Is Buying Gold and Silver a Smart Investment?

Two articles were recently published that took contrary views on investing in gold and silver. Both articles, which I’ll discuss in a minute, offer important insight into buying precious metals. Although not in large quantities, I’ve purchased silver American Eagles over the past two years and plan to buy gold American Eagles this year.

Given the price of gold, however, buying the precious metal right now seems about as crazy as investing in Amazon (p/e ratio of 131). I still believe that there is a place in most portfolios for these commodities. Let’s look at two contrasting points of view, and then I’ll describe my investing approach to gold and silver.

Buffett Says No to Gold

The first article is from Warren Buffett–Why Stocks Beat Gold and Bonds. I highly recommend this article. The best part actually has nothing to do with gold at all. In the article Buffett talks about the risk of an investment and why today bonds are riskier assets to hold than equities. It’s a must read.

But then he turns to gold. And as only Buffett can, he uses imagery to drive home his view that gold is a terrible asset to hold:

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Initially, I found Buffett’s argument persuasive. After all, he is right that gold is a non-productive asset. It doesn’t have earnings, pay dividends, or even interest. Even cash in a certificate of deposit pays interest, albeit in very small quantities today. Gold just sits there. It’s eye-candy at best.

Still, there was something bothering me about Buffett’s analysis. Much like his now famous claim that his secretary pays more in taxes than he does, I couldn’t help feeling like I was being swindled. And then I came across the second article I want to share with you.

Roy Sebag Says Yes to Gold

The second article comes from somebody you’ve probably never heard of, Roy Sebag. He was the Managing Partner of Essentia Equity, Ltd. a value oriented investment partnership from 2004-2010. Today, he is the founder and CEO of Natural Resource Holdings, Ltd. The article was published on Seeking Alpha–Respectfully Disagreeing With Buffett’s Recent Views On Gold – Seeking Alpha.

In my view, Sebag completely dismantles Buffett’s arguments. He points out, for example, that comparing gold to equities is like comparing apples to oranges. In Sebag’s view, gold is not an “investment.” Instead, it is an alternative to holding cash. And unlike cash, over the long term, gold does not lose its purchasing power.

He also points out that in 1998, Buffett bought 130 million ounces of silver. He also notes that over the last decade, gold has outperformed Buffett’s company, Berkshire Hathaway.

If you’re thinking of buying gold or silver, Sebag’s article is definitely worth reading.

My Take on Gold

The big question for those considering an investment in gold or silver is why. Why do you want to invest in precious metals? If you are buying gold or silver in hopes of making a quick buck as prices rise, you’re taking on an unjustified risk. It is impossible to consistently predict the short-term price movements of commodities, or anything else for that matter.

On the other hand, owning gold or silver is a good alternative to holding cash. I’m not suggesting that you take all of your cash reserves and pour them into gold. But holding some small percentage of a portfolio in precious metals does give a degree of diversity that is otherwise becoming harder and harder to achieve.

And as countries run extremely large deficits, there tends to be a risk of default as it pertains to the country’s outstanding obligations. This risk drives people from the nation’s currency into gold, triggering a surge in demand. Further, during times of political unrest and war, countries implement expansionist monetary policy which also causes the nation’s citizens to lose faith in the value of their currency, further increasing the demand for gold. Although there are other factors which lead to increased demand for gold and silver such as inflation, the above are significant drivers.

As I noted above, I’ll continue to buy a small amount of silver and gold American Eagles. With gold Eagles, you can buy coins ranging from 1 oz. down to 1/10 of an oz. The smaller coins make the cost a bit more doable for some. And in a post-apocalypse world some like to fear, they’d be easier to spend, too.

Topics: Investing

10 Responses to “Is Buying Gold and Silver a Smart Investment?”

  1. We have a crazy family friend that screamed for decades that gold is the only true investment. From 1984 – 2004 the his investment was essentially random: he made a few thousand, lost a few thousand, but basically was just treading water with some noise from commodity markets. Until the crisis, I suppose.

    I imagine he’s pretty pleased right now, gold being about 4x more expensive than the early 1980s. Of course, thanks to steadily growing investments and compounding, the retirement accounts of everyone else still blow his out of the water (and won’t evaporate should the economy recover in the coming years).

    I will say I wish I had bought some gold in 2007 when people started to see the writing on the wall (auction-rate market failed, subprime crisis brewing, etc)… At this point, though, buying gold seems just as risky as anything else. I wouldn’t want to sink thousands into metal that would be worth half once panic abates.

  2. From what the graph has provided, I agree that it is a good idea to invest in precious metals: Especially Gold. I agree that even though Silver isn’t rising as quickly in terms of value, it’s still a good investment. Thanks for sharing this info with us.

  3. 50 Peso Gold

    Excellent article! Remember, when buying gold or silver – look at the ALL the costs (not just the mark up over spot). State tax, shipping fees, minimum order sizes, and payment method are all things to consider. For instance, some dealers can offer a low mark up – but they have a $10,000 order minimum. Other dealers may require wired funds, and will not accept your credit card. NOTE: many credit cards offer you a % of cash back on every dollar you spend. This can offset some of your transaction costs.

  4. Jason Chambers

    seems like if your supposed to buy low and sell high gold would have been a good investment a few years ago, but with stock prices at record lows I would think that is where the real money is to be made. Gold may continue to go up, but the the higher you buy in the harder it is make money.

  5. rocco a. feramisco

    i would be very leary about buying gold, since like the housing bust, it’s just might have already peaked. and, now, it just might start to decline. awhile back, was the time. when it was selling low. but, to each his own. we all better go back to being patient and being more careful before we jump into the next financial trap.

  6. Not for my portfolio!

    Gold and silver may make great investments – I’m no psychic so what do I know – but there’s something about investing for apocalyptic scenarios that does not strike my fancy. If worst comes to worst, I can say now I don’t think I’ll really care how much gold or silver I have, nor will I care about the value of my retirement savings. Invest for the good times, since the only time your wealth will have any desirable value is, above all else, in those good times.

  7. bluecollargoldtieguy

    Gold is NOT an investment. Neither is silver. Gold and silver are money. Period. What most people think is money is wrong. When the governments and central banks of the world employ financial tools (ie. money printing) to devalue the national currency to allow deficit spending then you know something is wrong. For some, who aren’t fully educated on the subject, gold is an ‘end-game’ asset… The irony is they are right, too. For those who truly know what free markets are, and what money is, then they will prefer a currency chosen by the people, proven over thousands of years because it is very hard to manipulate. Gold forces governments to be honest and prevents individual’s wealth from being stolen by a deceptive form of wealth transfer – inflation. To quote the side of Alan Greenspan that many don’t know, “Gold stands in the way of this insidious process”. When the masses figure ‘it’ out, then there will be a return to honest money. Until then, make sure it is part of your portfolio. Ask yourself, why do central banks own gold?

Leave a Reply