Warren Buffett Is Completely Wrong on Gold

Every year the financial media await the Berkshire Hathaway annual shareholder meeting, relishing the opportunity to run interviews with Warren Buffett. Buffett didn’t disappoint this year, speaking freely about his thoughts on a number of issues. Among them was the idea of gold as an investment, which Buffett rejected. The media reported his statements on gold with not even a fraction of the fact-checking they engage in with President Trump’s statements. That’s inexcusable in this instance, because Buffett is dead wrong on gold.

Buffett drew an analogy about $10,000 invested in 1942 and compared the performance between money invested in gold and money invested in the S&P 500. He claimed that $10,000 invested in an S&P 500 index fund in 1942 (a product that didn’t exist back then) would be worth $51 million today, while $10,000 of gold would be worth $400,000 today. He claimed that an investor would have had 300 ounces of gold back then and 300 ounces of gold today. But that’s not true.

Buffett knows that gold ownership in the United States was illegal from 1933 until 1975. Anyone who had tried to buy $10,000 worth of gold in 1942 would have had zero gold, but would face a nice long term in a federal penitentiary. Between 1933 and 1971, gold was the plaything of governments and central banks, the victim of numerous attempts to artificially suppress its market price in the face of Federal Reserve money creation.

In a free market, gold would have appreciated rapidly once it became clear that the dollars being created by the Fed were no longer backed by the gold the US government claimed they were. In fact, the market price of gold did breach the $35 peg several times, yet Western governments still attempted to defend the peg, through agreements such as the London Gold Pool.

Once it was clear that the $35 gold peg could not be sustained, and the US government continued to hemorrhage gold due to foreign government redemptions, President Nixon closed the gold window in 1971. Thereafter, gold was treated as just another commodity, subject to the whims of the market. And what has gold’s performance been since that time?

Since the gold window was closed, gold’s price has increased from around $42 per ounce (it’s been officially valued by the government at $42.22 per ounce since 1973) to over $1,300 per ounce. That’s an average annual increase of 7.6%. Buffett’s vaunted S&P 500, on the other hand, has gone from 98.76 to around 2,660, an average annual increase of 7.3%. So investors who were able to capitalize on gold’s newfound freedom in 1971 have actually seen superior performance to stock markets.

Unfortunately, American investors were still forbidden from investing in gold until 1975, thus missing out on much of gold’s early gains in the post-Bretton Woods era. But that doesn’t mean it’s too late to invest in gold or that gold won’t continue to perform well. Gold’s performance in the 21^st century has been even greater against stock markets. Since the beginning of the century, gold has nearly quintupled from $268 per ounce, an average annual increase of 9.6%. The S&P 500, on the other hand, has only doubled, meaning an average annual increase of 4.1%. That’s pretty impressive performance from gold.

There’s nothing wrong with investing in stocks, and they form part of a well-diversified portfolio. But to say that they are universally superior to gold just isn’t supported by the numbers. It’s clear that gold not only can be part of a well-diversified investment portfolio, but it can also outperform stocks if investors do their homework. Particularly in recent years when consistent investment growth has been hard to come by, and in a future in which large continued stock market gains may no longer be a given, investing in gold may be the best way for many investors to get ahead.

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