No one has ever accused Warren Buffett of being a gold bug. The legendary investor made his fortune by investing in stocks and acquiring businesses. He’s never been a fan of buying gold.
During Berkshire Hathaway‘s (BRK.A +0.74%) (BRK.B +0.80%) 2018 annual shareholder meeting, Buffett famously trashed the idea of investing in gold instead of stocks. But how much money would you have today if you’d ignored the advice given by the “Oracle of Omaha” then?
Image source: The Motley Fool.
Buffett vs. bullion
Before we get to the answer, let’s first attempt to understand why Buffett dislikes gold so much. He made two key points about the precious metal at the 2018 Berkshire Hathaway meeting.
First, Buffett argued that gold has historically underperformed the stock market. He asked the audience at the shareholder meeting nearly eight years ago to guess how much $10,000 investments in an S&P 500 (^GSPC +1.97%) index fund and gold in 1942 would be worth then. Buffett selected 1942, by the way, because it was the year he made his first investment. It was also in the middle of World War II, when many people were worried about the future.
Buffett quickly revealed the answer. An initial investment of $10,000 in the S&P 500 in March 1942 would have grown to $51 million by the time of Berkshire’s 2018 shareholder meeting. Meanwhile, the same amount invested in gold would have increased in value to around $400,000.
By the way, Buffett acknowledged that index funds didn’t exist in 1942, yet he still made his point. He stated, “[F]or every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines.”
Second, Buffett essentially called gold a do-nothing investment. He said:
While the businesses were reinvesting in more plants and new inventions came along, you would … look into your safety deposit box, and you’ve have your 300 ounces of gold. And you would look at it, and you could fondle it, I mean, whatever you wanted to do with it. But it didn’t produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942, and it would be worth approximately $400,000.
A missed golden opportunity?
I recently ran across Buffett’s quotes about gold from that 2018 Berkshire Hathaway shareholder meeting. With gold prices soaring, I wondered whether or not Buffett’s premise still held. How much money would you have today if you had invested $10,000 in gold on the day the Oracle of Omaha railed against gold — May 5, 2018?
Since most people probably wouldn’t buy gold bullion, I decided to use one of the most popular gold ETFs — the SPDR Gold Shares (NYSEMKT: GLD)– for the analysis. I also used the SPDR S&P 500 ETF Trust (SPY +2.02%) as a proxy for investing in the S&P 500. The following chart shows how a $10,000 investment in each would have panned out (no pun intended).
Even after the recent gold sell-off following President Trump’s nomination of Kevin Warsh to the Federal Reserve, your initial $10,000 investment in this gold ETF would be up roughly 3.5x. That’s nearly as much as gold returned during the period Buffett discussed (1942 through 2018) when he argued against investing in gold. More importantly, it’s well above the $25,390 or so you would have if you invested in the S&P 500 ETF.
Was Buffett wrong about gold?
Some might conclude that Buffett made a mistake. But was he really wrong about gold? Over the last eight years, yes.
I think it’s important to note, though, that 2018 wasn’t the first time Buffett criticized investing in gold during a Berkshire Hathaway shareholder meeting. He also made a similar argument at the annual meeting held on April 30, 2011. In case you’re wondering, a $10,000 investment in the aforementioned SPDR Gold Shares ETF and SPDR S&P 500 ETF Trust on that date would be worth roughly $29,000 and $49,700 today.
The moral of the story: Buffett is usually right over the long term.
