Gold Beats Buffett
Published 3/11/2011
“…With an asset like gold, for example, you know, basically gold is a way of going along on fear, and it’s been a pretty good way of going along on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn’t produce anything…”When you analyze Buffett’s answer it does seem to be consistent with his investment philosophy. Buffett is only interested in businesses that produce cash flow, and that create products that people need. He’s not interested in speculating on the price of a specific asset class. Obviously gold doesn’t produce cash flow, so the only way to make a return on gold is to speculate on its price appreciation, which Buffett said is a game he’s not interested in.
The biggest flaw though in Buffett’s response is when he makes the comment: “the problem with commodities is that you’re betting on what somebody else will pay for them in six months”. This isn’t totally true since an investment into commodities could be either short term or long term in nature. Only commodity futures and options carry fixed time periods that expire, but expiration dates can go well into the future, and it’s also possible to roll over a position into a new contract. Speculating on the long term trend in commodities is possible through stocks and ETFs as well as the futures markets.
Buffett seems to be not interested in speculating on the price appreciation of an asset, even if there is an established long term trend higher in the price of the asset. That’s just his investment philosophy. Other institutional investors do not share that philosophy, and believe in the concept of long term trends in the prices of different assets. And that is what separates a value investor in the Warren Buffett sense, from a value investor that looks at the price of an asset in relation to where a long term trend could take it. Buffet sees the value from the income produced by an asset, in relation to the price paid for the asset. He wants a low price compared to income, but is not overly concerned with what the future trend of that price might be. A value investor concerned only with the fixed price of an asset wants a low price for the asset, but more importantly wants a low price with a reasonable expectation that the longer term trend is going higher.
There’s no question that Buffett’s investment philosophy has been hugely successful. But it should be known that the lump of gold that Buffett isn’t interested in investing in has beaten him in investment returns over the past 10 years. For not “producing anything,” gold has shown that it was remarkably undervalued in 2001 given its price appreciation to the current date. The table below shows the annual percentage change in per-share book value of Berkshire Hathaway, as reported in the Berkshire Hathaway annual letter, compared to the annual change in the price of gold based on the closing London PM fix for the year. As the table shows below, in nine out of 10 years from 2001-2010, gold produced a better return than Berkshire Hathaway
Year | Berkshire Hathaway | Gold | Relative Results |
2001 | -6.2 | 1.4 | -7.6 |
2002 | 10 | 24 | -14 |
2003 | 21 | 21.7 | -0.7 |
2004 | 10.5 | 5 | 5.5 |
2005 | 6.4 | 17.1 | -10.7 |
2006 | 18.4 | 23.9 | -5.5 |
2007 | 11 | 31.6 | -20.6 |
2008 | -9.6 | 3.4 | -13 |
2009 | 19.8 | 27.6 | -7.8 |
2010 | 13 | 27.7 | -14.7 |
Average | 9.43 | 18.34 | -8.91 |
Gold’s cousin silver has shown an even greater outperformance. Silver beat Berkshire Hathaway in eight out of the last 10 years, and outgained Berkshire by an average of 15% per year over the period.
| Year | Berkshire Hathaway | Silver | Relative Results |
| 2001 | -6.2 | -1.2 | -5 |
| 2002 | 10 | 3.2 | 6.8 |
| 2003 | 21 | 27.9 | -6.9 |
| 2004 | 10.5 | 13.5 | -3 |
| 2005 | 6.4 | 30.4 | -24 |
| 2006 | 18.4 | 46.1 | -27.7 |
| 2007 | 11 | 14.4 | -3.4 |
| 2008 | -9.6 | -26.9 | 17.3 |
| 2009 | 19.8 | 57.5 | -37.7 |
| 2010 | 13 | 80.3 | -67.3 |
| Average | 9.43 | 24.52 | -15.09 |
The fact that gold and silver have outperformed one of the greatest value investors of all time for a 10-year period shows the power of the long term trend in gold and silver. It also shows the value that can be obtained from identifying a long term trend early, no matter the asset class.
What's more is he's now created Richline Group, which "aims to be the largest jewelry supply group in the United States"
Add that to his aquisition of Burlington Northern railroad and for a guy who always favored equities, he's putting some serious money into commodities.
"Instead of turning to gold, Buffett sees Burlington Northern as a growth vehicle to earn more on the billions in cash Berkshire has on its books carrying coal, wheat and other resources across the nation." - Lisa Reisman
