Why Warren Buffett is wrong about gold
According to Warren Buffet, gold is pretty useless. The precious metal offers no dividend and no obvious use to the average man...
How can a fist full of yellow metal be worth more than a luxury Mercedes-Benz?
It was playing on my mind. Had I made a terrible mistake? Could gold really be worth what I'd been paying for it?
Up until a year ago, I held gold in an ETF it seemed the sensible and easy way to get some exposure. No worries about storage and insurance, or the bother of buying it from a dealer. A click of a mouse and there it was.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
But for reasons I won't go into here (I tell that story in a new report I'm preparing - as a Right Side reader I'll email you a free copy once it's ready), I decided to convert the ETF into physical gold.
Not a certificate promising some share of an arbitrary gold stash somewhere in the virtualsphere, but real, solid gold coins.
So every month, I sold a chunk of the ETF and went to the bullion dealer on The Strand to buy Krugerrands. Each time I bought just enough to keep me from getting too sweaty and nervous on my way home.
After I'd amassed a few of the little beggars, I got thinking I took a fistful, held them in my hand and pondered. Did it feel good? No, not really. Was there some sort of magical awe about the coins? Nope, not at all. What a let down.
Okay, so the coins were heavier than the normal shrapnel I carry, but really, they were just a collection of bronze-like coins. Some dated back to the seventies and others more recent. The stamp read fine gold and there was wonderful etching of a guy I guessed was Kruger and a springbok (apparently the quality of the etching is the best way to tell a fake).
Was this fist-full of yella' really worth more than the not so gleaming, Merc-Benz on the drive?
Think of all the materials and German engineering that had gone into the car electronics, leather, coachwork, not to speak of the man-hours.
Whereas in my hand I held some metal coins, from a dodgy period that South Africa would probably rather forget.
Gold was making me feel nervous
When my gold was in my ETF I had no concerns. As part of my online portfolio, the intangible metal sat neatly alongside the share portfolio.
Just a series of flashing lights on a computer monitor some days up and other days down. An investment. And one that had been performing well.
- Discover how to profit from oil without ever owning a single barrel
- Why NOW is the best time to put a few carefully selected oil investments into your portfolio
But once I took the coins in hand and assessed them, I was forced to re-evaluate my relationship this time face to face...
So what's gold really worth then?
There's one key argument against gold you'll hear time and time again:
There's no use for it therefore it's not of value. It's a barbarous relic' of the past.
Even Warren Buffett laments "It 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"
Well yes, that's easily said. But here at The Right Side, we don't go for easy. Why take easy when there's the obvious
There's one and only one attribute to gold that matters
Scarcity.
Gold is scarce. It's that simple. Steel, leather and plastic, along with a bit of labour can always be re-packaged into a car. If you want, you can make fleets of Mercedes.
But gold cannot be re-created. There's a finite amount of it in the ground and the easy to reach stuff has already been harvested. The costs of getting gold out of the ground are going up.
This is what makes it the perfect store of value. This is why gold is worth more than the finely honed lump of metal sitting on my drive. Because if you want to store value, you have to be sure that what you're holding will keep its value. And only scarcity gives you that.
Other things are scarce too gems, for instance, but they don't have the uniformity of gold. The fact that it's scarce, stable, portable and uniform makes it the perfect store of value.
If you appreciate the scarcity argument, then you immediately understand why it's got few industrial uses.
Of course, it has few industrial uses!
Who'd try to produce anything from a material so difficult to get hold of? Producers make things as cheaply and efficiently as possible. That means they need raw materials that are plentiful and that's certainly not gold!
Don't be fooled out of gold because you're told it's not useful
The wonder is really that gold has any industrial uses. But it does, and particularly in electronics and medicine. It's used in high value components, where its cost doesn't matter.
If an alchemist could turn lead to gold so that suddenly it was plentiful, its value would plummet. And then you'd see that gold could have plenty of applications. You'd see that gold is actually far from useless
It conducts electricity, doesn't tarnish, can be drawn into wire, or hammered into thin sheets and alloys well with other metals. You name it, gold would be in it.
The fact that gold is not used in industry is irrelevant. Gold is certainly NOT useless. It's just that its scarcity means it's too expensive to turn into frying pans, or golf clubs.
As the value of paper money is questioned, desire for gold is going up. Its value as an incorruptible store of wealth has never been more pertinent.
Will it go up from here? Yes, I suspect we'll see new highs after all, there's no scarcity of paper money that could come looking for a more permanent home.
Early next week, I'll send readers an email detailing my strategy for playing the gold market. I think we're heading into a very exciting period for the yellow metal, so don't miss out.
This article was written for the free investment email The Right Side.
The FSA does not regulate certain activities. This includes the buying and selling of commodities such as gold. Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.