This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Why Warren Buffett Is Wrong on Gold

Stocks in this article: GLDXOMBRK.A

NEW YORK ( TheStreet ) -- Warren Buffett, legendary investor and head of Berkshire Hathaway (BRK.B), has slammed gold, yet again, saying it doesn't have any use and isn't procreative.

In an adaption of his upcoming shareholder letter published on Fortune's Web site, Buffett rips into the intelligence of owning gold, saying that real demand for gold, defined as industrial and decorative, is incapable of soaking up new production and that the gold you own doesn't "do" anything. At the end of the day, gold is just an ounce of gold worth whatever someone is willing to pay for it.

Buffett does acknowledge that gold's 10-year bull market has been helped by the multiplication of fear in the marketplace, which triggered a flood into the hard asset. But he writes this rally off by saying that "as 'bandwagon' investors join any party, they create their own truth -- for a while."



Buffett uses the Internet and housing bubbles as examples of rising assets that fueled their own fire until those bubbles burst. With all the gold in the world amounting to $9.6 trillion, using $1,750 an ounce as the price, Buffett says he would rather buy all the U.S. cropland, 16 Exxon Mobils (XOM) and still have $1 trillion left over.

Since 2001, gold has rallied 539% while Exxon has climbed only 90%. Now, of course 16 Exxons would have produced a killer return, but why not own both? Most experts recommend that 5% to 10% of one's portfolio be in gold. Those that are more aggressive say 20%.

Although Buffett is one of the best-known investors in the world, here is why he might be missing out on gold investing.

It's not just retail investors or traders that are buying gold and making it a "bubble," but central banks are too. The "official sector" bought 430 tons of gold in 2011 -- the second year central banks were net buyers in more than two decades -- and the majority of these buyers are coming from emerging market countries that need to increase their reserve ratio.

India now holds 6% in gold reserves, which is still considerably lower than the 20% of gold reserves it held in 1994. China holds 1.8% of its reserves in gold. Compare these numbers to the U.S., which holds more than 75% of its reserves in the yellow metal. All of Asia currently only holds 2% of its reserves in gold. Even if the continent were to reallocate their holdings to 3%, it would need to buy 1,000 tons.

Central banks, in general, regard reserve allocation as an ongoing government policy and the more emerging markets rack up trade surpluses with the U.S., the more likely they will be to buy gold. Chinese companies that trade with the U.S. end up with dollars that are exchanged for yuan with the central bank. Then the central bank winds up buying a lot of Treasury bills with that money. The more dollars it accumulates, the more gold the country will have to buy in order to keep its asset ratio consistent.

"Gold holdings are part of a broad set of assets and liabilities of a central bank and are held to ensure against the negative impact of a sudden withdrawal of foreign capital and adverse exchange rate movements," says James Steel, analyst at HSBC. He thinks emerging market central banks will keep adding gold to their portfolio. "We forecast that the official sector could account for 450 tons of net purchases in 2012," this number is more than quadruple mine supply in 2011.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,195.42 +221.11 1.30%
S&P 500 0.00 -2.75 -0.14%
NASDAQ 4,566.1380 +16.9120 0.37%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs