Jeff Clark, Senior Analyst, GoldSilver
APR 8, 2019
Dear Warren Buffett,
Your recent comments about gold left me a little puzzled. You said “the magical metal was no match for the American mettle,” and that we shouldn’t “panic at the prospects of runaway deficits and a worthless currency.” You end by showing how stocks have outperformed gold since 1942.
The problem with your report is one that many investors make: you compare apples to oranges. Not only do stocks and gold serve different functions, but my gold outperforms your stock during crashes and crises. It’s even outperformed stocks for the past 20 years.
Not only that, you might want to take a look at just how small this market is. You could take easily take control of it employing just a small portion of your company’s cash – just like you do with many companies you buy.
Here are the reasons you should reconsider your anti-gold stance and become friends with the yellow metal…
Berkshire Hathaway stock, like most stocks, performs well during equity bull markets. But my gold outperforms it when they don’t.
BRK-A shares have crashed six times in the past 20 years. Here’s how gold performed during each of those crashes.
During BRK’s six major crashes, gold rose in half of those instances. It was flat in one, and fell twice, though only a third as much as your company’s stock.
In other words, gold has outperformed your stock every time it’s crashed.
The reason gold has outperformed your stock during crashes is because gold is inversely correlated to stocks. It’s a crisis hedge, providing investors with portfolio insurance against all sorts of interim political and economic uncertainties (and being history’s singular best bet during times of outright calamity).
How have the performance of stocks and Treasuries compared to gold during the past couple decades’ wide variety of crises?
Gold has not only trumped stocks but even Treasury bonds, which many consider to be the safest asset to own in times of crisis. But they aren’t. Not when compared to gold.
This is why we shouldn’t be enemies. Stocks and gold are complementary. Your stock outperforms gold in good times, but gold outperforms your stock in bad times.
You also wrote that stocks have outperformed gold since 1942, the first year you bought a stock. I’m sure you realize this isn’t a fair comparison. Not only was the gold price mostly fixed until 1968, but US citizens couldn’t own it until 1975. Besides, how many investors hold a stock for 77 years? Even you don’t own the same companies today that you bought back then.
Let’s be a little more realistic. How has gold performed against stock and bonds, say, so far this century?
Gold has outperformed stocks and bonds over the past 18+ years. It’s not even close. And this time period includes both bull and bear markets in gold.
This has very practical consequences for investors. Let’s go back a full 20 years and see who’s made more money:
Looks like my gold portfolio has crushed one chock full of common stocks or bonds over the past two decades. In fact, it’s returned more than twice as much as either one.
You probably know the COMEX warehouses gold for investors that wish to take physical delivery of the gold they control. The “registered” portion – bullion that is fully available and officially recognized by the COMEX for delivery – totaled 502,140 ounces on April 3. At $1,300/oz. gold, that represents $652.7 million.
Sounds like a lot of dough – until it’s compared to the market cap of just your Class A shares:
All the registered ounces of gold at the COMEX represent just 0.13% of your stock’s market cap.
It would be easy to get your hands on all this. Just take a puny 0.5% of your company’s cash and buy it all up.
You have so much cash compared to the total value of gold at the COMEX that you could purchase every ounce of registered gold with nothing more than a rounding error on your balance sheet.
You’d have control, just like you do with many companies you buy. That gold pile wouldn’t produce income, but its value will rise in the next crisis while your stock price craters. In fact, you might need more than what you can get at the COMEX.
This would have immediate and far-reaching consequences for the gold market.
The gold price would skyrocket… gold demand would soar… COMEX officials would have to scramble to move “eligible” stocks into the “registered” category so other metal would be available for delivery…
If that didn’t happen fast enough for you, you might have to enter the open market to get enough metal… or you could assure yourself of the best price in the market by placing an order with us. The bottom line is that this market would be off to races – you and China might control it.
Last, which one is a better buy right now – BRK-A or gold?
Your stock is up 181% since 2011, while gold is down 32% since then.
Unless someone thinks the overall market is cheap, buying BRK-A instead of gold right now is a terrible idea. Why? Because BRK-A (along with every other stock) is highly vulnerable to a stock market crash, and your own most-preferred metric – the Buffett Indicator – says the current stock market is very close to being as overvalued as it has ever been:
I might buy a few shares of your stock after it crashes – with the profits I make on my gold position.
I know as the CEO and largest shareholder of Berkshire Hathaway that you prefer businesses that produce profits and pay dividends, as opposed to gold, which does neither of those things.
However, it is precisely the lack of those characteristics that gives gold value:
You and gold should be friends, Mr. Buffet. It’s the perfect complement to your stock.
Instead of pointing out how much better your stock has done than gold, do some math on how much more your company would be worth if it had some gold in it. Based on all the data above and the opportunity to buy the entire COMEX inventory with what amounts to Berkshire Hathaway couch-cushion money, both the gold price and your company's market cap would move higher. Do you really want to leave some profit behind?