Warren Buffett and Investing in Gold

In Warren Buffett’s letter to Berkshire Hathaway shareholders released in late February, 2012, Mr. Buffett expressed his skepticism with respect to the investment merits of gold.  He stated that gold is a favorite of investors who fear almost all other assets, especially paper money.  What motivates most gold purchasers is their belief that the ranks of the fearful will grow.  As “bandwagon” investors join any party, they create their own truth — “for a while“.  “What the wise man does in the beginning, the fool does in the end.”

At current prices, today’s annual production of gold would be valued at $160 billion.  “Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.”  The total current value of the world’s gold stock of $9.6 trillion “will compound over the (next) century at a rate inferior to that achieved by (productive assets such as farmland and large U.S. corporations such as Exxon Mobil).”

Even though gold currently sells for over $1600 per ounce, up from a peak of $1421 per ounce in 2010, its recent price history has been extremely volatile.  From price data that I have examined, gold reached a peak of $850 per ounce in 1980, and subsequently sold for as low as $264 in 2000.  It did not exceed its 1980 peak price until 2008, 28 years later.

I was quoted in an article on this topic (March 20, 2012) as follows:

The “Greater Fool Theory” is an investing idea that means people will buy something not because it’s worth a given price but because they feel that they will be able to sell it later at a higher price.  People who buy gold and silver expecting to sell it at a higher price, Kass said, are perfect examples of the theory.

Investing in gold and silver is purely speculative, he said.

From my perspective, I think it’s risky,” Kass said.  “There’s no guarantee that it’s going to go up, and if it does you don’t know what your rate of return will be.”

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  1. “Investing in gold and silver is purely speculative”

    I agree to a certain degree but people also find security through the many different investing models of precious metals. So a slightly narrow minded comment in my opinion!

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