Is Warren Buffett Right About Gold?

Since his 2011 comments, the Oracle of Omaha has been right about gold. Will he be right over the next decade as well?

Mar 11, 2014 at 9:15AM

Many investors, Warren Buffett among them, believe that gold is an inferior investment to equities.

Buffett made the following famous statement in May 2011:

I will say this about gold -- if you took all the gold in the world, it would roughly make a cube 67 feet on a side. Now for that same cube of gold, it would be worth at today's market prices about $7 trillion dollars – that's probably about a third of the value of all the stocks in the United States. For $7 trillion dollars, you could have all the farmland in the United States, you could have about seven ExxonMobils, and you could have a trillion dollars of walking-around money. And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally Call me crazy, but I'll take the farmland and the ExxonMobils. 

Since May 2011, SPDR Gold Trust (NYSEMKT:GLD) is down 14% while the SPDR S&P 500 ETF  is up 38%. Owning gold has not been a rewarding investment over this period as the U.S.10 year yield has risen and the U.S. economy has improved. 

Images

Source: Ycharts

Despite the pessimism, many investors still believe in gold's prospects over the coming years. Here's why. 

Federal Reserve's trillions
First, the Federal Reserve has a $4.1 trillion balance sheet. That number is simply gigantic versus historical norms. Currently, the Fed is getting away with it because the U.S. is in a Goldilocks zone, where inflation and interest rates are low while growth is pretty steady.

This type of macro situation has not been historically sustainable. Eventually the U.S. will run into inflation when the economy reaches full employment. When that time comes, it remains to be seen whether the Federal Reserve can withdraw enough liquidity to avoid further inflation. If inflation becomes a big problem, demand for hard assets like gold will increase greatly. 

China and India demand for gold will only increase over the next 10 years
Second, as they get wealthier, China and India will consume larger quantities of gold. Even though their economies are not doing well at the moment, on a ten year time-frame, China and India's wealth will only increase. Since gold is a luxury good, as Chinese and Indian wealth increases, gold demand should likewise increase.

Data over the past decade backs this up. According to the China Gold Association, China became the largest consumer of physical gold in the world last year. Chinese gold jewelry consumption grew 43% to 716.50 tonnes in 2013.   

That number absolutely blows away Greater China's 2003 gold jewelry consumption of 232.2 tonnes. 

Similarly, India's total gold jewelry consumption last year was 612.7 tonnes versus 2003's 565 tonnes. 

The dollar and twin deficits
Third, the dollar is pretty strong right now because the U.S. economy is the best house on a bad block. On a ten year timeline, however, the dollar still has questions. The U.S. still has twin deficits: a large fiscal deficit and a large trade deficit. The dollar has not depreciated because the Chinese have been buying treasuries en masse, but as China becomes more of a consumer nation, it will buy less treasuries and the dollar may fall. Other major economies may also improve their competitiveness versus the United States, which would further weaken the dollar. If the dollar weakens, gold's value versus the dollar will strengthen.

The bottom line
I believe the principle reason to invest in gold is the growing Chinese and Indian demand over the next decade. Gold's protection against inflation is kind of like a free call option in this case.

Buying low-cost producers with disciplined management is probably the best way to go. Low-cost producers will still be around if gold prices fall below the $1,200 per ounce level and companies with disciplined management will contain costs better than companies with average management.

Some names to consider are Goldcorp (NYSE:GG) and Barrick Gold (NYSE:ABX). Goldcorp has a 2014 all-in sustaining cost of between $950 and $1,000 per ounce. The company forecasts production increases of 50% and a reduction in all-in sustaining costs of between 5% and 20% over the next two years. 

For 2014, Barrick Gold has an all-in sustaining cost forecast of between $920 to $980 per ounce. Soros Fund Management also recently added 6.3 million shares of Barrick Gold to its portfolio. 

Despite the recent rally, gold is still a pretty controversial investment. Warren Buffett may be right on gold over the next ten years. Equities may continue to outperform gold. There are, however, some good reasons to take the opposite side. 

Invest like Buffett
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

 

Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers