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Is The Oracle of Omaha, Warren Buffett, dead wrong on Gold?

March 23, 2012

Mr. Buffett last month wrote that investors should avoid gold because its uses are limited and it doesn’t have the potential of farmland or growth companies to produce income and has no intrinsic value.

Achieving a long-term gain on the metal requires an “expanding pool of buyers” who think that the group will increase further, he wrote.

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” Mr. Buffett wrote in the letter from February 25th. “As bandwagon investors join any party, they create their own truth — for a while.”

In his letter, Mr. Buffett estimated that the world’s stock of gold if melded together would form a cube of about 68 feet per side and, when valued at $1,750 an ounce, amount to about $9.6 trillion. For the same amount of money, an investor could acquire all the cropland in the U.S. and buy Exxon Mobil Corp. 16 times, while still having $1 trillion left over, he wrote.

In his article “Why Warren Buffett is Wrong About Gold” Russ Koesterich believes that Mr. Buffett’s argument ignores two crucial facts: gold helps to diversify a portfolio and, if only by an historical fluke, it is a recognized store of value.

Russ states, “By combining assets that are uncorrelated, i.e. move in different directions at different times, investors can lower overall portfolio volatility, which in turn can help preserve returns. One of the principal advantages of gold is that it generally has a low correlation with other asset classes, a dynamic that is particularly valuable during periods of rising inflation.

The second argument for gold is that while the metal produces no income, it has historically fulfilled its role as a store of value and an inflation hedge.

The argument that gold is an anachronism whose value is purely dependent on the”greater fool” theory is espoused by many, including Mr. Buffett. The Oracle of Omaha ham­mers home the point by comparing gold to the infamous Dutch Tulip Bubble. However, the Tulip Bubble was an idiosyncratic event that occurred centuries ago in one particular part of the world.

Gold has been a store of value for millennia. While Mr. Buffett is quite right that gold neither produces income nor has any practical use, several thousand years of economic history have, for better or worse, assigned to gold the role of a default currency.”

There can be no doubt the Gold market has been on a massive trend in the last decade, being quite lucrative for the investors who caught this wave. We try to stress that due to what gold has gone through lately, you may want to view your position as a “trading” position and no longer an “investing” position.

Let us know your thoughts, are you searching the mid-west for farmland or stockpiling bullion?

Read more from Jeff Clark from MorningStarWhy Warren Buffett is Wrong About Gold

Email us at  iinvest@chesapeakeinvestment.com.

“Always invest your time before you invest your money

Chesapeake Investment Services
Managed Futures Specialists


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TRADING FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. THERE ARE NO GUARANTEES OF PROFIT NO MATTER WHO IS MANAGING YOUR MONEY. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS UNLIMITED RISK OF LOSS IN SELLING OPTIONS. AN INVESTOR MUST READ AND UNDERSTAND THE COMMODITY TRADING ADVISOR'S CURRENT DISCLOSURE DOCUMENT BEFORE INVESTING.