The Motley Fool

Warren Buffett shows us why shares absolutely thrash gold

I’ve never really understood the lustre lust some investors have for gold. I mean it’s nice and shiny and all that, and has a fascinating 4,000 year history, but I can’t see the point of holding it in your portfolio. I thought it was just a quirk of mine. An irrational prejudice. 

So I’m glad to see I’m in good company. Billionaire Warren Buffett, the Sage of Omaha, has just restated his view on gold, and I’m pleased to say it tallies with mine. We like it when clever people agree with us. It makes us feel clever too.

Sign up for FREE issues of The Motley Fool Collective. Do you want straightforward views on what’s happening with the stock market, direct to your inbox? Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio. Click here to get started now — it’s FREE!

Gold bugs me

Buffett’s antipathy is already known. Interestingly, it doesn’t extend to other precious metals such as silver, which has medical and industrial uses. Gold doesn’t. As Buffett once said: “It doesn’t do anything but sit there and look at you.”

Some people like to sit and look right back at gold and fair enough, we all like beautiful things, but that’s not much of an investment case. Especially since gold doesn’t pay any interest or yield.

Lost lustre

I’m being a bit harsh. The price does move about a bit. In fact it’s doing quite well lately, having risen above $1,300 an ounce. The price is still down 3% over five years, although it’s 30% higher than 10 years ago, when it traded at $995.

That pales when compared to equities, though. Over the same period, the FTSE All-Share has risen 185%, and the UK smaller companies index has turned in 350%.

Buffett has taken a longer term view. He recently compared gold’s performance to that of US equities over his 77-year career, which began with a $114.75 investment in 1942. Over that time, the investment in a hypothetical, no-fee index tracker for the S&P 500, with dividends reinvested, would be worth $606,811 on a pre-tax basis.

By contrast, $114.75 would have bought 3.25 ounces of gold which is now worth around $4,220. Stock markets have delivered 144 times more growth. As you can see, all that glisters is far more likely to be stocks and shares.

Heavy mettle

Russ Mould, investment director at AJ Bell, said Buffett’s words are unlikely to move gold bugs. “They will counter that the metal was a great source of protection during the 1930s, 1970s and early 2000s when economic times got tough and global indebtedness a worry.”

Buffett had an answer to this argument, saying that ‘the magical metal was no match for American mettle’ during his own career.

Case for gold

The best argument for holding gold is as a diversifier for, say, 5% or 10% of your portfolio, as it tends to rise when investors get nervous and start selling. This way it can protect you against a market meltdown. If this soothes your nerves and helps you last he course, that’s a good thing.

Or if you draw income from your portfolio in retirement you could dip into your gold reserves to avoid selling your stocks at a low price in a market slump. You can also make money from investing in gold mining companies. However, over the longer run, shares win. Just ask the biggest winner of them all.

Five Income Stocks For Retirement

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it right away!

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.