Be Civilized and Don't Buy Gold in 2013

When Warren Buffett speaks, the investment world tends to listen, and for good reason. Likewise, when Buffett's second in command, Berkshire Hathaway (NYSE: BRK-A  ) Vice Chairman Charlie Munger, expresses an opinion, you should take note. Nearly a year ago, Munger told CNBC that he thinks that "civilized people don't buy gold," instead preferring a collection of well-run business, much like those in Berkshire's portfolio. While his advice was sound a year ago, it truly resonates this year as analysts across the street slash price expectations and, in some cases, recommend being short gold. Given the turmoil and increasingly negative outlook settling over the gold market, 2013 may be a good year to sit out in pursuit of more prim and proper pursuits.

What Munger advocates
Rather than focus such plebian investment vehicles as gold, or even the gold ETF -- the SPDR Gold Trust (NYSEMKT: GLD  ) -- Munger talks up Berkshire's holdings:

We just have a wonderful portfolio in business, if you average them out. By and large they're doing productive, useful work. It's not outsmarting the computer systems in the trading markets.

Even though the comment is self-serving, and arguably stale, it highlights an important concept when thinking about the gold market, namely that gold doesn't really do anything. Unlike silver, which has a myriad of industrial uses, as do Molycorp's (NASDAQOTH: MCPIQ  ) rare earths, gold is mostly coveted as a safe-haven investment or inflation hedge.

"I think civilized people don't buy gold," Munger said; "they invest in productive businesses." Where the rare earth materials produced by Molycorp and others are used in health care, technology, water treatment, and defense applications, gold is used for very little beyond jewelry. He may not have had other materials companies in mind, but this distinction for gold is an important one and should not be lost.

The analysts are circling
Both Goldman Sachs and Deutsche Bank recently cut their respective outlooks for gold for the rest of 2013 and beyond. Deutsche focused on the strength of the U.S. dollar, the shift into stocks, and its view on improving U.S. growth as all being negative for gold over the medium and longer terms. It trimmed its 2013 outlook by nearly 12% and, while it dropped its 2014 projection by 4.7%, it still sees gold climbing to $1,810 next year.

Goldman's view is much grimmer, leading the investment bank to recommend that clients go short gold ahead of continued weakness. In its second cut of the year, Goldman dropped its 2013 price target to $1,545 and its 2014 target to $1,350, well below the estimate of many peers. Some of the reasons cited include the muted response gold prices have had to economic weakness and the potential for accelerated selling pressure as speculative investments are wound down.

Ultimately, I believe reality lies somewhere in between the views of the two investment houses, with the real possibility that another debt hiccup in Europe could serve as a catalyst to redraw the landscape. At current levels, gold remains speculative and better options exist. Even if you prefer not to liquidate your exposure completely, some trimming is indicated here.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2013, at 2:50 PM, herky46q wrote:

    Gold is pretty good for dentistry and electronics.

  • Report this Comment On April 13, 2013, at 5:35 PM, duuude1 wrote:

    High concentrations of gold are thought to be located either deep within the core of the earth, or in certain classes of asteroids. During earth's early molten stages, heavier elements such as iron, nickel, gold and many other metals sank into the core, while lighter compounds such as silicates and aluminates floated to the surface. Metal-rich asteroids are presumably remnants of early planetary cores.

    These two sources lead to mineable deposits on the surface of the earth through a couple mechanisms. Volcanism brings materials from core to surface, and leaching by water precipitates gold veins along the surface. Asteroid impacts, meanwhile, lead to the most productive gold mines in the world, such as those in South Africa.

    These previously untouchable locations of high gold concentration will soon be tapped by several rapidly evolving technologies: drilling and deep-space robotics.

    Harvesting metals from deep within the earth may benefit from several aspects of drilling technology:

    - depth of drilling. Wikipedia states that the Kola superdeep borehole in NW Russia exceeds 40,000 feet in depth, and superdeep holes have been drilled in several other countries.

    - pumping materials in and out of boreholes. The fluid-handling technology encompassed in the controversial fracking industry is relevant for metals extraction.

    With these developing drilling capabilities, we can easily imagine the ability to pump water, or more efficient solvents that capture high quantities of metals, into the boreholes and extracting metals such as gold from the fluids retrieved from the boreholes.

    Meanwhile, Elon Musk's SpaceX and Peter Diamandis's Planetary Resources are just a couple of the companies capturing our attention with their rapidly evolving space technologies. Planetary Resources' explicit goal is to harvest rare and strategic materials, including gold, from asteroids. Planetary Resources is backed by the deep pockets of highly successful entrepreneurs and executives from Google, Microsoft and others.

    Peter Diamandis tells a most illustrative story of a meeting between monarchs a few hundred years ago, where one had cutlery made from gold, and the more exalted emperor had cutlery of aluminum - because at the time aluminum was by far most valuable metal on the planet. Aluminum is abundant, but at the time it was almost impossible to obtain in pure form. The subsequent development of electrolytic extraction of aluminum from its ore made it cheap.

    Technology changes what was rare into something more abundant.

    Lesson: don't invest in things (such as gold or platinum or pork bellies); invest in people and companies who develop technologies that change the world.

  • Report this Comment On April 15, 2013, at 9:48 AM, Raphael1990 wrote:

    Thank you for that insightful comment, duuude1.

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