What’s Warren Buffett’s Take on Gold?



Warren Buffett and gold

Warren Buffett’s disdain for gold is well known. He has been quite vocal about how gold does not yield anything in terms of value. Once he said, “It doesn’t do anything but sit there and look at you.” Silver, on the other hand, meets Buffett’s investing principles, as it has industrial and medical uses. In Berkshire Hathaway’s latest annual meeting, Buffett and Charlie Munger again attacked gold and gold investors.

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Warren Buffett says stock returns are outpacing gold’s returns

Warren Buffett used an initial investment of $10,000 as an example to demonstrate how buying gold with this amount versus buying a stock or index fund would have generated more returns. He mentioned a $10,000 investment in the S&P 500 Index fund (SPY) back in 1942 (though he noted that sort of fund did not exist at the time) would be worth $51 million today. Investing the same amount in gold would have gotten much lower yields.

Gold acts as a diversifier in a portfolio

While Buffett’s approach might be right over the long term, as stocks generate higher returns compared to gold, most investors don’t expect gold to outpace the market returns anyway. They hold gold as insurance against a system breakdown, skyrocketing inflation, trade disputes, and geopolitical concerns. Even central governments keep a part of their reserves in gold holdings as a hedge against market risks. Many hedge fund managers suggest investors also keep at least 5% to 10% of their portfolio in gold investments.

Gold also acts as a great diversifier. The above graph shows the correlation coefficient of gold (GLD), the VanEck Vectors Gold Miners ETF (GDX), the S&P 500 (SPY), and the iShares Barclays 20+ Year Treasury Bond ETF (TLT), considering monthly returns for ten years.

The correlation coefficient always lies between -1 and 1. The correlation between gold and Treasuries is 0.1 and between the S&P 500 and gold is also 0.1. The correlation between gold and gold miners is quite high at 0.84, which means that gold adds diversification benefits to a portfolio that contains the other three assets. Gold miners are a close second. So, investors should consider having at least a small amount of gold in their portfolios. By diversifying, investors can improve risk-adjusted returns.

In the next article, let’s see what Wall Street analysts are forecasting for gold prices in 2018 and beyond.


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