WHAT OTHERS ARE THINKING
Surprise surprise, he isn’t in favour of it. In this Fortune article, Buffett says he doesn’t like gold because it “has two significant shortcomings, being neither of much use nor procreative” and “requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.”
We can’t really disagree with him on that point, nor with his preference for “investment[s] in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.”
However, we would note that the average person in the street may find it hard to identify assets which “deliver output that will retain its purchasing-power value” AND need minimal “new capital investment”, even at the best of times. We think Buffett forgets that the average investor doesn’t have his skills, which is why many often prefer safer options such as cash, particularly in uncertain economic environments. This is not unreasonable.
However, Buffett himself notes that “Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.” Spin out of control is a euphemistic way of saying hyperinflation – as per Zimbabwe.
As Coutts, a UK private banking and wealth management firm, note: “with both short and long-term interest rates below the inflation rate, the real value of savings in fiat, or paper, currencies are being eroded, reducing their appeal as a store of value”. These negative real interest rates, as they are called, “drive investors to seek assets that are not directly affected by inflation, depreciation, devaluation or default”, which Coutts notes provides support for gold prices.
So when the average person faces:
• uncertainty about which business to invest in to retain purchasing power and
• going backwards holding cash
is it at all surprising that there is currently an “expanding pool of buyers” for gold?
Of course, this will not continue forever, which is the useful message from the Buffett article: when the economy turns around and/or cash interest rates move above the inflation rate (after taxes), then it would be wise to consider reassessing one’s gold holdings, either reducing it over time or exiting completely.
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