Gold Should be Viewed as Money — Not as an Investment Instrument

Gold Should be Viewed as Money — Not as an Investment Instrument by Thorsten Polleit – Mises

On May 4 and 5, 2018, Warren E. Buffett (born 1930) and Charles T. Munger (born 1924), both already legends during their lifetime, held the annual shareholders’ meeting of Berkshire Hathaway Inc. Approximately 42,000 visitors gathered in Omaha, Nebraska, to attend the star investors’ Q&A session.

Peoples’ enthusiasm is understandable: From 1965 to 2017, Buffett’s Berkshire share achieved an annual average return of 20.9 percent (after tax), while the S&P 500 returned only 9.9 percent (before taxes). Had you invested in Berkshire in 1965, today you would be pleased to see a total return of 2,404,784 percent: an investment of USD 1,000 turned into more than USD 24 million (USD 24,048,480, to be exact).

In his introductory words, Buffett pointed out how important the long-term view is to achieving investment success. For example, had you invested USD 10,000 in 1942 (the year Buffett bought his first share) in a broad basket of US equities and had patiently stood by that decision, you would now own stocks with a market value of USD 51 million.

With this example, Buffett also reminded the audience that investments in productive assets such as stocks can considerably gain in value over time; because in a market economy, companies typically generate a positive return on the capital employed. The profits go to the shareholders either as dividends or are reinvested by the company, in which case the shareholder benefits from the compound interest effect.

Buffett compared the investment performance of corporate stocks (productive assets) with that of gold (representing unproductive assets). USD 10,000 invested in gold in 1942 would have appreciated to a mere USD 400,000, Buffett said – considerably less than a stock investment. What do you make of this comparison?

To answer this question, we first need to understand what gold is from the investor’s point of view. Gold can be classified as (I) an asset, (II) a commodity, or (III) money. If you consider gold to be an asset or a commodity, you might indeed raise the question as to whether you should keep the yellow metal in your investment portfolio.

But when gold is seen as a form of money, Buffett’s comparison of the performance of stocks and gold misses the point. To explain, every investor has to make the following decisions: (1) I have investible funds, and I have to decide how much of it I invest (e.g. in stocks, bonds, houses, etc.), and how much of it I keep in liquid assets (cash). (2) Once I have decided to keep X percent in cash, I have to determine which currency to choose: US dollar, euro, Japanese yen, Swiss franc – or “gold money”.

If one agrees with these considerations, one can arrive now at two conclusions: (1) I do not keep cash, because stocks offer a higher return than cash. However, many people are unlikely to follow such a recommendation. They keep at least some liquidity because they have financial obligations to meet.

People typically also wish to hold liquid means as a back-up for unforeseen events in the form of money. Money is the most liquid, most marketable “good”. Anyone who has money can exchange it at any time – and thus take advantage of investment opportunities that come up along the way.

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