Warren Buffett on Gold

The most famous investor in the world, and arguably the best, is also the most widely known opponent of “gold bugs.”

“Gold gets dug out of the ground in Africa, or some place,” said Buffett in 1998. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

The chairman and CEO of Berkshire Hathaway prefers to stick with investments that pay dividends in make money, unlike gold, which “doesn’t do anything except look at you.”

The gold bugs believe that the commodity dozen excellent job of protecting your portfolio from the central bank printing press ravages. They also love to fight about the best ways to invest in gold – by purchasing the commodity directly, the mining companies or ETFs on the stock market.

You’ll get no gold bar for guessing which way Tuckwell prefers.

“Over the past 10 years, the big five miners have started with an 100 ounce gold bar and – regardless of the price – given you back 30 or 40 ounces. ETF securities has taken a bit for storage and management fees, but we’ve given you back 96 ounces.”

Tuckwell claims that the miners cannot help themselves but focus on production instead of maximizing the investments net present value.

“Ever heard of a gold company cutting back on production, increasing cut-off grades, and paying some dividends? No, they decrease cut-off grades which increases the cost of production considerably, and if they ever have any spare cash they get a new idea on how to spend it.”

This is classic “talking your own book stuff,” according to Greg Foulis, who once ran a precious metals fund for Deutsche Bank, prior to a brief foray into business development for AngloGold Ashanti, one of the big five miners.

“When the cycle is running, generally you’re going to make far more from the equities than you will from the physical,” he says.

“In the decade up to 2010 they were performing at 1.5 to 2 times what the gold price was doing. Then they started underperforming, but there are a number of reasons for that.”

One of the main reasons is the rise of the ETFs themselves. This invention has attracted new money that would to have typically gone into gold mining stocks.

The next major factor was the sudden rise of China. This sent cost inflation for copper and gold miners into the double digits.

“Investors just weren’t getting the margin leverage,” explains Foulhey you got to hide your love away

ever, the miners will adapt. He knows it better than anyone else.

This past March, Foulis lost his job at AngloGold Ashanti, because in his own words the industry “slashes new projects, winds back on people and creates the headroom to generate cash flow and returns.” Luckily, since half of the industry is “still underwater,” there is still some restructuring consulting work to be done.

“Believe me, there will be a price at which a Newcrest represents better value than any gold ETF,” he says.

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