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posted on 04 December 2015

Warren Buffett Hates Gold. Why Do You Like It?

by Daily Reckoning, Daily Reckoning

-- this post authored by Byron King

Today I want to share with you an email from a friend and reader. It has a special "Thanksgiving" takeaway, to be sure.

The email was short and crisp, the note stated, "Warren Buffett hates gold. Why do you like it?"

Let's have a look...

Yes, Buffett Hates Gold

First, let's go to the source of the question, the exact words of Mr. Buffett. In a 1998 speech at Harvard, Buffett gave no quarter to the yellow metal. Gold, he stated:

"Gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Funny, right? If Buffett weren't an avuncular, ukulele-playing billionaire, he could be a stand-up comic. Then again, people tend to laugh at rich guys' jokes.

Warren Buffett and Ukulele

If you had his money, you'd play ukulele too. Texas A&M image.

More recently, in his 2011 annual Berkshire Hathaway letter, Buffett took another sharp wire brush to gold. He called gold an "unproductive" asset that will "never produce anything."

Gold, declared Buffett in that same 2011 letter, reflects a "buyer's hope that someone else... will pay more for [it] in the future." Indeed, per Buffett, gold as an asset "will remain lifeless forever." Gold prices are held aloft "by the belief that others will desire it even more avidly in the future."

OK, you get the idea. Buffett doesn't like gold. Then again, he's super rich. He's neither peasant nor proletariat. He's far removed from the "99%" - or 99.999% - rest of humanity.

Heck, Buffett can "afford" not to like gold because he's asset rich in so many other ways, as I'll discuss in a moment. Meanwhile, as Buffett trashes gold, he indirectly talks up his own book of assets and endorses his own brand of investing. Not to put too fine a point on things, but Buffett is a rich guy talking monetary smack and behaving badly.

Why Do I Like Gold?

To answer the reader's question right out of the gate, I like gold because it's a form of insurance - monetary insurance, of sorts. When (not if) something bad happens to our nation's currency, I want to own gold. Allow me to go out on a limb here. When things go deep south for the dollar, gold won't be one of Buffett's "unproductive assets", I suspect.

Now, you might be wondering... is something bad going to happen to the dollar? Well, yes, sooner or later. If history is any guide, we - the country, that is - have a major panic or currency crisis every generation or two. That makes for several long stories; not here, not now.

The takeaway is that when wheels fall off the economy and/or our currency takes a hard hit, you'll know what I mean. For now, every respectable portfolio ought to hold about 5-10% in physical metal - meaning gold or silver. If you're more "gold buggy" than not, then own more than that percentage. But you owe it to yourself and your family to hold some amount of real precious metal. Gold (and silver) make for insurance in not just bad times but very bad times.

As I'll explain in a moment, you need to own gold only once, and that's when you need it. At that particular point in time - sooner or later, as I noted above - you'll all but dislocate your shoulder patting yourself on the back. You'll dodge a lot of bullets when the time comes.

What's my logic? Well, let's begin with the concept of insurance... right after I say some more about Buffett.

Yes, yes, yes... I know... Buffett owns all manner of "productive" assets through his control of flagship Berkshire Hathaway. That company's holdings comprise of a long list, from Acme Brick to XTRA Corp.

And yes, Buffett's holdings are "productive" in the sense that they're companies that do or make things and deliver services. Consider the above-noted Acme Brick company, or holdings of Benjamin Moore paints. Self-explanatory, eh?

Then there's the Burlington Northern Santa Fe Railway, which is a productive asset if ever there were one. Plus leading consumer brands like Fruit of the Loom and Heinz foods. Or consider that Buffett is in the midst of buying Precision Castparts, a major supplier of aircraft and engine components. Productive, productive, productive, right? Lots of steel, lots of factories.

Then again, here's some of the other names in the Berkshire portfolio: Applied Underwriters, GEICO, General Re, Guard Insurance, Medical Protective, National Indemnity, U.S. Liability. What do these companies do? Notice anything? They're insurance carriers of one sort or another. They spread and allocate risk, for which they collect premium payments.

Think about it... Investment wise, how "productive" is insurance? Well, it's very productive for Buffett and Berkshire. Insurance is a solid long-term line of business that generates immense cash flow for Mr. Buffett and his stable of companies. Good for him.

Then again, how "productive" is insurance to the policyholder? For example, if I buy auto insurance - which I'm required to do in most states, by the way - but don't have an accident, what good was it to me? Or if I'm a doctor or lawyer who doesn't get sued, did I really need malpractice coverage? Or if my house doesn't burn down, then I must be wasting my money on fire insurance, right? Or what if I run a big company that self-insures with a major reinsurance policy for any big hits, but I never take a big hit?

In other words, insurance is a total "waste" if you never use it, right? Pay premiums. Get nothing back, right? Talk about burying money down a hole?

What is the Income Play Rich Investors Love? (Hint: It's Tax-Free)

As far as I'm concerned, I wouldn't turn the key in my car without liability/casualty/property insurance. Back when I practiced law, you better be sure I carried malpractice insurance every single day - "claims made" and "claims arising," if you know what I mean. I absolutely carry fire insurance on my real estate, and can't imagine not having it. Plus, I carry other liability, error and omission insurance. Life insurance too - accidental death and dismemberment, as well as just plain "life" insurance - except I have to die for that to kick in (bummer).

For all the premiums I've ever paid, I've had almost no claims (knock on wood). Even the very few claims made were minor. Thus, I've paid far more premiums than I've ever received back in benefits.

Then again, insurance allows one to move through life and assume more risk. Stated another way, insurance de-risks one's ability to function in the world. For example, like drive a car. Or leave your house and not stay there shut in with a fire hose resting on a hook right next to you. Or join in the world of commerce and engage in business. Then if something bad happens, your policy kicks in. Your carrier pays the lawyers if you get sued or pays coverage if there's a valid claim.

Maybe Buffett Doesn't Need Insurance, but You Do!

OK, so maybe Mr. Buffett doesn't need "monetary" insurance like gold because he owns so many other productive assets. That is, if the economy - the dollar - falls off a cliff, Buffett still owns the brick factory, the railroad, even a candy company (See's Candies). Plus, he owns all those cash-spinning insurance companies. What does he care? If things tank, we won't have to hold a bake sale for him.

How about you? Where's your wealth? Money in the bank, right? (At near zero interest for the past seven years, by the way.) Stocks and bonds. Real estate. Personal property like cars, furnishings, art, jewelry, etc., right? Perhaps some whole life insurance. Maybe you own your own business, too, although it's not exactly the BNSF Railway, I suspect.

What happens when (not if) our government mismanages the economy, such that we awaken one day to a currency crisis? Hasn't happened in many decades, right? Well, to my mind, that just means we're getting closer to that ground zero every day. Sooner. Or. Later.

C'mon... What happens when you can't access all that "wealth" you think you have? That is, you go to bed one night feeling fine. All is good. You awaken the next morning to news that the banks are closed and... Uh-oh... Now what? Now do you wish you had bought some gold (or silver)?

How much gold should you own? As I've said many times along the way, own 5-10% of your portfolio in precious metals. Right now there's no need to go out and buy a whole whack all at once. Accumulate over time. Buy the dips, of course. But over time, buy and build your stash.

Here's a story to illustrate the point...

When Calamity Strikes

I have an acquaintance named Nando Parrado. He's a businessman from Uruguay, of all places. He lives in Montevideo.

Some years back, Nando owned and operated a string of businesses in Uruguay and Argentina. Things went well for Nando; he had plenty of money in the bank - U.S. dollars, in fact. He was quite well-off.

Early one morning, while he was still in bed, the telephone rang. It was a business partner, calling to say:

"Nando, the government is closing the banks today. I don't think we'll be able to get to our money."

Sure enough, the government of Argentina nationalized all dollar-denominated assets, literally overnight. The impact of the currency seizure instantly crossed the border to neighboring Uruguay as well. Literally billions of dollars of "wealth" vanished with the stroke of a pen by some officious, socialist-populist minister in far-off Buenos Aires.

Nando and his colleagues met at the company office. They drank coffee and called bankers at different banks. The answer was always the same:

"I'm sorry, Nando, but there's nothing we can do. Your money has been seized."

What did Nando and his friends do? "Well," said Nando:

"we realized that all our dollars were gone. So we went to lunch. Then we all went to the movies. And I had some gold, so I was able to convert that into enough money to start out again."

Such equanimity, eh? Then again, Nando was one of the few survivors of a terrible airplane crash in the Andes, at 12,000 feet elevation, back in 1972. The survivors stayed alive for 72 days before being rescued.

Eventually, Nando walked down from the mountain, his feet wrapped in nothing but rags, and found someone who called the rescue teams. Sound familiar? See Alive: the Story of the Andes Survivors, by Piers Paul Read (1974) or Miracle in the Andes: 72 Days on the Mountain and My Long Trek Home, by Nando Parrado and Vince Rause (2006).

Nando said over dinner with me a few years ago:

"When you survive against all the odds... , when you have to confront your fate and realize that you are a few breaths away from death... well, you understand how to live with disaster."

Then Nando added:

"But I was sure as hell glad that I owned some gold, too."

I'll sum up by saying that Warren Buffett can do what he wants. But unless you're hyper-wealthy like him, you need "insurance" in the form of gold. You just never know.

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