Why Warren Buffett Avoids Gold

By Kapitall | February 21, 2012 AAA

Written by Rebecca Lipman



Warren Buffett may have been born an investing genius, but he received help along the way from his mentor, famed value investor Benjamin Graham. Together, the "godfather and godson of value investing" have made quite a fortune.
Their conquests over the market have also earned them devoted followers. If Buffett buys IBM, his fans are influenced to buy IBM stock too. If Buffett says Bank of America is undervalued, it just may be.

Buffett on Gold
Buffett has taken a controversial, if not contrarian, attitude towards gold. He sees gold as an inanimate object that investors flock to when they fear other assets. It holds little actual value beyond some industrial and decorative utility, both of which is "limited and incapable of soaking up new production." Therefore, any investor holding gold instead of stocks is acting out of irrational fear. (via Ritholtz)

David Galland, managing director of Casey Research asks "How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?" Consider that gold has been the most popular "counter-trend investment" in periods when stocks and bonds were underperforming.

To understand, we should look back to his mentor Benjamin Graham: During Graham's adult life, in the mid 1900s, owning more than a small amount of gold was illegal between 1933 and 1974. Graham passed away in 1976. He never really had the chance to use gold as a counter-investment.

Bucking the Trend
It stands to reason that gold was never a part of the value investment theory so popular to today's investors. Galland believes this also goes a long way in explaining why "the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding."

It follows that investors who capitalize on the gold trend may have an advantage over those who stick to the old principals, and that this contrarian view has allowed some investors to enjoy the rising valuations of gold while others miss out.

Galland concludes that Buffett's, and thus Graham's, arguments against gold hold no water. "Meanwhile, we'll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing."

Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.





Business Section: Investing Ideas
So do you agree with Graham and Buffett or Galland?

If you agree with Galland and believe gold has a place in your portfolio it may not be too late to jump in the game.

For ideas, we screened a universe of gold miner stocks and found three that have seen significant levels of insider buying in the past six months. Insiders know their company better than anyone else does, and if they are putting their own money on the line it is a sign they believe the share price is currently undervalued.

Do you agree with these gold miner insiders? (Click here to access free, interactive tools to analyze these ideas.)

1. Golden Star Resources, Ltd. (NYSE: GSS): A gold mining and exploration company, through its subsidiaries, engages in the acquisition, exploration, development, and production of gold properties. Over the last six months, insiders were net buyers of 150,000 shares, which represents about 0.06% of the company's 256.49M share float.

2. Kingold Jewelry, Inc. (Nasdaq: KGJI): Engages in the designs, manufactures, and sells gold jewelry and Chinese ornaments in the People's Republic of China. Over the last six months, insiders were net buyers of 100,000 shares, which represents about 0.39% of the company's 25.70M share float.

3. Solitario Exploration & Royalty Corp. (NYSE: XPL): Engages in the exploration and acquisition of precious metals and base metals in Brazil, Mexico, Peru, and Bolivia. Over the last six months, insiders were net buyers of 50,000 shares, which represents about 0.17% of the company's 29.56M share float.

Disclosure: Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Insider data sourced from Yahoo! Finance.

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