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Warren Buffet Misses the Point: Gold Is Money

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Warren Buffett has never been a fan of gold and has publicly disparaged the yellow metal on more than one occasion.  During his annual shareholders meeting earlier this month, he compared investing in gold and stocks, arguing that over the long term gold is an “unproductive asset” that “doesn’t produce anything.” So, why have it, unless you just want something to “fondle.”

But is Buffett really making an accurate comparison? Or is this a proverbial apples and oranges scenario?

We can classify gold in three ways. We can view it as an asset, a commodity or as money. Gold does exhibit characteristics of both assets and commodities, but ultimately, gold is money. When you look at things from that perspective, Buffett’s comments don’t make as much sense. I doubt you would ever hear him say “never hold cash because it’s an unproductive asset.”

Considering gold is money, perhaps a more accurate comparison is between gold and the US dollar. From that perspective, the yellow metal wins hands down.

Between January 1972 and March 2018, the purchasing power of the dollar dropped 84%. Even if you take short-term interest rate into account, the greenback’s purchasing power has gone up no more than 47%. On the other hand, the purchasing power of gold has increased by 394%.

As economist Thorsten Polleit explained in an article published on the Mises Wire, when we understand gold is money, it becomes clear Buffett’s explanation misses the point.

 Every investor has to make the following decisions: (1) I have investible funds, and I have to decide how much of it I invest (e.g. in stocks, bonds, houses, etc.), and how much of it I keep in liquid assets (cash). (2) Once I have decided to keep X percent in cash, I have to determine which currency to choose: US dollar, euro, Japanese yen, Swiss franc – or “gold money”. If one agrees with these considerations, one can arrive now at two conclusions: (1) I do not keep cash, because stocks offer a higher return than cash. However, many people are unlikely to follow such a recommendation. They keep at least some liquidity because they have financial obligations to meet. People typically also wish to hold liquid means as a back-up for unforeseen events in the form of money. Money is the most liquid, most marketable “good”. Anyone who has money can exchange it at any time – and thus take advantage of investment opportunities that come up along the way. 2) I decide to keep at least some cash. Anyone who has near-term payment obligations in, for example, US dollar, is well advised to keep sufficient funds in US dollar. Those who opt for holding money for unexpected liquidity requirements, or for longer-term liquidity needs, must decide what type of money is suitable for this purpose. One way to do this is to form an opinion about the respective currency’s purchasing power. If Buffett shared this view, a comparison between the purchasing power of the US dollar and gold would be in order. This exercise would show that gold – in sharp contrast to the US dollar – has not only preserved its purchasing power over the past decades but even increased it.”

Polleit goes on to highlight another significant advantage gold has over other currencies in a world drowning in debt. Gold has no counterparty risk.

Unlike fiat money, gold cannot be devalued by central bank monetary policy. It is immune against the printing of ever greater amounts of money. Furthermore, gold does not carry a risk of default, or a counterparty risk: Bank deposits and short-term debt securities may be destroyed by bankruptcies or debt relief. However, none of this applies to gold: its market value cannot drop to zero.”

This is why, when given a choice, smart investors almost always choose gold as their preferred form of money, and they’ve done so for centuries.

Gold offers protection against currency devaluation and payment default. And if you insist on thinking of gold as an asset, the price tends to go up during times of economic crisis – when the value of other assets is falling. In fact, gold hasn’t fared poorly against the S&P 500 this decade. As investor Frank Holmes pointed out last month, since 2000, the price of bullion has outperformed the S&P 2-to-1, 200% more performance on your money.

Buffett misses the point. Gold isn’t like a stock. It’s isn’t like oil. It certainly shares many features with assets and commodities, but at its core, gold is money.

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