All That Glitters Is Not Gold

May 15, 2012 9:08:00 AM


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I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot - and it's a lot - it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.

The above quote comes from Warren Buffett in a 2009 CNBC interview and his thoughts on gold.

As one who uses Warren Buffett quotes often to emphasize a point, the quote above along with recent comments from Mr. Buffett emphasize his personal opinion on gold, and mine.

Although I am not necessarily advocating his position in Wells Fargo or Coca-Cola, his point is well taken - be an investor in businesses.

Of course, no one can argue the performance gold has had in the last 10 years.

However, it is important to understand the purpose of gold in a portfolio and why some investors may want to own gold.

I have found that most investors want to invest in gold for two reasons.

First, it is one of the few assets that have performed well in the last 10 years. Of course, past performance is NOT the only reason to invest in something!

The second reason why investors own gold?

Very simply.... Fear.

I find investors feel more comfortable owning gold because of their concerns over the continual printing of dollars and euros - a currency or inflation hedge.

However, one should invest based on the fundamentals of a business, NOT in how they feel about a particular investment or economic policy.

Gold is NOT an investment. It is a hedge against inflation.

Therefore, the big question an investor must ask themselves - is gold the best hedge to use against currencies or inflation? Short-term, maybe, maybe not.

Long-term, no.

Personally, I would rather own businesses that do well in an inflationary environment - Oil, copper, steel, etc.

If we should continue to see an increase in inflation over time, owning businesses in the basic materials and commodity spaces may be a good way to hedge ones portfolio against inflation.

Of course, in owning businesses, one must be ready for stock price volatility as commodity prices can be very volatile at times.

In fact, gold has not exactly been all that stable lately. For example, on February 28, 2012, the GLD (an exchange traded fund which invests in gold bars) was near $173 a share. Today, it's near $151.

According to a Yahoo Finance article dated May 14, 2012, after falling 13% in 2011, the Dow Jones-UBS Commodity Index entered this week at its lowest level since September 2010 amid concern about slowing global growth hurting demand. In addition, the dollar has benefited from Europe's ongoing debt crisis, resulting in lower prices for hard assets, notably gold and silver.

Understand what you own and why you own it. It will offer you the clarity you need to make solid investment decisions.

Volatility in stock prices has historically created great opportunities for many investors.

Once again, fear is growing in the streets over the fiscal issues in Europe. However, it turns out gold has not exactly been the safe haven many expect during periods of financial crisis. In the last 12 months gold has turned out to be just as volatile, lending credence to Warren Buffett's opinion of gold.

Although, no guarantees, history has shown over time, the process of owning businesses has proven to be a key component to successful investing for many investors.

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Mark Pearson

Mark Pearson

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