Should You Invest in Gold?

Investors may recall a famous metaphor employed by Warren Buffett to explain why investing in gold could be unwise.

Buffett calls gold an “unproductive” asset, which, as defined in his 2011 letter to shareholders, means “assets that will never produce anything, but that are purchased in the buyer’s hope that someone else — who also knows that these assets will be forever unproductive — will pay more for them in the future.”

Buffett’s gold cube analogy

To get his point across about gold in that shareholder letter, Buffett imagined owning all of the world’s gold — at the time 170,000 metric tons — melded into a cube about 68 feet per side. “Picture it fitting comfortably into a baseball infield,” he wrote.

In 2011 prices (not far off today’s value) the brick would be worth $9.6 trillion. With that money, Buffett noted, you could have also owned all 400 million acres of U.S. cropland, the entirety of Exxon Mobil (at the time the world’s most profitable company, and a stock that pays a generous dividend) 16 times and still have $1 trillion left over.

If you’re wondering what you’d rather own for the long term, think of what you’d have decades down the line, Buffett suggested.

“A century from now, the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty whatever the currency may be,” he wrote. “Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and remember you get 16 Exxons).”

Your gold cube, meanwhile, will simply continue to be a gold cube. The price of gold could be higher or lower a century from now. In the meantime, Buffett quipped, “you can fondle the cube, but it will not respond.”

The case for owning high-quality, productive assets

Gold and cryptocurrency are speculative assets. That means that their price doesn’t move based on underlying fundamentals, such as growth in corporate earnings or cash flows, but rather based on what traders are willing to pay for them.

“They don’t reproduce, they can’t send you a check, they can’t do anything,” Buffett said of crypto coins in a 2020 CNBC interview. “And what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem.”

Because growth in stock prices is driven by growth in the global economy, Buffett posits, you’re much likelier to produce long-term compounding interest by investing in a diversified portfolio of stocks than you are speculating on gold or crypto prices. Between investing in stocks and speculating, Buffett wrote that “over any extended period of time,” the former “will prove to be the runaway winner.” Try our compound interest calculator to see for yourself! 

And because the style doesn’t require the investor to try to time volatile markets, “it will be by far the safest” of the options, he wrote.

Be careful using gold or crypto as a dollar hedge

But wait, you may be thinking: What about inflation? What about the dollar? Indeed, investors argue that holding gold or crypto could act as a hedge against the possibility that the U.S. dollar erodes in value or indeed fails altogether.

But financial experts say you’re on shaky ground there as well. Cryptocurrencies don’t have much of a track record to go on when it comes to periods of high inflation, and gold’s track record is mixed.

Growth in the broad stock market, meanwhile, has historically outrun the rising the cost of goods, points out Howard Hook, a certified financial planner and principal at EKS Associates in Princeton, New Jersey.  “The only way to really deal with a loss of purchasing power is to buy investments with the ability to go up more than inflation most of the time, but can go down,” he stated. “By that I mean investing in stock mutual funds and index funds, not individual stocks.”

If you want to gear up for rising prices, focus on firms with strong advantages over competitors and loyal customers, says Mike Stritch, chief investment officer at BMO Wealth Management. “Companies with pricing power and the ability to sustain their margins generally do well in inflationary periods,” he says. “Real estate is prone to do well, too, if there is persistent inflation, since they have the ability to pass on rent increases and the like.”

Buffett is confident that investments in leading companies will continue to pay off over the long run.

“Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle,” he wrote in 2011. “In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.”