Article Commentary: Gold...Buffett doesn't buy it. Should you?

July 31, 2020 by Matt McCracken

Disclosure:  Our strategies are long SGOL, SIVR, CEF, NEM and PAAS and we may close or add to these positions at any time.  We are actively seeking an attractive exit for some of these securities. 

Finally, here it is.  An article on the futility of gold ownership appears on CNBC to discredit the oldest form of money on earth, just as it hits all-time highs and has just finished out its best month in many years.  Bob Pisani, long-time CNBC contributor, writes an article titled "Gold hits an all-time high, but Warren Buffett doesn't buy it.  Should you?".  The author reiterates an old quote from Buffett regarding gold when he said, "It doesn't do anything - it is an uproductive asset." 

And I think they nailed it right on the head!  Gold has never defaulted on its liabilities, it has never lost its purchasing power in over 10,000 years of human history, it doesn't lose value when money is printed recklessly, it has never experienced an accounting scandal, never tweeted an inflamatory comment and it never lied to Congress, or the media or to its shareholders.  Gold just sits there and looks all pretty and shiny.  And it, along with silver, are still more highly valued than just about any other metal on earth.  

I just wrote post a couple days ago called "Gold and silver prices going vertical" which outlines the most straightforward reason to own gold right now as it over takes US Treasurities as the preferred savehaven for investors.  In short, while gold doesn't yield anything, now, neither do US Treasuries.  Why buy Treasuries subject to our government's overt default via monetary inflation when they have no yield when you can buy gold with no yield but no threat of default in any manner?

In this post, I'd like to refute a few widespeard myths about investing in gold that Pisani repeats in his article:

Misinformation #1: "[Gold] has been a fairly poor performer against stocks and even bonds over the last several decades.  One study found that from 1972 to 2013, stocks outperformed gold whether rates were rising or falling or flat (kinda covers all the options there, Bob.)"

Truth:  Since the Nixon Shock when the US defaulted on the Bretton Woods gold standard system, gold has appreciated from $35 to over $2000, a 5714% gain versus the Dow Jones Index aveage which was at 889 on August 16, 1971 and today sits at 26,144, a 2941% gain.  Pisani, who I assume didn't do well in Journalism school, fails to provide any sort of reference to the study he is quoting.  He just says, "one study found...".  Well, I'd like a little more information because obviously gold has held up pretty well versus the DJI outperforming by a 2:1 ratio.  In favor of the anti-gold crowd, the Dow figure doesn't include dividends, so with dividends, the Dow would likely have beaten gold.  Conversely, those dividends would have been taxed and there is a survivorship bias in the DJI as some of its components have changed.  

Misinformation #2:  "stocks outperformed gold when rates were rising...."

Truth:  I really find it quite remarkable that a journalist of any credibility is allowed to print such utter nonsense.  In the 1970's when rates went from around 2% to 15% and inflation was its highest in a generation, gold went up over 2200%.  And between 2002 and mid-2008, a period of above average inflation where gas went to over $4/gallon while oil hit $140, gold appreciated several hundered percent.  Rates have largely gone down from 1980 until now and during that time, gold was typically flat to down as well.  But the truth is that gold does go up when interest rates or inflation goes up.  With interest rates at 0%, there isn't anyway for them to go but up! 

Misinformation #3:  "It also has not proved to be a very good hedge against inflation."

On this point, Pisani doesn't even provide any evidence, he just throws it out there.  Gold has historically been a remarkable inflation hedge.  Over the past 150 years, every period of inflation including the post Civil War inflation, the late 30's, the '70's stagflation and the Housing Bubble reflation trade, all saw gold appreciate handsomely.  Personally, I don't think gold is the best inflation hedge but it definitely works.  And to argue anything to the contrary is balderdash.  For me, I would rather buy direct beneficiaries of inflation including other hard assets like corn, sugar and wheat.  But if gold is your only option as an inflation hedge, it will serve that purpose.  

We are not necessarily recommending gold or silver at this point.  As our diclosure says above, we are holding various forms of precious metals and have thus far seen them appreciate considerably but they are all strenously overbought at this juncture.  Gold and silver can be obscenely volatile.  We are actively looking for an opportunity to cull profits on our existing positions which may or may not happen.  If you venture into this space, we suggest doing so with some strong risk management controls in place.  Perhaps averaging in a part of your desired exposure.  Or use hard-and-fast stop prices to exit the position if metals start to decline.