Warren Buffett Continues to Be Wrong on Gold

Warren Buffett Continues to Be Wrong on Gold

Most investors know that Warren Buffett isn’t a fan of gold. He has long derided the yellow metal as a bunch of rocks that sit in a vault and don’t do anything. Of course, when stocks are plummeting and losing half of their value there’s nothing investors want more than something that does nothing but sit in a vault and retain it’s value, but we’ll get to that later.

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Buffett loves to compare gold to stocks, particularly over a very long time horizon. He bought his first stocks in 1942 at age 11 with $114.75. He famously stated recently that if he had bought that much gold in 1942 it would be worth $4,200 today. Instead he bought stocks, and today he’s a billionaire.

But Buffett conveniently forgets that you couldn’t buy gold back then. It was illegal for US citizens to own gold and wouldn’t become legal again until 1975. For the first 30-plus years of his investing career Buffet couldn’t buy gold even if he had wanted to. And besides that, the government attempted to control the gold market and sought to set a price ceiling by periodically adjusting the gold content of the dollar as world markets valued gold higher.

Once President Nixon closed the gold window, gold was no longer subject to government efforts at price suppression. Markets could now determine the actual exchange value of gold. Since that time gold has appreciated at an annualized rate of 7.5%, versus 7.3% for the S&P 500 and the Dow Jones Industrial Average. Not too bad for yellow rocks that don’t do anything, right?

Gold’s performance this century has been even more phenomenal, with a 9% annualized growth rate versus 4.1% for the S&P 500 and a 5.0% rate for the Dow. Buffett overlooks all of that as he has a vested interest in continued high stock prices. As long as stocks remain elevated he continues to look like a genius and his reputation as the “Oracle of Omaha” remains intact.

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When stocks enter a bear market, those who bought gold will be glad that they did. While stocks were losing 50% of their value in the last financial crisis, gold gained 25%. There’s a time to buy stocks and a time to diversify into gold, as stocks don’t stay elevated forever. So when it comes time to protect your retirement assets, don’t listen to Warren Buffett. Invest in the safety and security that only gold can offer.