Warren Buffet scorns gold. Bad move!

Posted APR 5 2012 by JAN SKOYLES in 

Whenever Warren Buffet expresses a like or a dislike for a certain stock or asset, everyone seems to sit up and listen. Last month he famously once again denounced gold. Gold investment, according to the Sage of Omaha, is a waste of time, it is ‘unproductive’. In the article below, the author points out that Mr. Buffet may well be on the quiet side of the fence when it comes to buying gold, as there are plenty of other billionaire investors (and countries) who appreciate the qualities of gold which Mr Buffet hates so much.

Warren Buffett doesn’t like gold. In this year’s annual letter to Berkshire Hathaway shareholders, Warren Buffett scorned gold as an asset that is “forever unproductive.”

And he’s right about that…

But investors don’t buy gold because they hope it will produce something. They buy gold because they know that no one can produce it. Therefore, the more that folks distrust their national currency, the more they put their trust in the ultimate currency: gold.

The gold price has increased for 11 consecutive years — a time frame during which, coincidentally, it has trounced the investment return of Berkshire Hathaway. Why? Because a new era of monetary destruction is unfolding throughout the Western world. That’s why a growing number of investors are devoting a growing percentage of their investment portfolios to gold and other hard assets.

Rolling 10-Year Return of Gold vs. Rolling 10-Year Return of Berkshire Hathaway

Nevertheless, the American community of gold lovers remains miniscule by comparison to the community of Berkshire Hathaway lovers or Apple lovers. In this sense, Buffett is thoroughly average — he hates gold just as much as the next guy.

Interestingly, however, Buffett is one of the very few billionaires on the planet who scorns gold. In fact, several billionaire investors have disclosed recently that they are taking the other side of the Buffett “sell” on gold.

George Soros, the billionaire founder of Soros Fund Management LLC, raised his stake in the SPDR Gold Trust (GLD) to 85,450 shares from 48,350 during the last three months of 2011. The billionaire hedge fund manager John Paulson also holds a large stake in GLD.

“Paulson made his way into the financial history books thanks to what many now call the ‘greatest trade ever,’” Money Morning reports:

“Paulson & Co. shorted the subprime mortgage market before the collapse, banking a $15 billion gain. So when Paulson went big again by buying gold in 2009 and 2010, investors took notice… In fact, Paulson’s holdings in the SPDR Gold Trust (GLD) make his firm the biggest stakeholder in this ETF, with a position currently valued at $2.9 billion.”

The billionaire “Bond King” is also singing gold’s praises these days. Bill Gross, the guy who founded PIMCO, the $1.3 trillion financial firm dedicated to managing bond portfolios, remarked last month, “Recent central bank behavior, including that of the US Fed… may as well induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

One final admirer of gold is neither a hedge fund manager nor a billionaire. This admirer is a trillionaire! Literally.

In 2011, China became the No. 1 importer of gold. China was already the world’s leading gold producer. The Asian juggernaut also reduced its holdings of US government securities last year for the first time since the Treasury began keeping the data in 2001. As of Dec. 31, China held $1.15 trillion in Treasuries, down from $1.16 trillion at the end of 2010.

This reduction doesn’t sound like much, but it’s the trend that’s telling: gold up, Treasuries down.

China's Hong Kong Gold Imports vs. Its Holdings of US Treasury Securities

China is not only the biggest importer of gold, it is also the biggest miner of the precious metal. According to the World Gold Council, China produces nearly 50% more gold (about 300 tons per year) than the second-place country… Australia. And not a single ounce of that newly mined gold leaves the country. By law, the Chinese government buys every ounce of gold that surfaces from a Chinese mine shaft… no matter what.

Clearly, the Chinese are taking the “long view” when it comes to gold accumulation. They believe they can trust gold more than US Treasuries.

Maybe Soros, Paulson, Gross and the Chinese are all crazy to buy gold. Or maybe Buffett is crazy not to. Place your bets!

About the Author

Jan SkoylesJan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working at Cheviot Asset Management in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from university Jan joined The Real Asset Co research desk and now contributes to the Cobden Centre, The Commentator, The Renegade Economist and Market Oracle.View all posts by Jan Skoyles →