“Gold will never produce anything,” Warren Buffett once declared. “Gold has two significant shortcomings, being neither of much use nor procreative … It will remain lifeless forever.”
Let’s examine the billionaire’s assertion up close. To be sure, gold is not an investment in the classic sense of the word. Buffett is right about that — and that’s why he dismisses the ancient monetary metal as an asset that “will never produce anything.”
But that doesn’t mean gold is worthless.
After all, gold belongs to a long and storied collection of “lifeless” items that “will never produce anything” — a list that includes things likes parachutes, lifeboats, EpiPens, airbags and flak jackets.
Most of the time, these items serve no useful purpose whatsoever. They just sit there … waiting for an emergency. But we don’t trash-talk fire extinguishers just because they aren’t as useful as a tractor or as tasty as a cheeseburger.
That’s because a fire extinguisher serves a vital function, albeit rarely. When your house is burning, you don’t grab a cheeseburger.
And when monetary stresses or geopolitical crises flare up, you don’t bust into your nest egg to buy penny stocks. You buy gold … unless you’re Warren Buffett.
Interestingly, gold is not solely a “crisis asset.” It can perform well, even when economic and geopolitical conditions are relatively placid.
In fact, despite gold’s “significant shortcomings,” it has delivered a much higher return during the last 20 years than Buffett’s “useful” and “procreative” Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
The 20-year scorecard reads as follows:
- Berkshire Hathaway up 355%.
- Gold up 525%.
Gold’s performance has also surpassed Berkshire’s over the last 15- and five-year time frames. However, over the most recent 10 years, Berkshire has topped gold’s return.
In other words, as the writer of Ecclesiastes observed, “There is a time for everything” — even a time for “non-procreative” assets like gold.
Notwithstanding this irrefutable fact, gold has never been a part of Berkshire Hathaway’s secret sauce … and it still isn’t. Buffett’s contempt for gold, therefore, feels more like a habit then an investment insight.
Charlie Munger, Buffett’s longtime partner, shares the same habit. “Civilized people don’t buy gold,” Munger says. “They invest in productive businesses.”
“Gold gets dug out of the ground. 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.”
Maybe that’s true. But despite the skepticism of Martians, most of the 8 billion creatures residing on Earth believe that gold has at least some utility. Many centuries of investment history support that belief.
Gold may be an uncivilized asset, as Charlie Munger asserts — and it may be a lifeless one, as Warren Buffet claims. But it is definitely not a “lifeless forever” one.
That’s fake news.
The Battle of the Cults
In fact, gold often rolls away the stone and springs to life at the exact moment most stocks are rolling over and playing dead … including great stocks like Berkshire Hathaway.
The last 18 months provides the latest example.
Gold has soared nearly 40%, while Berkshire shares have slumped more than 15%.
Warren Buffett is a legend, no doubt about it. He is also a self-made billionaire. No doubt about that either.
That’s why he has been duly and deservedly canonized as the patron saint of value investing … and maybe every other style of investing as well.
But “St. Warren” seems to regard gold as a heretical asset class — a false idol. Perhaps that’s because gold represents the opposite of everything that enabled Buffett to become a billionaire.
He amassed most of his wealth betting on the mighty American enterprise of the 1980s and 1990s — a disinflationary era that featured low inflation, low taxation, a reliable rule of law and a stable U.S. dollar.
That same era also featured a gold price that gained no net ground between 1979 and 2001 — a 22-year span of dead money. Twenty-two years isn’t “lifeless forever,” but it feels like an eternity in “investment years.”
Not surprisingly, therefore, Buffett learned to shun the asset that played zero role in his success. This anti-gold philosophy is as much a part of the Buffett mystique as his affinity for sugary sweet companies like Coca-Cola (NYSE:KO), See’s Candies and Baskin-Robbins.
Buffett’s unique, fascinating and brilliant investment persona has attracted millions of admirers and devotees — so much so that I drew a comparison many years ago between the “Cult of Buffett” and the cult-like aura that surrounds the gold market.
“Let us take a look at two cults,” I started off. “One has a charismatic leader and millions of disciples. The other has no leader whatsoever, but billions of disciples.”
Neither cult engages in fringy activities like polygamy, sacrificing goats, or building armed compounds in the desert. Nevertheless, both cults attract a very fanatical following.
Today, we examine the cult of Berkshire Hathaway and the cult of gold-buying. The former pays homage to Warren Buffett; the latter genuflects at the altar of Hard Money…
If you always wanted to belong to a cult but didn’t want to deal with the threat of a federal raid or the hassle of raising dozens of children who may or may not possess your DNA, Berkshire Hathaway may be your ticket. In fact, Berkshire may be the most “cultish” cult since the Branch Davidians.
Let’s pull back the sacred shroud to examine the evidence…
Once a year, you get to join your fellow cultists in Omaha for Berkshire’s annual shareholder meeting — the “Woodstock for Capitalists.” Additionally, you get to quote the utterances of your leader as if they were holy writ. Best of all, you don’t have to surrender your possessions to the community of believers. Instead, you get to make even more money for yourself.
Curiously, the lower Berkshire’s investment returns have slipped over the years, the greater the frenzy to attend the company’s annual shareholder meeting in Omaha … and the higher the price to break bread with the cult leader at the annual Power of One Lunch in San Francisco.
The attendance at Berkshire’s annual meeting has exploded from a mere 15 individuals in 1981 to about 40,000 last year. Meanwhile, as the chart below illustrates, the winning bid to purchase a charity lunch with Warren Buffett has skyrocketed from $25,000 in 2000 to $4.56 million last year.
If this “lunch with Warren” were a stock, its value would have increased at a compound annualized growth rate of more than 30%!
But at the same time, Berkshire Hathaway’s spectacular long-term track record has become decidedly less spectacular over the last two decades. In fact, for the last three years running, Berkshire’s 10-year investment returns have trailed behind the S&P 500’s.
Perhaps Berkshire’s performance is merely taking a pause that refreshes. Certainly, that stock deserves the benefit of any doubt.
But so does gold…
A Bit of Gold Could Go a Long Way
The yellow metal may be “lifeless” and “uncivilized,” and it may be as non-procreative as a congressional filibuster. But it is also a metal that can deliver extraordinary gains from time to time, particularly when stocks are struggling.
I believe we have entered one of those rare, precious moments — a time to add a bit of gold to whatever else your portfolio may be holding.
Warren Buffet wouldn’t approve, but your portfolio might.
Learn more about my most recent suggested gold trades here.
P.S. A year from now, don’t be surprised if you see a headline like this one: “Where Did All the Gold Go?!” The answer will be a simple one … Rich people bought and hoarded it all. Sound crazy? It’s already starting to happen…
Billionaires like “Bond King” Jeffrey Gundlach… Ray Dalio… Stanley Druckenmiller… and Paul Tudor Jones are bullish on the yellow metal. Seventy-eight-year-old billionaire investor Sam Zell just bought gold for the first time in his life. I think you’ll be surprised when you see what this means for the future of the economy. It could have a huge impact on your financial future. Click here to see the full story.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.