Warren Buffett and Charlie Munger Tag Team Gold

Source: Eric McWhinnie, Wall St. Cheat Sheet  (5/7/12)

"The United States and the Federal Reserve system holds more gold than any other country in the world."

It is no secret that Warren Buffett publicly dislikes gold. Earlier this year, Berkshire's CEO and largest shareholder reminded investors in a <i>Fortune</i> article that gold has limited industrial demand and even said the precious metal "will remain lifeless forever." Apparently, the strong distaste for the yellow metal runs throughout the Omaha-based company.

Charlie Munger, vice chairman of Berkshire, recently sat down with CNBC's Becky Quick to discuss the economy, Federal Reserve and even gold. When asked about the Fed, Munger says he has no real quarrel with the central bank system. However, he clearly has some issues with gold. He said, "I think gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939, but civilized people don’t buy gold, they invest in productive businesses." The statement is extreme to say the least, but reinforced the view from Buffett’s right-hand man.

In 2010, Munger gave a speech at the University of Michigan that discussed bailouts and also touched on gold. While Munger says we should all thank God for the bailouts, he spoke quite differently on gold. He said, "I don’t have the slightest interest in gold. I like understanding what works and what doesn’t in human systems. To me that's not optional; that’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational. And I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk."

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Ironically, the United States and the Federal Reserve system holds more gold than any other country in the world. According to the latest statistics from the World Gold Council, the U.S. holds 8,133.5 tonnes of gold, representing 77.1% of its reserves. Furthermore, Berkshire owns several subsidiary companies such as Ben Bridge Jeweler, Borsheims Fine Jewelry and Helzberg Diamonds. I doubt these companies, which rely on "lifeless" elements such as gold to run a business, would appreciate the remarks made by Buffett and Munger.

Perhaps the hostility Buffett and Munger have toward gold comes from the hard asset outperforming Berkshire shares for the past decade? Since May 2002, Berkshire shares have increased 64%. Meanwhile, the price of gold has surged 430% in the same period. While the 80-something billionaire investors probably couldn’t care less about gold's outshining performance, Berkshire's recent underwhelming performance against the S&P 500 is beginning to attract more attention. As Bloomberg notes, Berkshire's annual weekend this past Saturday marked a three-year period where shares have climbed nearly 32%, lagging the S&P 500's gain of about 60%.

Although gold investors may be considered "uncivilized" by some, even "jerks" need to diversify their portfolios and preserve wealth. Investing in productive businesses is worthy advice, but it is also hard to ignore the financial headwinds facing the global economy. In regards to individuals protecting their wealth from the printing-press, a congressman from Nebraska years-ago once said, "The taxpayer is completely outmatched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren’t run according to his idea of soundness, he had an individual right to protect himself by obtaining gold." He continued to explain, "Also those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money. You must be prepared to meet their opposition intelligently and vigorously." The source of this insightful and cautionary quote comes from none other than Howard Buffett, Warren’s father.

Investor Insight: Warren Buffett Trashes Gold, But What About Silver?

Eric McWhinnie
Wall St. Cheat Sheet

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