Why Buffett is (Still) Wrong About Gold (Even Though He Just Bought a Miner) – But How He Loves Silver

Why Buffett is (Still) Wrong About Gold - But How He Loves Silver

August 2020 Update: Buffett Buys GOLD

The big news in the world of gold this week was that Warren Buffett’s Berkshire Hathaway bought GOLD. Yes that is in capitals for a reason. As GOLD is the stock ticker symbol for the gold mining company Barrick Gold Corp. Bloomberg reported that Berkshire Hathaway’s latest filings show the they bought “20.9 million shares, or 1.2% of the company’s outstanding stock, with a current market value of $565 million”.

So Does This Mean Buffett Has Changed His Mind on Gold?

Not necessarily. And for a number of reasons…

  1. It could be that one of Buffett’s 2 junior investment managers made the purchase.
  2. Also the purchase only amounts to 0.28% of the Berkshire Hathaway portfolio. So it is not very significant in their overall portfolio.
  3. It could be they have simply bought because Barrick has low mining costs and is paying a good dividend too.
  4. Also a gold miner is not the same as gold. Buffett (as you’ll see below) believes gold is just a pet rock that just sits there. Whereas Barrick is a cashflow producing business.
  5. Buying a gold miner could be a move to find investments that will not be affected by COVID-19.

Of course it is possible that Buffett or his managers are realising that all is not well in the world’s monetary system. It may be telling, that in the same quarter Berkshire Hathaway significantly reduced its stakes in 2 US banks: JPMorgan Chase & Co. and Wells Fargo & Co. While Goldman Sachs Group Inc. was completely sold and PNC Financial Services Group Inc. was cut. Although they did further build its stake in Bank of America Corp.

So overall we could make arguments each way. Maybe Buffett still doesn’t like gold, but he’s happy to buy a miner of it? Or perhaps we should watch what Buffett does more than what he says?

Either way, Mike Maloney makes a good point in the video below. He argues that this purchase by Buffett and co, could be an indicator of the big money moving into gold itself. This big money will likely put a floor under the price. So each pull back we see sets a new floor that gold does not go below.

Riding Warren Buffett’s Gold Rollercoaster

Below we detail what Buffett’s previously stated beliefs on gold are. We then argue why he is very wrong on gold. But then interestingly we show how he has bought silver in the past…

Why Buffett is (Still) Wrong About Gold – But How He Loves Silver

Warren Buffett doesn’t like gold. Or rather should we say Buffett doesn’t “get” gold. We’ve commented briefly on this some years ago. In his 2019 Berkshire Hathaway annual company letter he was again running down the precious metal.

An email we received from the Crux summarises Buffett’s thoughts on gold nicely:

“Warren Buffett doesn’t like gold.

In fact, Buffett has made it a point of reminding investors of his position many times over his long career. He’s maintained that the metal “has no utility,” nor is it “procreative.”

As he puts it, “If you own one ounce of gold for an eternity, you will still own one ounce at its end.” On the other hand, money invested in the stock market could grow exponentially. The analogy Buffett once used is choosing between two types of geese… If you had to pick one, would you want the goose that lays eggs or the goose that just sits there?

‘Doom and gloom’ investors are making a mistake

In Buffett’s recent annual letter to Berkshire Hathaway shareholders, he took the opportunity once again to drive home this point by comparing the performance of gold to stocks over a near-80-year period…

“On March 11, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock.”

On that day, Buffett says he became a “capitalist.”

Over the years, while the market bounced up and down through changing presidencies, economies, and global conflicts, Buffett stayed true to his principles as a value investor… And with a force he refers to as the “American Tailwind” behind him, he prospered.

Fast-forward to today, and we’ve reached a point where the national debt has surpassed $22 trillion. During uncertain times like these, safe-haven assets like gold become particularly attractive…

“Those who regularly preach doom because of government budget deficits might note that our country’s national debt has increased roughly 400-fold during the last 77-year period. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy three and a quarter ounces of gold with your $114.75.”

According to Buffett, investors who let themselves get spooked out of the market would have seriously limited their potential returns. Those who opted for this protection “would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business.”

Buffett’s conclusion

As he summarizes, “The magical metal was no match for the American mettle.” Looking back at the last 77 years, periods of uncertainty and financial panic caused all kinds of frightening headlines… But everything folds into “history,” as Buffett says, and history shows that keeping money in the stock market has led to the greatest profits over time.”

There are a number of points that spring to mind in response to Buffett’s view on gold.

Let’s go through them…

Buffett’s Gold Mistake Number 1: Eventually All Debts Come Due

Firstly just because the US debt has been growing for a long time – it doesn’t mean it can carry on indefinitely.

As Sovereign Man’s Simon Black points out:

“Just because the guy knows investing doesn’t mean he knows anything about the national debt..

The US government is now $22 trillion in debt. It’s running $1 trillion deficits. And we’ve got a wave of socialist programs on the horizon which will only further crush the US’ finances (including AOC’s Green New Deal, which would cost an estimated $93 trillion).

This only ends one way…

Buffett studies history. He knows that every great empire throughout history has eventually fallen.

He’s even gone on record himself, saying:

“What we learn from history is that people don’t learn from history.”

And warns people against hiding behind the idea that “This time it’s different.”

Well, sorry Warren, this time isn’t different. Eventually the US’ debts, like all debts, come due.”

Buffett’s Gold Mistake Number 2: Comparing Gold to Stocks is Like Comparing Apples to Oranges

Buffet holds a lot of cash. In fact in this latest letter he says he can’t find any investments worthy of his cash hoard. So instead he is buying back shares in Berkshire Hathaway.

But on the topic of cash is where Buffett gets things really wrong about gold. Buffett should be comparing gold to his cash hoard. Gold is money. Not an investment.

Buffet is not comparing apples with apples.  In the current monetary paradigm, gold is the “anti-dollar” and that is what he should compare gold to. Not stocks.

As we’ve written before:

Shares Should Outperform Gold Over the Long Term

You’d expect shares to outperform gold over the very long term as they are investments that produce a yield (hopefully!) in the form of dividends. So they should go up in value over time, or perhaps not go up in value but produce a yield instead.

Ideally money should simply hold its value over the long term. This is where fiat currency – todays money – performs terribly. And where gold performs remarkably well – even over centuries.

So instead of using dollars (or whatever other national currency) to compare the performance of gold and stocks, we prefer to use gold to measure and compare the performance of money and stocks.

…But given we’re now in 2018, the perhaps more valid question to ask is:

How Might Gold Do Versus Stocks Over the Next Decade or So?

Read more: Dow Gold Ratio: How Does Gold Compare to Shares For the Past 100 Years?

So Buffett should be comparing gold to cash (such as the US dollar) over the long term. Not to U.S. businesses. A.K.A. The U.S. stock market.

Buffett’s Gold Mistake Number 3: Not All Investors Are as Good as Buffett

Another point that seems to allude Buffett is that he is vastly superior to just about every other stock market investor on the planet!

In fact just about no investor alive is even close to being as good as Buffett!

So for the average “non savant” investor, it makes sense to hold a portion of your wealth in gold. As you’re unlikely to pick your sharemarket investments nearly as well as Warren does.

Buffett’s Gold Mistake Number 4: It Doesn’t Have to be Gold or Stocks

Unlike Buffett, we’re not saying don’t invest in other assets like the share market, real estate etc. But rather we’re saying, “Just don’t invest everything”.

Buffet looks at this as an either or decision. Stocks or gold. When in fact some of each makes a lot of sense.

There is research that shows the benefit of holding a percentage of your wealth in gold too.

See: What Percentage of Gold and Silver Should Be in My Portfolio?

As the always eloquent Bill Bonner put it in an issue of The Bill Bonner Letter …

“Gold is a hedge against falling stock prices. And falling bond prices. And falling bitcoin prices. And falling real estate prices. And a falling dollar. And falling hopes, illusions, and myths of all sorts.

There is a time for everything under heaven. A time to believe. And a time to restrain from embracing crackpot ideas. In short, we believe we have entered an Era of Busted Dreams. Gold is a hedge against all of them.”

A good rule of thumb is to have at least 10% of your wealth in gold as a hedge against disaster.

Warren Buffett Doesn’t Need Gold, But You Do – Rick Rule

The always insightful Rick Rule also had some interesting thoughts on why Warren Buffett doesn’t need gold, but the average investor always does…

Buffett May Not Like Gold – But He Did (Once) Like Silver

While Buffett doesn’t “get” gold, he did once take a serious position in silver.

In fact in the mid-1990’s Buffett’s Berkshire Hathaway took delivery of 130 million ounces of silver. At the time this was around 80% of annual silver mine supply.

This was second only to the infamous Texan oil tycoons Hunt Brothers silver hoard in the mid 1970’s. Where they supposedly tried to “corner” the silver market with around 250 million ounces.

Read more: What Today’s Silver Buyer Can Learn From the Real Hunt Brothers Silver Story

While that sounds like a lot of silver, it was only about 2% of Berkshire Hathaways total investment portfolio.

Why did Buffett buy that much silver? Probably because like any investment he buys, he thought silver was cheap.

From the 1997 Berkshire Hathaway letter to shareholders:

Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal’s fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand.

So is Silver Cheap Today? Would Buffet Buy Again?

Today one ounce of gold is worth 72 times more than one ounce of silver. (This is down from the recent COVID-19 crash high of 125). This is depicted in the gold to silver ratio chart below (with the silver price in the lower part of the chart).

Chart of the Gold Silver Ratio showing when Buffett bought and sold silver
Warren Buffett bought silver when the gold/silver ratio was above 70. Silver was cheap compared to gold. Today silver is at a very similar ratio to gold at 72.

Read more on: The Gold Silver Ratio

Warren Buffett started buying silver in July 1997 paying around $5.25 per ounce. The gold/silver ratio was then above 70. So silver was cheap compared to gold.

Buffett sold 8 years later in the first quarter of 2006 when the silver price had doubled. And the gold/silver ratio had fallen to just above 50.

Sidenote: Why Did Buffett Sell His Silver in 2006?

There are 2 reasons why Buffet sold all of his silver:

1. The “official” reason. Buffett saw “bubbly characteristics in the price of silver, which was rising like crazy”.

2. The “unofficial” reason, which seems more likely. Buffett was being investigated by the government in 2005 because his reinsurance company General Re had engaged in illegal transactions with AIG. AIG’s CEO was forced to step down but Buffett was left unscathed. Why was Buffett let off easy? Some say that Buffett sold his silver immediately after meeting with federal “investigators”. Keep in mind that inflation was high in 2006, so the U.S. government was afraid of another silver spike like that of 1980 (which would have caused inflation to rise even more). Thus, there’s a chance that the U.S. government let Buffett off the hook in exchange for not running up silver prices.

It’s worth noting that the popular silver ETF SLV began trading in May 2006. A major concern at the time was “where would SLV get the physical silver to back up its shares”? Another question is “why did Buffett’s sudden selling not cause silver prices to fall in Q1 2006”? SLV had exactly 130 million ounces of silver, and Buffett sold 130 million ounces. Putting 2 and 2 together, it’s likely that Buffett sold the silver directly to SLV, thereby allowing him to sell without putting any downwards pressure on the price.


Yes Silver is Very Cheap Today

While the price per ounce of silver might today be more than when Buffet bought. Today silver is actually at a very similar value to 1997, with the gold to silver ratio at 72.

Would Buffet Buy Silver Again Today?

The fundamentals for silver today look much like they did when Buffett bought in 1997.

But the question is perhaps rather could Buffett buy?

The COMEX registered silver totals just 129.5 million ounces or $3.6 Billion.

Whereas Berkshires Hathaways current cash hoard is a monstrous and record $146.6 Billion.

So if Buffett bought every ounce of registered COMEX silver this would be less than 2.5% of Berkshires cash on hand! Compare this to 1996 when his silver purchase was about 2% of the whole portfolio of Berkshire Hathaway.

Today Berkshire is simply too large to buy silver. As any meaningful purchase would impact the price far too greatly.

However the average silver buyer today has no such worry.

Consider starting – or adding to – your own silver hoard today. And don’t pay too much attention to Buffett’s thoughts on gold. Especially when he has previously bought “poor mans gold”.

Shop silver bullion bars and coins.

Editors note: This post was first published 1 March 2019. Updated 19 August 2020 to include latest information of Berkshire Hathaway buying Barrick Gold Corp.

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