March 23, 2011 - Whenever Warren Buffet appears on CNN the investment potential for gold bullion gets called into question. And no wonder. Mr. Buffet is perhaps the best known investment guru among retail investors and there is no questioning his success in the stock market.
Buffet’s philosophy is unwavering: an investment asset should provide income over time, growth in the price of the asset is secondary. Because gold investments produce no income, he considers them to be pure speculation. Buffet’s observation is valid, but only to a point. Whenever he discusses gold he speaks only of short positions. There is little distinction between the long-term appreciation of a fixed asset and plowing dividends back into stocks, however. Neither realizes income until the asset is cashed in.
Using data compiled by Justin Smyth from Berkshire Hathaway’s annual shareholder letters and published in an editorial a few weeks ago we can compare the returns of Buffet’s iconic stock investments to the performance of gold bullion.
$1,000 invested in Berkshire Hathaway at the beginning of each year from 2001 to 2010 would have grown to somewhat less than $17,500 by the end of 2010. However, had the same money been used to buy gold bullion the value today would be more than $28,700. Put another way, Buffet earned a very respectable annualized return of 9.9% but gold almost doubled that at 19.6%.
Doing those same calculations for just the years 2008-2010, when most people lost their shirts, Buffet netted about $700 while the gold investment grew by nearly $1,600.
But what about income? Say you still put $1,000 in every year but at the end of each year you cashed in your returns for income. Gold would have put just shy of $11,000 in your pocket, beating Berkshire Hathaway by $5,300.
In terms of both income and growth, gold bullion investments beat Warren Buffet hands down.
