Is Warren Buffett Wrong About Gold?http://www.fool.com/investing/general/2012/09/28/is-warren-buffett-wrong-about-gold.aspx Arjun Sreekumar
September 28, 2012
Very few assets spark debates as controversial as those over gold. Some investors, notably Warren Buffett, say it's just a shiny metal that doesn't yield any cash flows. Others argue that it's the best insurance policy when the outlook for paper currencies looks dire. Who's right?
The anti-gold argument
It's hard to argue with that. Yet some of the most highly respected and successful investors in the world disagree.
A growing number of gold bulls
Similarly, billionaire investors Soros and Paulson are also bullish about the outlook for gold. Both recently upped their ante on the precious metal by raising their investments in the largest gold-backed exchange-traded fund, the SPRD Gold Trust (NYSE: GLD ) . Soros Fund Management more than doubled its position to 884,400 shares as of the end of June, while Paulson and Co. raised its holdings by 26% to a whopping 21.8 million shares. Paulson's fund has invested a sizable percentage of its money in gold-related stocks, including NovaGold Resources (NYSE: NG ) , in which it bought more shares last quarter.
But it's not just hedge fund managers and individual investors who are rushing into gold. In recent years, the plethora of gold buyers has come to include not only gold bugs and Ron Paul fans, but also sophisticated monetary institutions and sovereign wealth funds. Central banks' official reserve managers are just one of many who appear to have turned bullish on the shiny yellow metal. They became major purchasers in 2010, after almost two decades as sellers. Last year, central banks amassed a whopping 456 tonnes, representing the greatest central bank accumulation of gold in more than four decades.
Gold as a hedge against inflation
If you look back through history, the short answer is "not always." For instance, consider the 1980s. In 1980, the price of gold was around $400 an ounce. It rose to a high of nearly $700 in the following years only to end the decade back at $400. Meanwhile, the U.S. Consumer Price Index rose more than 60% during that decade, meaning gold failed miserably in keeping up with inflation.
On the flip side, though, gold has fared much better as an inflation hedge in recent years. Since 2000, its price has increased nearly 600%, more than keeping up with consumer price inflation. So its effectiveness as an inflation hedge really depends on when you buy it and over what time frame you hold it.
Final thoughts and two gold stocks to consider
Societe Generale's global strategist Dylan Grice, in his characteristically blunt tone, sums up the advantages of gold nicely (emphasis mine):
If you're convinced that the price of gold will continue to move higher, there are numerous ways