Warren Buffet does (or did?) not like gold as an investment. The Oracle of Omaha has pointed out that gold just sits there and does nothing. The bulk of the world’s gold does indeed find itself in jewellery or stored as bullion or coins. But, that’s the point of gold, enthusiasts will argue: that it sits there and stores its value against the ravages of inflation and low interest rates.
A $10,000 investment in the S&P 500 made in 1942 turned into $51m by 2018 according to Buffett. The same investment in gold grew to $0.4m. There was a lot of unexpected inflation and many recessions between 1942 and 2018. Gold might have done better than stocks when panic set in. But crises punctuate longer periods of calm, and stocks have outperformed gold in the long term.
Recently, Buffett sold some of the stakes he took in banks in the depths of the great financial crisis. These trades were classic examples of his mantra to be greedy when others are fearful. At the same time, he bought shares in gold miner Barrick Gold. But, this is not an admission that gold is now a better long-term investment than stocks on Buffett’s part.
First, banks are struggling to remain profitable with low interest rates, which are also driving gold prices higher. Second, Buffett has taken advantage of short-term opportunities before, like when he bought a load of silver in 1997. This could be a similarly short-term play. Third, Buffet is buying a slice of ownership in a company that he hopes will generate cash flows, which gold alone does not do.
So, in the long term Buffett still appears to believe that stocks will outperform gold as he has always done. The evidence is there to support this stance. Gold, as an investment, has generated inferior long-term returns when compared to stocks.
All that glitters…
It would, however, be bad advice to recommend investing only in stocks. Every investor has different goals and different amounts of time until the day they will want to cash in. Emergencies happen and portfolios might have to be raided early. If this happens when stocks are down, and the portfolio is entirely in stocks, well, you can see the problem.
Buffett himself has said that he would recommend passively investing 90% in stocks and 10% in bonds as a retirement plan. Bonds have the role of diversification in this 90/10 portfolio. Bonds tend to increase in price when interest rates and growth are low, and stocks tend to do the opposite. Adding an investment in gold to a stock portfolio can be diversifying as well since its price tends to increase in situations when stock prices are declining.
I tend to hold around 5% across my portfolio in gold, and a decent chunk in bonds. However, 70% of my portfolio is invested in stocks. I’m not as aggressive as Buffett recommends on the equity front, but I share the view that stocks are a better bet for long-term wealth generation than gold is.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. 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.