In this video we’ll cover Buffett’s criticisms of gold, the role of gold in a portfolio, and a more fair comparison of the returns of gold vs stocks. By the end, you should have a more complete and objective view of gold and whether or not it deserves a place in your own investment portfolio.
Buffett’s criticisms of gold. Here’s Why You Might Want Gold in Your Portfolio
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Warren Buffett doesn't own any gold. Here's why you might want to. Behind me is Buffett 2018 letter to Berkshire Hathaway shareholders a letter he writes every year and shares some of his investment wisdom. This used letter had a particularly interesting comparison between the returns of stocks and gold one that I think could be potentially a little misleading for the average investor in this video will cover Buffett's criticisms of gold. The role of gold in a portfolio and what I believe is a more fair comparison between the returns of gold versus that of stocks. By the end of this video you should have a more complete and objective view on gold and whether or not it deserves a place in your own investment portfolio. Before we begin. My name's Michael and take a second to subscribe to gain access to more investment content like this in the future.
Now if you search Warren Buffett shareholder letter 2018 you'll be able to find a copy of the document I'm looking at here. And on the 13th page you'll find the section titled The American tailwind in it Buffett reflects over his seventy seven year investment career how America has overcome a myriad of obstacles and challenges to continue and grow and improve the quality of life for future Americans. This American tail wind has not only benefited the average citizen but the investor as well. Buffett demonstrates this with example that if he took that first one hundred fourteen dollars and seventy five cents he had at age six in 1942 and invested that an S&P 500 index fund. That amount would have grown to over six hundred thousand dollars by the end of January 2019 an investment gain of nearly fifty three hundred dollars for every one dollar initially invested. It's no question that U.S. equities have performed quite well over this period of time. However I think the next comparison could benefit from a bit more context and clarification in Buffett's own words this comparison to gold was as follows.
Those who regularly preach doom because of government budget deficits as I regularly did for many years might note that our country's national debt has increased roughly 400 fold during the last of my 77 year periods. That's over 40000 percent. To protect yourself you might have issued stocks and opted instead to buy three and a quarter ounces of gold with your 114 dollars and 75 cents. And what would that have supposed protection have delivered. You would now have an asset worth about four thousand two hundred dollars less than 1 percent of what would have been realized from a simple unmanaged investment in American businesses. The magic metal was no match for the American metal. So at first glance most investors might initially agree with Buffett here in the sense that investors would likely have been better off long term at least over this period to exclude gold from their portfolios. Instead focus on equities or stock ownership of American businesses. While I'm personally in agreement with Buffett on his optimism for America and the efficacy of the American tailwind I think his comparison to gold here is misleading at best and investors would probably be better off understanding the full picture surrounding gold. In fact there are a few specific issues that don't really make this a fair comparison.
First is that Buffett portrayal of gold as an asset class is oversimplified. In his letter many of you likely do but some of you may not know that gold was effectively the default currency for the United States. Throughout the vast majority of its history starting with the coinage act of 1792 the U.S. dollar was defined by law as a specific amount of gold or silver. For example a dollar was defined as roughly 24 grams of pure silver and a ten dollar gold eagle equivalent to roughly 16 grams of pure gold. This meant during this period in time the price of gold didn't fluctuate with the dollar because it was effectively the same currency gold continued to be used in circulation as a currency until 1933 when President Franklin D Roosevelt made it illegal for citizens to own and hold gold. This meant that all citizens by law had to turn over their goal to the Federal Reserve in exchange for paper certificates which we're very familiar with today. Following that the next year in 1934 the Gold Reserve Act required that the Federal Reserve transfer all gold and gold certificates directly to the U.S. Treasury. The act also changed the nominal fixed price of gold from twenty dollars and sixty seven cents per ounce to 35 dollars per ounce effectively devaluing the dollar by 40 percent overnight. That on its own is an interesting story for another video. But the end result of the gold reserve act is that while the dollar is still linked to gold only international banks can exchange their dollars sometimes called currency reserves for gold.
Ordinary citizens no longer have that option that international convertibility of dollars into gold ended in 1971 during the Nixon shock when then President Nixon closed the gold window no longer allowing international convertibility of dollars to gold and effectively severed the last link between the dollar and gold making the dollar a free floating fiat currency. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States. This is one of the first issues that makes Buffett comparison a bit problematic.