On Investing in Gold
Clients often ask me what I think about investing in gold. They’re usually disappointed when I tell them that I don’t generally recommend it. I suspect this is because they’ve been told by someone else, or have heard from someone else (typically a radio or television commentator) that gold “is a good investment” or that “gold is a great inflation hedge.” Despite claims to the contrary, gold is generally not a good investment and there are better inflation hedges. I could bore you with all of the reasons why, but here’s the best (and pithiest) counter-argument to investing in gold that I’ve ever heard, from none other than the most successful investor in history, Warren Buffett (taken from the August/September issue of the AARP Magazine):
“Gold is a huge favorite of investors who fear almost all other assets, especially paper money. But what motivates most gold purchasers is their belief that the ranks of the fearful will grow.
The world’s gold stock is 170,000 metric tons. If all of the gold were melded together, it would form a 68-foot cube – and fit in a baseball infield. At $1,750 per ounce – gold’s price as I write this [last year] – its value would be $9.6 trillion. Call this cube pile A. Now create pile B. For $9.6 trillion, we could buy all U.S. cropland (400 million acres producing $200 billion annually), plus 16 ExxonMobils (the world’s most profitable company, earning more than $40 billion annually). And we still have $1 trillion left over. Can you imagine an investor selecting pile A over pile B? [Gold has since plunged more than 20 percent.]”
Not mentioned by Buffett were ExxonMobil’s annual dividend payments of nearly $11 billion (or $176 billion in total with 16 ExxonMobils) – which we get to add to our cropland earnings. An investment in gold – in case you didn’t realize – pays no income. And, whereas gold (as measured by the SPDR Gold Shares exchange traded fund) is down by 16.91% (through 8/31/2013), ExxonMobil is up 2.82%.
*By the way, they don’t call him the “Oracle of Omaha” for nothing!
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