Without doubt, gold is world’s favorite investment option. Gold is by far the most preferred investment option among all hard assets. Shares and mutual funds does give it a tough competition but, in recent times, among debt crisis and devaluing national currency, gold investing has almost captured the cult status. But this is not the case when it comes to expert investors view on gold investing. One such expert is Warren Buffett whose capital allocation in gold is said to be zero. So what is important for all Warren Buffett followers is to understand why he is not interested in Gold?
Let us see some views of Warren Buffett about gold investing, he always categorize gold as an investment option that has ‘no utility’. As per investment logic, if anything has no utility then it will be impossible to find its customers. If there are no customers, long term growth is only speculative. In gold investing this is what is happening, investment in gold has become a trend. People tend to buy and store gold just because everyone else is buying it. Try to understand why we say gold is a most unproductive investment option, we do gold mining and filter put gold from all dirt. Then the same gold is melted in the crucible and converted to bards, coins or jewellery. Same gold bars, coins and jewelers is bought by prospective customers. Here the productivity cycle stops, after this gold is in hands of final customer, he cannot consume or use it for any other purpose. He has only two options in his hands (1) Store in locker or (2) Sell it to other person willing to pay a higher price than the purchased price. The word ‘willingness’ is important here as it adds the speculative factor to gold investment. This willingness is not driven by any financial calculation or logic, it is just a feeling. Compare two investment options; (a) Stocks of Tata Steel worth RS 100,000 and (b) Gold Coins worth Rs 100,000. Stocks of Tata Steel will be making money for you instantly in the form of dividends, but the same worth of gold coins will be like a sitting duck which lays no eggs. Till you decide to sell your gold, you can never make money out of you stored gold. In fact you are only paying cost for its safe storage to banks etc. This is pure speculation, it is not investing.
Today there is nearly 0.17 million tones of gold present in this world. The worth of this gold (as per present valuations) is nearly $10 trillion. Equivalent to this $10 worth of gold is say 15% holding in world’s all major dividend paying large cap stocks. On an average we can say that dividend yield of these stocks will be 3% per annum (as per present valuations). Means $10 trillion generating annual dividends at rate of 3% per annum, which is equivalent to $0.3 trillion ($30,000 Crore). Supposing that there was no gold on this mother earth, and same worth of money was invested in stocks, then income generation per annum in $30,000 crore. This can feed (may be) all people living below poverty line in India for next one year. This is what is called as ‘value creation’; and on other hand the same gold will stay unproductive.
But this is a fact that over the past year, gold has appreciated substantially in value. International governments are ready to pay higher price to accumulate gold. This does not mean that what they are doing is wrong, but is critical for us to understand that why and how they are doing this. Internationally it has been observed that currencies are getting devalued. Government is buying gold at low prices creating shortage in supply. This creates demand/supply imbalance leading to market price appreciation. For governments or any institutional investors, investment in gold is mainly for medium term, they sell their holdings and book profits. By the time they sell gold, currency situation also stabilizes and stock market also shifts to bullish behaviors.