Do you agree with Warren Buffett's views on gold?

Warren Buffett is an investing icon, and when he speaks, investors pay attention. Buffett is well-known for not only his strengths as a businessman, but also for his rather outspoken dislike of gold. The stance is somewhat controversial given the massive popularity of the precious metal especially in India.

Gold bullion and ETFs simply have no place in Warren Buffett’s portfolio. And to hear Buffett tell it, gold should have no place in yours, either. For him, gold is simply useless, is not productive, expensive to store. Some of his sayings on gold are given below.

In 1998, he said - "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 in a CNBC interview. He was asked, “Where do you think gold will be in five years and should that be a part of value investing?”

“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 will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot — and it’s a lot — 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.”

In October 2010, Warren Buffett said:

“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. Plus, you could buy 10 Exxon Mobils, 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?”

“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything."

He says, “if you own one ounce of gold for an eternity, you will still own one ounce at its end”

So, what do Indians think of gold?

Mr. S Gurumurthy,  a commentator on political and economic affairs and a corporate advisor, in a brilliant article in Oct 2013 has nicely brought out the  importance of gold for Indians who do not just go by the  price trend and return on investment. He says that gold has consistently beaten inflation in India, been a family security to most Indians and a marketable security. He writes:

Modern economists and the Indian people seem to operate on two different paradigms with regard to gold. In the modern West, gold is more a state asset than a private possession. Gold constitutes just three per cent of family wealth there, but a third in India. Western states, socialist or capitalist, expropriated all private gold during the last century. Even the liberal US outlawed private gold in 1936 and built official gold reserve of over 20,000 tonnes by 1950.

Modern economics views gold as an uneconomic, wasteful, private investment. But traditionally, in India, gold has been the preferred asset of the rural masses who hold 70 per cent of the nation’s stocks. Indian gold habits clearly mock at modern economic theories.

Market Oracle, a UK-based market analysis and forecasting online publication, captures the relation between India and gold thus: Indians own 20,000 tonnes of gold worth $1 trillion — almost half of India's GDP. For Indians, gold is not just money or asset; it ensures the financial security and stability of families. It has religious overtones. More than a commodity or money, it is integral to the warp and weft of family life. Investments in gold and jewellery are indistinguishable. Jewellery is the working capital of families; families collateralise it for commercial borrowing.

Some 13 per cent of Indian families, more from rural areas, borrow against gold as collateral; while rural India borrows from the unorganised financial sector, urbanites access bank loans.

Undervalued private financial institutions and the discredited moneylenders are the main sources of finance for the largest employment provider of the country. And the collateral for their loans is invariably gold.

There is no collateral, stocks or real estate, as liquid as gold in India. How can gold, so valuable a security for productive credit, be dismissed in India as a “barbaric relic”?

However, whatever Warren Buffett’s reasons may be, it’s hard to argue against gold’s importance to Indians.

The below chart gives the performance of gold since 1980. 

 Source: WGC

  

CAGR - Jan 1980 till date	2.69%	Hardly any returns over 35 years
CAGR - 1.1.1980 till 30.12.05	0.00%
CAGR - 1.1.2005 till date	11.86%	Huge run up from Aug 2005 to 2011
CAGR - Jan 2005 to Sep 2011	24.64%
CAGR - Sep 2011 till date	-10.97%	Negative returns from end 2011- a retreat from the highs of 2011

It’s hard to tell what the future holds for gold prices. The billionaire investor hasn’t changed his tune on gold, and it’s hard to believe that he will change course anytime soon. Indians dont just love gold. They revere it. Their reverence for gold manifests itself during Danteras and Akshaya Tritiya — the auspicious days for buying gold. The number of lady students in my workshops who will continue to go for gold schemes of jewelers is only proof of the value of gold as a security.

Financial planners always speak of asset allocation and even though prices have fallen from the highs as seen in the above graph, many advisers ask us to maintain an allocation to gold.

So what do you think? Is Buffett simply stuck in his ways, or is he right about gold?

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