In Why stocks beat gold and bonds, Warren Buffett, who is known as the Oracle of Omaha, takes the view that the risk of an investment is not measured by ‘Beta’ (a wall street term that entails investment volatility as an indicator of risk), but is instead measured by the likeliness of any given investment preventing its owner from investing in other options. He deems this to be a loss of purchasing power.
He describes the characteristics of what he deems to be three main investment options, with these options being:
- Investments that are in a given currency (such as money-market funds, bonds, bank deposits and mortgages);
- assets that will never produce anything (an unusual example of which being tulips, a choice investment in the 17th century);
- and finally investment in productive assets (such as farms, real estates and businesses).
Buffet outlines his preference for the latter, citing these as a superior investment, and advising would be investors to invest heavily.
In this article, Jay Jenkins furthers Warren Buffets argument that it should not be considered as a worthwhile investment.
He explains that whilst many consider it to be an inflation hedge, and a staple of the diversified investment portfolio, he strongly urges investors to change their view on gold as a lucrative option.
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He goes on to say that there are various factors that drive the demand, summarising it as 3 reasons:
- It has intrinsic Value,
- It Hedges Inflation and the view that is a
- Liquid Alternative to Cash. Jenkins states that usually it is a mix of reasons 2 and 3 that makes people invest in this metal, and communicates his understanding as to why people do so.
However he reaffirms his stance that he will never buy it, come what may, and recounts Buffet’s thoughts that the world’s gold stock is about 170,000 metric tons, which equates to a cube that would scale around 68 feet per side. Based on current values, this cube would be valued at $9.6 trillion.
This cube is then compared to the fact that for $9.6 trillion, an investor could buy all of America’s cropland, as well as ExxonMobils (the world’s most profitable company) with $1 trillion left over. This stark contrast demonstrates it to be insignificant in value when compared with the latter option.
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Jenkins concludes his piece by emphasising the importance of dividend stocks as a worthwhile, and moreover more attractive investment alternative to this precious metal. He states that they are less risky, and that their quarterly payouts, as well as the speed of their growth, means that the return on investment mounts up quicker than many imagine.
Our third article summary is Jay Reeves’ take on Why Buffett thinks investing in this precious metal is stupid, he pointedly makes an analogy that illustrates the uselessness of it as a commodity:
Gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
Just as in Jenkins article, Reeves reaffirms the gold cube value analogy, and goes on to point out that the current state means that, in terms of value, it has returned to 2010, when Buffet made his remarks. Given that ExxonMobils shares are, in comparison, up 35%, Reeves gives even more credibility to Buffets comments.
Whilst Reeves acknowledges that the future looks uncertain in terms of prices, he finishes by echoing Buffet’s thoughts, and telling his readers that they should follow his advice on not buying gold.