Warren Buffett: Why Gold is a Bad Investment

Okay, so it's no secret that the United States, and frankly, the entire world is experiencing high levels of inflation that most countries around the world haven't experienced in decades. You're probably seeing this inflation, which refers to things that are becoming more expensive in your everyday life, whether it is prices at the grocery store, gas for your car, or even just the rent you pay for your apartment. Inflation has resulted in higher prices for nearly everything.

So how do you, as an investor, deal with that? Well, conventional wisdom says that you should be investing in things like gold as a hedge against inflation. But not so fast! Here's legendary investor Warren Buffett explaining why gold is a lousy investment, even when there is inflation.

"You had a shareholder who asked you a question about gold over the weekend, and your response was pretty interesting. Berkshire versus gold, you want to talk about how that's performed over the years?"

"Yeah, but we can go beyond that. But certainly, when we took over Berkshire, Berkshire was selling at 15 a share and gold was selling at 20 an ounce. And then gold is now 1600 and Berkshire's 120,000. But you can take a broader example than that. If you buy an ounce of gold today and you hold it 100 years, you can go to it every day, and you could cool to it and you can caress it, and you can fondle it, and 100 years from now, you'll have one ounce of gold, and it won't have done anything for you in between."

"If you buy 100 acres of farmland, it will produce for you every year. You can use that money to buy more farmland. You can do it all kinds of things. But for a hundred years, it will produce things for you, and you still have 100 acres of farmland at the end of the 100 years. You could buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then 20; at the end, it was 11,400. But you'd all gotten dividends for 100 years. So a productive asset of any kind— a decent productive asset—is going to kill a non-productive asset over time."

"Now, in any given one-year period, five-year period, any asset can outperform another asset. Tulips, why don’t you—why don’t you join me? Why don’t you join me and buy some cows? I mean, I like your farmland, but you know you're in Nebraska for Iowa. You love steak. I mean, we can have leather, we can have manure, we can have milk, we can have meat. We'll employ them."

"You can have the manure; I'll take the meat. I've got plenty of the manure. No, but we employ people taking care of the cows. I mean, yeah, little bar of gold that's worth 50—whatever. We had one in here; look, I think it was worth like 60 or 70,000. I can get like so many head of cattle for that and be productive. That was my point. I, but you like farmland. You're just too lazy to take care of the cattle or something."

"Pay some people!"

"Absolutely, absolutely. Have you ever tried to take care of cattle, Joe? It must be, I think it might be hard. I know I've tipped a few, but I've never— have you? I've now— I hope you have not kissed! That’s mean; it's cool. They're sweet; they're sweet, but they're not too bright like me. With land, you can get somebody else to do all the work, give them a percentage of the crop, and you can sit back there for 100 years and get a percentage of the crop, and you still got the land when you get all through. I will guarantee you that farmland over 100 years is going to be gold."

"Solar equities! Why do you think gold bugs get so irate? Because they really come out—yeah, it's very interesting if you go on CNBC and say that bonds are kind of a poor investment, you know, people don't get mad at you. You don't even hear from the Treasury. I mean, you can knock almost any investment and people may get a little irritated. But when you talk about gold, and of course that says something about their motivations for ownership. They want people to agree with them. They want people, everybody—they want everybody to get so scared they run to a cave with gold, and caves might be a better investment than gold. I mean, at least they're not producing more caves all the time. So they want people to be as afraid as they are because that's what's going to produce an increase in prices."

"Incidentally, they're right to be afraid of paper money. I mean, they have a very— their basic premise that paper money around the world is going to get worth less and less over time is absolutely correct. But you just disagree with the investment theory beyond that."

"Yeah, yeah, where they run from that and they should run from it is where, in my view, they make the mistake, but they have a correct basic premise."

Okay, I want to elaborate on one of the points that Buffett made that really explains why gold is a poor investment over the long term. Yes, gold may outperform what Buffett refers to as productive assets such as stocks over short periods of time—call it months, a year, or even five years. But over an investing lifetime, productive assets will significantly outperform gold.

This is because gold is at a structural disadvantage to other investments. Let me explain why by comparing gold to other investments. Meet John, our hypothetical investor for this example. Let's say John has been working hard and saving money, and he now has 100 thousand dollars to invest. Let's look at the investment choices he has: gold, real estate, farmland, or stocks.

If he invests that 100,000 in gold, the only way John will make money is if the price of gold increases. However, since gold does not produce anything, the only way this will happen is if demand for gold increases while the supply of it remains constant. That is economics 101. This is what Warren Buffett means when he calls gold an unproductive asset.

This becomes especially apparent when you compare gold to the other investment alternatives. If John would instead put that 100,000 dollars into real estate, let's say it's a small house that he can rent out to tenants. Every single month that house is rented to tenants, John is going to receive a rent check. So at the end of each month, John still owns the house, but that house has produced rental income for him.

So not only does John benefit from the house going up in value—likely every year—he also gets income from renting that house out. And guess what? Rents go up pretty much every year. So the rental income John receives from the house will likely increase every year as well. Real estate checks the box of being a productive asset.

Next up is farmland. If John buys a few acres of farmland every year, that farmland produces crops for John. These crops can then be sold and turned into cash. Farmland too checks the box for being a productive asset.

And though we have stocks, while it is true that like gold, the value of a stock is also based on supply and demand, over the long term, the value of the stock is based upon the profits the underlying business produces over its lifetime. As Warren Buffett's mentor, the legendary Ben Graham said, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

If you want to check out the video I did summarizing Ben Graham's book, "The Intelligent Investor," you can check it out here. Look at Coca-Cola stock for example. If you had bought a share of Coca-Cola stock back in 2007 and held it until now, look at what the company would have produced for you in the way of earnings. However, gold over that same period of time would have produced nothing for you as an owner.

This is why gold, as an investment, is at a structural disadvantage compared to productive assets. If you need any more proof, take a look at the 10-year chart of the S&P 500. Over the last 10 years, the average annual return of the S&P 500 has been 14.3 percent—not including dividends. How exactly does that compare to gold? Maybe you're thinking gold returned 12 or 10, or maybe even 8—if things were really bad. All of these are wrong. The real answer is much worse.

Over the last 10 years, the return on owning gold has actually been negative. Gold was selling for around 2100 an ounce in October 2011 and is now selling for about hundred dollars an ounce at the time this video is being made—in October 2021. So much for being a store of value. The return on gold hasn't even kept up with the inflation rate during the last 10 years. You would have been better off keeping your money under your mattress at home over the past 10 years than investing in gold.

So there we have it. I hope you guys enjoyed this video and learned something new. If you haven't already, make sure to like this video and subscribe to the Investor Center because it is my goal to make you a better investor by starting the world's greatest investors. Talk to you next time!