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Be Civilized and Don't Buy Gold in 2013

By Doug Ehrman - Apr 13, 2013 at 1:45PM

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Buffett's top lieutenant is squarely opposed to maintaining exposure to gold.

When Warren Buffett speaks, the investment world tends to listen, and for good reason. Likewise, when Buffett's second in command, Berkshire Hathaway (BRK.A 0.10%) 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 (GLD 0.07%) -- 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 (NYSE: MCP) 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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Stocks Mentioned

SPDR Gold Trust Stock Quote
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GLD
$172.03 (0.07%) $0.12
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Berkshire Hathaway Inc.
BRK.A
$456,500.00 (0.10%) $468.99

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