buffettt is the buffoon? Maybe Berkshire's returns will slip but coke, Mickey Ds, Geico, Sees Candy, Etc will still be throwing off many times more in dividends than what he paid. And you don't even need to be Buffett to buy some of those types.

  • Report this Comment On March 11, 2012, at 10:48 AM, hudsondusters wrote:

    Someone wrote that 10 oz of gold cost 167 in 1986. incorrect. He may have meant one ounce. And an ounce actually ranged between 326 and 438 in 1986.

    Since March 11 1986 PG's stock is up 28 times, gold not quite 5x. And PG pays about the same in dividends every year as the adjusted 1986 basis. Some gold is indeed a decent hedge for inflation or societal collapse, I suppose. If you are worried about the dollar buy bhp, rio or chl.

  • Report this Comment On March 11, 2012, at 12:04 PM, racchole wrote:

    I think it is safe to say, that when the world turns to chaos, people will kill you for your corn, not your gold.

  • Report this Comment On March 11, 2012, at 4:29 PM, Kauaicat wrote:

    Gold (and silver) is a form of money, and it is not difficult to convert to cash immediately, either at a coin store or a storefront gold buyer. If I have a couple of days available to trade my gold for dollars, all I have to do is sell my gold on Ebay and the money paid flows directly from Paypal to my bank account. There are thousands of gold and silver transactions weekly on Ebay.

    For example, if I need $500 by Tuesday, I can sell 20 Morgan or Peace silver dollars today (Sunday) and net around $600, and write a check on my account Tuesday.

    Backing up what several others have written, gold is not an investment, it is a hedge against the falling value of the dollar and inflation. I've limited my holdings in precious metals to 15% of my investment portfolio. The government statistics for inflation do not reflect the actual inflation in food and fuel that has occurred over the past 10 years as the Federal Reserve and the European Community Bank print money. When they stop printing money AND raise interest rates, I'll divest myself of gold and silver. Until then, it's a no-brainer.

  • Report this Comment On March 14, 2012, at 3:23 PM, DJDynamicNC wrote:

    "True market value acknowledging the real value of capital, interest, and solvency would place the Dow at about 4000."

    That's an intriguing claim.

  • Report this Comment On March 15, 2012, at 11:35 AM, malachiconstant4 wrote:

    Buffet is a crony capitalist who got the government to bail out the companies that Berkshire invested in. He pushes for progressive tax rates knowing they can never touch him. ( They only keep the average Joe from amassing wealth and securing his financial future.) Warren may not like gold, but he did invest in silver in the 90's trying to manipulate the price. When became public he ended up selling for a loss. If he does not believe in gold why is he even mentioning it? I'll take Warren as my contrary indicator and keep on buying.

  • Report this Comment On March 15, 2012, at 2:53 PM, DJDynamicNC wrote:

    Yes, Buffett would be nowhere if not for the Great Coca-Cola Bailout of 2007.

    Betting against Warren Buffett is a safe way to ensure you don't suffer the fate of Berkshire Hathaway.

  • Report this Comment On March 16, 2012, at 2:11 PM, stickerpoint wrote:

    There are a lot of misconceptions here, and spurious arguments about hamburgers being a better store of wealth than gold etc. (try that a week later).

    Gold has been one of the major store of wealth since history books have been written (not just since the Conquistadors). This is longer than the nano-second society we currently live in. It is pointless to try to compare stock prices etc. from such-and-such time. Try to see gold as what it is - a long term asset which does not tarnish nor rust, nor go broke. It is an element from the periodic table, and has properties which cannot be matched by any other. That is why it is valuable, not because it is shiny.

    Of course, putting all ones eggs in one basket would be stupid. But not to put any eggs in the gold basket would be equally so.

  • Report this Comment On March 17, 2012, at 6:12 AM, punitsjain wrote:

    Lets be very direct here, there are a lot of things out there that Buffet would not like to invest in. Buffet does not invest in any opportunity that will just give him the best returns. He's got his rules, his likes, his dislikes, his moral stands, his 'do not understand' list. His complex rules work for him, and based on the rules he is comfortable with his buys and even his sells. We need to leave him alone to do his magic.

    Quite frankly nobody else can even come close to repeating his choices. Thank goodness for that. Now if I like Gold I can go and buy it without the 20% premium it would have had if Buffet liked it :-)

    Cheers and happy independent investing from www.jainmatrix.com

  • Report this Comment On March 17, 2012, at 10:15 AM, obiwan48 wrote:

    Due to many major countries in the world "racing to devalue" their respective currencies, gold will increase in value as the devaluation process goes forward. The current devaluation process is serious. It may lead to letting the inflation genie out of the bottle.

    Similar to a War, inflation can be much more easily started than ended.

    I'm an advocate of financial diversification, including owning stocks, real estate, and

    hard assets, such as gold as part of the financial diversification.

    Value of gold to stocks?

    Who's to say that any stock should be worth any

    multiple of it's earnings. P/E is a historical financial measure that is accepted by the financial world. Assigning a large multiple to the value of a company doesn't have to happen.

    Instead of a stock being worth a 13X of it's P/E,

    why not 2 or 3?

    Because, similar to the value of gold, the P/E (and other factors) is what someone is willing to pay for a particular stock.

    If all the hype was taken out of the media for "reasons to buy stocks" for even one year, you can be assured the market would drop sharply.

    Since stock markets have been around hundreds of years, how many stocks still exist from the countless (hundred of thousands) of companies that were part of the stock exchanges in the past?

    Few.

    Conversely, unless totally lost or destroyed (hard to do), most of the world's gold from any time period still exists in one form or another.\ and is valuable. If it's in an artistic or historical form

    it can be priceless.

    Anyone can pick and choose (via looking back a great company), however, gold is in reality, the ultimate economic insurance policy.

  • Report this Comment On March 17, 2012, at 10:04 PM, killwill wrote:

    Warren Buffet is well past his prime. He doesn't remember October, 1929. He could be reduced to a mere millionaire during the course of a day.

    Some of us remember FDR calling in all the gold in 1933. Why did he do that? The price of gold went from $20 an ounce to $35 an ounce overnight. It was a step toward putting all trust for maintaining monetary value in the hands of politicians without any constraints.

    Even though the Federal Reserve; could circulate "notes" as currency, they still were 'backed" by gold until Nixon removed us from the gold standard in response to deGaul's demand for metal instead of paper in the early '70's.

    It's taken almost 80 years, but it's finally caught us with us. The guy at 1600 Pensyllvana Ave. keeps the presses at Treasury running 24/7 piling up the paper, the value of which is--?. When the folks wake up and find that it takes a wheelbarrow full of paper to buy a loaf of bread, gold will still have it's value. Those who ignore history are doomed to repeat it, read the Weimar Republic.

  • Report this Comment On March 19, 2013, at 9:15 AM, duuude1 wrote:

    When I was just starting my professional career, I knew nothing about investing. I read a book called Stocks for the Long Run by Jeremy Siegel. In it he compares the long term returns of every asset class you can imagine, real estate, bonds, treasuries, gold...over 200 years of detailed data. And it was clear, even to a young, inexperienced duuude like me, that diversified stocks were by far the best place to be. It was absolutely no comparison whatsoever. This included a timespan covering major world wars, depressions (including the Great One), real threats of nuclear wars with former USSR and China.

    I've always been 100% invested in diversified stocks, no bonds, no treasuries, no real estate, no gold. I go back and compare my returns periodically, and at no time have I ever regretted my decision. I will continue to keep this investment all the way through retirement.

    Stocks beat gold with both hands tied behind the back.

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