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Warren Buffett on gold

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Published : May 27th, 2013
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24hGold - Warren Buffett on go...Wall Street legend Warren Buffett has famously declared that gold is not an investment. He is correct, but he stopped halfway. He did not go on to say what gold really is, perhaps purposefully intending for people to draw their own conclusions.

In my view, there is only one conclusion possible, because there are only two alternatives when it comes to allocating assets in any portfolio, whether that of an individual or an institution. Your assets are either an investment, which gold is not; or money, which gold indeed is.

Mr Buffet defines investing as “…the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power…in the future”. In other words, you put your money at risk hoping that you have made a good decision, so that more money is returned to you from your investment in the future.

Note though that Mr Buffett purposefully uses the term ‘purchasing power’, and not money. He clearly understands that money today is no longer a constant measure of wealth. The purchasing power of £100 today will be less than £100 a year from now because of inflation. Thus, the success of an investment should be measured by purchasing power to determine whether your investment actually increases your wealth.

If money were sound, to use a term rarely heard today, it would preserve purchasing power. When Sir Isaac Newton invented the classical Gold Standard circa 1700, he set into motion a monetary policy that would preserve the pound’s purchasing power, which it did. For more than two centuries the purchasing power of the pound was essentially unchanged – until 1914 when Newton’s invention was abandoned, notwithstanding its remarkable track record. Money has never been the same. But what about gold?

Mr Buffett explains that gold is “incapable of producing anything”. If you take the gold you own, melt it down into a cube, and check back years later, he observes that the cube “…will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond”. But the same can be said of all money.

If you take a stack of pound notes and store them in a vault, and then check back years later, they too will not “respond”. They also will be unchanged, at least as far as their appearance goes. But what about the purchasing power of that stack of pound notes, which is the important question that needs to be asked?

Did that stack of pound notes preserve purchasing power as effectively as gold? The answer can be found in the following table which presents gold’s annual appreciation against nine of the world’s major currencies for the past 12 years.

Gold % Annual Change
USD AUD CAD CNY EUR INR JPY CHF GBP
2001 2.5% 11.3% 8.8% 2.5% 8.1% 5.8% 17.4% 5.0% 5.4%
2002 24.7% 13.5% 23.7% 24.8% 5.9% 24.0% 13.0% 3.9% 12.7%
2003 19.6% -10.5% -2.2% 19.5% -0.5% 13.5% 7.9% 7.0% 7.9%
2004 5.2% 1.4% -2.0% 5.2% -2.1% 0.0% 0.9% -3.0% -2.0%
2005 18.2% 25.6% 14.5% 15.2% 35.1% 22.8% 35.7% 36.2% 31.8%
2006 22.8% 14.4% 22.8% 18.8% 10.2% 20.5% 24.0% 13.9% 7.8%
2007 31.4% 18.1% 11.5% 22.9% 18.8% 17.4% 23.4% 22.1% 29.7%
2008 5.8% 33.0% 31.1% -1.0% 11.0% 30.5% -14.0% -0.3% 43.7%
2009 23.9% -3.6% 5.9% 24.0% 20.4% 18.4% 27.1% 20.3% 12.1%
2010 29.8% 15.1% 24.2% 25.5% 40.2% 25.3% 13.9% 17.4% 36.3%
2011 10.2% 8.8% 11.9% 5.1% 12.7% 30.4% 3.9% 10.2% 9.2%
2012 7.0% 5.5% 4.4% 5.9% 5.2% 11.0% 20.5% 4.4% 2.3%
Average 16.8% 11.0% 12.9% 14.0% 13.7% 18.3% 14.5% 11.4% 16.4%

Against the British pound, gold has appreciated by 16.4% per annum on average. This result far exceeds the interest one could earn from bank deposits during this period.

The difference between what one earned from a bank deposit, and the rising gold price, is particularly striking at the moment because of the near-zero interest rate conditions which central banks are imposing on the market economy. The cumulative detrimental effect on savers from years of suppressed interest rates has been catastrophic. Their wealth has shrunk because they are not able to earn enough interest on their savings to compensate them for the loss of purchasing power from inflation and other insidious debasements of national currencies.

The low deposit rate which has lasted now for several years is one factor explaining why so many people are finding it increasingly difficult to maintain the standard of living which they previously enjoyed. It also explains, along with the above table, why gold may be a prudent alternative to traditional bank savings accounts; or at least be a meaningful diversifier in which to hold part of one’s savings, until bank deposit rates return to normal levels.

Admittedly, gold’s appreciation has not been a smooth ride. Though gold has risen against the British pound in 11 of the past 12 years, the annual rates of change have ranged from a loss of -2.0% in 2004 to an astounding annual gain of 43.7% in 2008, the year of the financial crisis, which highlights another important point.

Gold is a safe-haven. This attribute results from the fact that gold is a tangible asset. It is money that is not based on any bank’s promise or central bank policy.

The collapse of Northern Rock and Lehman Brothers are events that will not be forgotten. But even more lessons have been learned recently from the banking collapse in Cyprus. Depositor money was grabbed by the monetary authorities to bail-out insolvent banks. Even savers with small deposits were hurt by the capital controls that were imposed because these restrictions prevented deposits from being withdrawn, except nominal amounts that could be disbursed through ATMs.

Thus, gold offers two clear advantages over the British pound and other national currencies. It can preserve purchasing power, which is an attribute that is particularly important when the interest rate on bank deposits is not high enough to offset the erosion of purchasing power from inflation. Second, a tangible asset like gold eliminates the uncertainty of not knowing whether keeping money in a bank is safe.

From reading Mr Buffett’s various statements about money and investments, it is clear that he has a nuanced view. He sidesteps gold and its 5,000-year history as money, but you should not. Gold still has an important place in everyone’s portfolio.

Given Warren Buffett's well-known views about gold, it's ironic that one of the few politicians in 20th century America with a clear appreciation of gold's use as money was one Howard Buffett – a four-term Republican congressman from Omaha, Nebraska and Warren's father. For a more detailed examination of the contrasting views of the Buffetts on this subject, readers might be interested in the following essay, published by the GoldMoney Foundation: 'A Perspective on Money from Howard and Warren Buffett'.

Data and Statistics for these countries : Cyprus | All
Gold and Silver Prices for these countries : Cyprus | All
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James Turk is the founder of the Free Gold Money Report and of GoldMoney.com. He is also the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).
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No James Turk, gold is not money so Ben Bernanke didn´t lie. Gold was money when we stamped a value on to it or when we where under a goldstandard. We are not going back to stamping values on gold or creating a new gold standard. We have some coins "stamped" but they will not be the general money. Hard money gold is a thing of the past bc it never lasts. History proves that.

But wee will be going back in time, old gold world but looked upon with modern glasses. What is evolving is the money concept. Gold is not money, gold is wealth. Money has three functions today, medium of exchange, unit of account and store of wealth (to some degree). The dollar will be the last standing reserve currency, soon a thing of the past. Oil made our economies expand immensly and we absolutely needed FIAT to accomplish that. "Oil" understood that a currency, printed at will, can not be payment in full for the worlds most valuable commodity.

So the world agreed to let the dollar be the world oil-currency so to expand the economies. The other choice was to go back to a gold standard wich would not accomplice a fast growing world. But some gold had to flow the opposite way of oil to be payment in full. Gold is cornerd by oil since decades ago. The biggest corner there ever was. Ironically one commodity cornering another.

We still live in our FIAT world but it will not last. A FIAT is by design destined to fail in the end. Paper-gold and the derivaties came into existence to hedge for a dollar that couldn´t last. A sort of make-belive to extend it´s lifespan. Some say that an ounce of gold pays for a nice suit just like in the roman times. Yes it does but something is missing in that comparsion. All the wealth that oil brought forward. It´s in that context you can understand what golds future price will be when paper-gold and derivaties have lost theire meaning. They are only an insurance sticker and will not pay out in the end. Designed to function before "gold" but not after.

What also will be gone is the illusion of paperwealth. Your wealth is not what your money says it is. Money is credit (not gold) and not wealth it self. A promise of more to come. And credit is the extending of yours or my credibility so to speak. Banks don´t create mone from nothing, they simply extend yours or my credibility. All the money and it´s derivaties in this is world is grossly overvalued compared to real assets. What is make-belive will eventually fail, always has, always will.

This brings us back to the pure money concept, a shared value in our minds. When gold is finally set free from the paperillusion of wealth all will se what real wealth is. And when that happens the three functions of money will separate. Money (FIAT) will only have two functions left for the foreseeable future, some say for a millennia or more. Money will be left with medium of exchange and unit of account. The result is finally the uniting of the soft and the hard money socialists coexisting. Gold is what prices currencies and not the other way around. Gold is wealth, store of value. It´s been out of fashion for a long time but it never disappeared.

It was always gold that was the fulcrum, the most perfect referencepoint the world has ever had. Modern man just thought it went away for good.

Put not your trust in money,
but put your money in trust.

Oliver Wendell Holmes

A tribute to the words of ANOTHER and friends FOA, Ender, Aristole and FOFOA (I understood Antoher but you made it inevitable)
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OOPS. Darn those printing gremlins! James likely meant the purchasing power of a certain sum today will be MORE than that same sum a year from now!
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Interesting table James. You need to go back at least another 20 to 30 years though is you want to make a valid point as a 10 year period cannot be used to draw the sort of conclusion you draw.
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OOPS. Darn those printing gremlins! James likely meant the purchasing power of a certain sum today will be MORE than that same sum a year from now! Read more
dcspencer - 5/28/2013 at 5:29 PM GMT
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