Saturday, 25 December 2010

What's Buffett got against gold?

The Oracle of Omaha has become wealthy investing in undervalued companies that contribute valuable goods and services. Gold just sits there.

By InvestorPlace

Warren Buffett is an investing icon, and when he talks about the stock market, individual investors and Wall Street insiders alike take notice. Perhaps Buffett's most controversial investment advice regards gold prices. Gold bullion, gold miners and gold exchange-traded funds simply have no place in Warren Buffett's portfolio. And to hear Buffett tell it, gold should have no place in yours, either.

So what does Buffett have against gold? Well, the famous value investor has been pretty clear on this: Gold is, in a word, useless.

As early as 1998, the Oracle of Omaha was criticizing gold bugs. Buffett emphasized the nonproductive aspect of gold in a speech at Harvard that included this gem:

"(Gold) 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."

He echoed these thoughts last year during an appearance on CNBC, when he was asked, "Where do you think gold will be in five years, and should that be a part of value investing?"

Buffett's answer: "I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO, news, msgs) will be making money, and I think Wells Fargo (WFC, news, msgs) will be making a lot of money and . . . it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."

Buffett struck a similar vein last month in an interview with Fortune.

"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States," Buffett said. "Plus, you could buy 10 Exxon Mobils (XOM, news, msgs), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

He has certainly stayed on message over the years. Key talking points for Buffett appear to be that gold is expensive to store, has no practical use and doesn't generate and income. Those are all pretty good reasons to hate gold.

For investors who think Buffett is wrong on gold, though, there are several ways to invest in the yellow stuff.

One of the most popular is through exchange-traded funds that operate as gold trusts – including SPDR Gold Shares (GLD, news, msgs) and iShares Gold Trust (IAU, news, msgs). These investments mirror the price of gold bullion and are a pure play on the metal, as opposed to investments in the shares of companies that mine gold.

What's more, these ETFs allow you to buy gold without worrying about the logistics of storing it or insuring it in your own home. The SPDR and iShares gold ETFs recently have exploded not just in popularity, but also in price, with the IAU and GLD ETFs both up about 23% so far this year, significantly outperforming the broader stock market.

In 1998, the year that Buffett made his remarks at Harvard, gold averaged around $300 an ounce, meaning that anyone who bought an ounce of the precious metal back then would now be sitting on a return of 400%.

Shares of Buffett's Berkshire Hathaway (BRK.A, news, msgs), on the other hand, have appreciated about 140% since early 1998. That's significantly better than the broader market, but it doesn't come close to gold's advance.

In the short term, the results are varied. Gold prices are up about 53% since Buffett's March 2009 interview with CNBC, while Berkshire Hathaway stock has notched a 63% gain over the same period. Since the Fortune piece was published, gold has risen about 6%, while Berkshire Hathaway has sustained a small decline.

It's hard to tell what the future holds for gold, but one thing seems certain: Buffett will sit out the gold rush.

This article was reported by Jeff Reeves for InvestorPlace.

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