You Need To Know What Buffett Got Wrong About Gold
Speaking at CNBC early in May, Warren Buffett said some controversial things regarding precious metals. He unfavorably compared gold to stocks, saying that if you had invested in stocks in 1942, you would have earned over a hundred times more than if you had invested in gold. There are plenty of people out there who take Warren Buffett’s words as law, but the famous Omaha investor isn’t playing by the same rules as real investors.
The numbers aren’t wrong. Buffett said that investing $10,000 in gold in 1942 would have yielded $400,000 at today’s price of gold, while $10,000 would have turned into $51 million if you had invested in stocks. But Buffett missed the mark with the comparison. Growth is by and large not the reason today’s average investor buys gold. A mixed portfolio that includes both stocks and more conservative alternatives like gold is widely considered the best way to go, even by many prominent gold investors.
Gold investors choose precious metals for three primary reasons: insurance, inflation, and diversification.
Insurance – Over and above everything else, gold is your insurance policy. Many of the investors who buy gold from us at Silver Gold Bull do so because they’ve seen how gold performs in a crisis. When markets are down or the world is in turmoil, gold prices do better. Keep in mind Buffett’s 1942 analogy. The world was at war and while it’s easy to see today how stocks have performed over time, you could find just as many stories about financial disa sters ruining lives. Part of the problem is that investors repeatedly buy high and sell low, selling off stocks when markets plummet and scrambling to get back into markets part-way through a rebound. You don’t have to panic when you own gold. Rising gold prices will offset your overall losses. They can even give you the confidence to stay invested in stock markets and participate in a full recovery.
If your equities are in funds that aim to match the market’s growth, you see how the market grows in the long-term, despite corrections and crashes along the way. The average returns on stocks since 1950 have been 10 percent annually, but average isn’t the same thing as normal. In 2008, if your portfolio tracked the S&P 500, your portfolio would have lost 38.49% of its value in a single year. Gold prices gained 4% that same year and began to steamroll ahead of the stock market recovery in the years that followed, growing over 25% in 2009 and 30% in 2010. Gold mitigates your losses and gives you the capital to participate in a recovery.
Inflation – Another reason to buy gold online at Silver Gold Bull is inflation. Gold is a popular purchase at Silver Gold Bull because it keeps up with inflation and, in fact, often does better. Remember Buffett’s $10,000 in 1942? Today it would be worth $400,000, but if it had been invested to match inflation, it would only be worth $153,100 today. Gold i s always better than cash.
Inflation bites into real interest rates (the rate of interest after inflation). High enough inflation ca n even deliver negative real interest rates on conservative investments like bonds. When that happens, investors give up on bonds as their defensive asset of choice and start looking toward tangible assets like gold and silver instead. Keeping up with inflation is a lot better than a negative return.
Diversification – Warren Buffett is famous for dismissing diversification, once saying “It makes little sense if you know what you’re doing.” On one hand, he does support creating portfolios that are highly diversified and that track indexes for average investors. But he believes that anyone who wants to do better than the rest of the world should never diversify. Instead, they should learn one business and invest accordingly.
Tell that to investors in Enron, who were mislead into believing they were investing in a solid company. Investing everything in only a few stocks is a recipe for disaster, whether you know the industry or not. Even if you’re an expert, you still run into third-party risks. Investing in a company means you trust its management. Diversification is rightly considered a basic principle of investing and it’s especially important for the average investor who has a job and doesn’t spend all day learning the ins and outs of finance. The reality is, gold is an important asset for diversifying your portfolio. It’s safe and it helps you manage risks. It can also help you get ahead during a crisis.
One final point Buffett made was a common criticism against gold: it doesn’t produce anything. This was something he’d already said in 2015 when he compared gold to the time he bought a farm in Iowa. Buffett is not the kind of investor interested in value investment, i.e., making money off the price change because an asset is more desirable than when you bought it. Gold has always acted as an exchange of value. Only in recent history has it been separated from currency. People today invest in gold because keeping significant cash savings is no longer a good idea. In 1981, a savings account with a bank gave nearly 16% interest. In today’s low interest world, it’s negligible. Instead, investors want a liquid asset that won’t get eaten up by inflation. The answer to that need has always been gold.
If you’re serious about investing, gold should not be the only asset you have. A balanced portfolio is diversified with a great insurance policy. Start by learning how to buy gold online and learn how to get ahead the next time stocks are in a correction.
Gold is an important element in a diverse portfolio for real investors. Gold will help you sleep at night knowing your money is safe, but it will also help your portfolio grow when other sectors in the economy are struggling. Make gold part of your investment future.