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Gold Hits An All-time High, But Warren Buffett Doesn’t Buy It. Should You?

Gold. It has always held a special place in many people’s hearts. It is beautiful to behold; it is malleable; it can be used for jewelry or just held as a store of value.

Midas turned everything to gold. If something is really valuable, it is said to be “good as gold.”

But should you own gold?  

That depends a lot on how you view the world, and on how you view gold. What are you buying it for? Because you love its physical beauty? As an investment? As protection against uncertainty?

Years ago it was difficult to own gold. You had to purchase physical gold in the form of bullion (gold bars) or coins. Investing in gold futures was also complicated.  

It’s much easier to own gold today. You can still own physical gold directly, but now many investors own gold through exchange-traded funds. In most cases, the gold is held in storage in a vault. The largest gold ETF, the SPDR Gold Trust (GLD), is one of the largest ETFs in the world, with $85 billion in assets.

Reasons People Buy Gold

Gold can be bought for many reasons. Here are five of the main ones:

1. As a store of value. Gold can be traded and stored for future use. About 40% of gold production goes into direct physical investment in gold — bullion or coins.

2. For jewelry. About 50% of gold production goes into jewelry. In many countries, such as India, gold in the form of jewelry is often a very large part of a household’s net worth.

3. As a hedge against inflation. When inflation rises rapidly, investors often turn to gold.

4. As a hedge against uncertainty. Investors often flee to gold during times of crisis, whether it is financial or geopolitical. This is especially true in times of war, or when confidence in governments is low.

5. For diversification. Gold is often considered to be an asset class separate from stocks, bonds and other commodities and therefore often used to diversify risk, since it is often not correlated with the movement of other asset classes.

Reasons To Doubt Gold’s Value

Despite its many attractive qualities, it’s not obvious that everyone should own gold. It 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. 

It also has not proved to be a very good hedge against inflation.

Another problem with gold: It doesn’t do anything. This is Warren Buffett’s big beef with gold — it is an unproductive asset. Unlike stocks, it doesn’t throw off earnings in the future that you can lay claim to, and it doesn’t pay a dividend. Unlike bonds, it doesn’t pay interest. It just sits there, and it costs money to store it, even if you own an ETF.

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