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Flash in the pan or long-lasting hedge? Buffett speaks out on gold, again

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Will all the gold that glitters glitter less?

Warren Buffett tossed some nuggets of wisdown into the stream again.

In “Gold Riot”, I discussed gold bullion, gold stocks and Buffett’s opinion on the metal.

Despite gold’s excellent performance of the last ten years, it’s been one heck of a ride. Soaring and then plummeting, gold has shown investors that when it corrects, it corrects with a vengeance.

Buffett sees gold as an unproductive asset. He believes stocks are the more “productive” assets and will “prove to be the runaway winner” trumping bonds or gold over an “extended period of time”.

He also says stocks will be “by far the safest” of assets.

Bonds, says Buffett, need a “warning label”. He believes they’ll fall victim to inflation and taxes.

Risk is a slippery slope. While many investors don’t realize it, so-called “safe” investments like GICs or U.S. Treasuries have risks, too. At the moment, Buffett sees bonds (including other currency-based assets) as “dangerous”.

Still, portfolios need some bonds depending on the investor’s risk tolerance. Buffett’s company, Berkshire Hathaway, holds bonds for liquidity issues.

Investors who have been heavy in bonds have had a great year, but such returns may be harder to come by in the future.

Buffett says:

… owners [of gold] are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future … bubbles blown large enough eventually pop.

To see Buffett’s interesting metaphor on gold, see my blog from last December, “Gold Riot”. Famously, Buffett compared gold to stocks and farmland.

Fondling the cube

Buffett again emphasizes his position on gold:

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

If you didn’t check the link above, do it now for a more complete picture of Buffett’s philosophy.

Buffett highlighted the mania in gold near it’s peak. Gold has recovered since it dropped, but Buffett’s still not a big fan.

In “Gold Riot”, I pointed out, agreeing with Buffett, that it would be wise to be cautious.

The new boss different from the old boss?

Buffett called the tech bubble early over ten years ago. Many made light of his opinion then, saying the “new economy” no longer needed to play by the old rules.

But the “new bosses” turned out to be wrong and the “old boss” turned out to be right.

Hype and speculation eventually led to a blow out. Buffett was early, but he was right.

With respect to gold, if an investor interested in gold had held off during its spike last year and waited for the correction, they would have:

  • Had a great buying opportunity

and/or

  • Avoided a big downturn

Gold has its place in a portfolio, but there are some great points to remember about investing in bullion or gold stocks.

As with any other investment – perhaps even more because of its volatility – hype and value are part of the equation.

Gold will play its part in the next few years, but do investors understand the risks associated with investing in gold?

See Buffett’s article in Fortune

Sprott diversifies:

Sprott, volatility and gold

Peter Hodson agrees on gold

Click here for more about bonds and fixed income investments

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

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