Is Gold Really a Good Investment Over the Long Term?

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Is Gold Really a Good Investment Over the Long Term?Over the last twelve years, the price people are willing to pay for gold has increased significantly.   The following historical gold value chart from clearly shows how the price of gold has increased from January 2000 to January 2012.

     According to the data presented in the chart, the price of gold was steady from January 2000 through January 2002, at which point the price of gold began to increase gradually through July 2006.  After July 2006, the price began increasing at a much greater rate.

     According to Blanchard and Company Inc., there are five reasons that gold prices will continue to rise.

  1. Continued U.S. economic uncertainty.
  2. Continued public fear.
  3. Increased demand for the limited supply of gold.
  4. Benefits of “reflation.” People see gold as a hedge against inflationary pressures.
  5. Uncertainty related to the value of the U.S. Dollar.

     The increasing demand for gold must be understood in relationship to the actual known gold reserves.  In an article adapted for CNNMoney dated February 9, 2012, Warren Buffet describes the current total world gold supply in a very surprising way.

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion.

      The 170,000 metric tons of known gold reserves described by Warren Buffet will not change significantly in the foreseeable future. The gold being discovered each year and made available for public ownership will be absorbed by public demand. Because of this, no significant amounts will be added to the gold reserves held by governments and large financial institutions. Regarding the annual new gold production, Warren Buffet went on the make the following comment.

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.

     According to other comments by made by Warren Buffet, there are other financial assets that will provide a much higher and more dependable return on investment.

My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola ( (IBM), and our own See’s Candy meet that double-barreled test. Certain other companies — think of our regulated utilities, for example — fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

     The crux of Mr. Buffet’s argument is there is a finite quantity of gold available to investors, which will not grow significantly over time. The present increase in value of this finite resource is being artificially elevated because of investors’ reaction to present economic conditions. Given time, the economic conditions in the U.S. and around the world will improve, and the price of gold will be driven down. Over the same time period, there are businesses that will continue to grow and build wealth for owners and investors alike. In his comments, Mr. Buffet’s provided the following insight into his own investment philosophy.

Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.

     Warren Buffet’s opinion on fixed asset investments such as gold has been consistent over time. In an article for published by the Wall Street Cheat Sheet dated March 8, 2011, Warren Buffet made the following comment.

The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.

     Investors wishing to follow the advice of Warren Buffet will invest in retail businesses, farming and manufacturing activities that have proven themselves capable of producing solid income over the long term. The inflated price of gold lures investors seeking to make a quick return on their investment, but gold does not have the ability to produce dependable investment income over the long term.

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