Last week this newsletter addressed the topic of re-weighting a portfolio in difficult times. It is a topic that must be on many minds as Warren Buffet decided this past week to author an article in “Fortune” magazine entitled “Why stocks beat gold and bonds.” (1) In it, the Oracle of Omaha explains why he believes equities “almost” always beat the alternatives over time. While many may agree that now is not an opportune time to assertively direct investment funds into fixed income assets like bonds, I do not concur with his incentive regarding gold. Will Warren Buffet’s article deter investors from increasing the weight in a portfolio towards precious metals? Are precious metals going to be beaten by stocks?
First consider that this piece was written by Buffet as a "preview" for his long-established annual letter to Berkshire shareholders. In it he concedes his aversion towards currency based investments, as he accepts a continued devaluation of the dollar. Buffet confirms this by saying, “I do not like currency-based investments.” Gold buyers are likely to agree. It is repeatedly suggested that gold investments are an indication of the lack of confidence in fiat currencies. This is based on the view that current aggressive fiscal monetary policies have sped up the process of currency debasement through the practice of printing more fiat money.
What is fascinating is that this latest article’s stance is eerily similar to comments attributed to him previously. and Contrary to Buffet’s view, following the publication ofthose negative statements gold prices have advanced. While Buffet does state that what “motivates most gold purchasers is their belief that the ranks of the fearful will grow,” he also follows with, “During the past decade that belief has proved correct.” A decade seems fairly long-term, yes? While he also mentions both housing and internet stocks as having been involved in bubbles, he makes no similar statement regarding gold.
Buffet is, and with good reason should be, admired for his investment prowess. To his credit, he has built a superior reputation for being an astute long-term investor. Therein lies the key: Buffet is speaking about investments held over the long-term. Exactly how has that changed in today’s marketplace? One need only look at the volatility investors now face to answer that question.
Today’s markets are moving at a much more rapid pace than ever before., While it is certainly prudent to structure your investment portfolio for advancement and appreciation over the long haul, with today’s instability, portfolio adjustment is no longer a once in a year proposition. Investors would be wise to monitor markets more closely and frequently, and re-weigh their portfolios appropriately. Buffet attempts to build his case by defining investing as “forgoing consumption now in order to have the ability to consume more at a later date.” How much later is never made specific. The one example he relies upon to make his point about gold is to compare two investment piles. Pile A- which contains all the gold in the world and B- all U.S. cropland plus 16 Exxon Mobils. He then poses the question: “Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” His decision to prefer pile B is not a realistic example to say the least, even for someone as well-heeled as Buffet.
So what exactly is long-term, and does he specifically denounce precious metals as an investment? Warren Buffet has previously shown an active interest in precious metals as a viable investment, though he does not mention that critical feature in this particular article. Previously, Buffet has stressed that “assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.” That phrase appears to echo the concept of physical ownership of precious metals.
He goes on to compare such assets as farms, real estate, and other “businesses” such as Coca-Cola (KO) and IBM (IBM), and ends up by stating that such investments “will be by far the safest.” Yet, his argument about comparing all the gold in the world to other assets is likely foolish. For a large number of investors, including this one, gold is not a speculation but a store of wealth.
He points out that gold held over the long-term is “incapable of producing anything;” gold does not pay dividends. However, that is likely not the current strategy for investors - who in their right mind puts all of their eggs into one basket? Warren Buffet sure does not. Buffet diversifies his investments and has indeed taken positions in precious metals, although never solely so.
Consider how these investments move.
In 1973 stocks lost 18% and gold gained 75%. The very next year, 1974 stocks lost 27%, while gold increased by another 70%. In 2000 stocks lost 10%, in 2001 stocks lost 11%, in 2002 stocks lost 21% more. During those same 3 years gold made 25%. In 2008 stocks lost 37% in the biggest crash since the great depression, while gold prices advanced 5% that same year. It all depends on the situation. Below is a chart of the S&P verses gold prices for the last five years. Notice how, beginning at the end of 2008, both stocks and gold both advanced steadily into 2011. The two are not always diametrically opposed; sometimes they move in the same direction, something which traders have seen since December of 2011.
Past performance is not indicative of future results.
Over the last 11 years gold has outperformed the S&P 500 and the Dow Jones by a long shot. Despite this, the shoe was on the other foot during the bull market of 1980 to 2000, when stocks zealously outperformed gold. Anyone who thinks stocks are a better than gold is entitled to that opinion, even the Omaha Oracle. Still, anyone who invests their entire portfolio solely into one market position runs a huge risk by putting all their eggs in one basket. The weighting of different investment allocations generally makes sense no matter what the market is doing. Excluding precious metals in favor of exclusively one market or another never will.
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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.