I really liked this piece by Matt DiLallo on why gold is so hated by Warren Buffett. He provides the juicy details, but I’ll give you the quick and dirty rundown:
- Gold is an unproductive asset.
- Gold is valuable largely because people believe it’s valuable.
It’s not that Buffett is an ideologue or just on some anti gold rampage. I think there are some logical and great lessons to be learned here:
- We build wealth by increasing our own production. That is, we become more valuable to others within society when we do things that they find valuable. This is why society rewards great innovators and people who tend to work hard.
- Betting on commodities like gold is often a bearish bet against human productivity and innovation. When you buy a block of gold you are essentially buying an insurance asset whose value will increase if the value of dollars collapses or falls. In other words, you are betting directly against the ability of US workers to produce and maintain the value of the dollar.
- Betting on gold is largely a bet on faith. That is, you are betting on the idea that someone else will believe gold is more valuable in the future. Although gold is valuable to some degree as a commodity there is also a substantial portion of the population who wants to own gold because it is viewed as money or protection against paper money. I’ve referred to this in the past as a “faith put”, a premium in the price that inflates its value due to sheer faith.
I don’t mean to rant against gold. I just think that there are some fundamental reasons to keep gold in the proper perspective when we consider its value as a portion of our asset holdings. In my view, it’s not the type of asset you want to build a portfolio around due to the aforementioned thoughts….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.