As the money supply increases at a record pace, investors are looking to hedge against what some believe could become mass inflation.
In this environment, many are touting the virtues of gold. In fact, the trade has worked for the last few decades.
Since 2001, gold soared from $271 an ounce to $1765 where it is now.
However, others don’t share that favorable view of the precious metal. In fact, among many mainstream investors, gold has had a bad rep. They consider it a relic from the past, of a bygone era before paper money and money printers.
Warren Buffett, the billionaire investor and CEO of Berkshire Hathaway for example is not a fan.
In 2010 he told CNBC that, “The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.”
Buffet’s longstanding business partner Charlie Munger puts his criticism even more harshly.
“I think civilized people don’t buy gold, they invest in productive businesses,” he told CNBC in 2013.
Other value investors, such as Billionaire Peter Lynch agree. Lynch has arugued that, in the long run, no investment can compete with the stock market.
There is some truth to these claims. As Buffett explains, gold does not give any yield. While other investments benefit from the compounding effect of interest, an ounce of gold is always just an ounce of gold.
The effects of this lack of yield are most pronounced in the long run.
In the last 100 years, the S&P 500 was up 60,000% in the same period, while DOW was up 40,000%. Gold was only up 8,000%.
As such, value investors seem to have a strong case for stocks.
As long as the economy keeps growing, stock indices should outperform almost any investment of a comparable risk profile.
Or, as Buffett puts it, the “magical metal” is no match for the “American mettle,” Buffett said.
Buffett Buys Gold?
Yet, in 2020, Berkshire Hathaway bought a $500 million stake in Barrick Gold (GOLD), a gold mining company.
This came as a shock to many in the investment communities, given Buffett’s legendary harsh stance on gold.
But, it’s not hard to understand the reasoning behind the move. The investment came at the height of the coronavirus pandemic and the economic uncertainty that accompanied it.
When the economy falters, nothing beats gold. Even Buffett agrees. (Story continues below.)
However, he did not stay invested for long.
As the first vaccines started rolling out, Buffett began selling his mining shares. By February 2021, he had sold his entire position in the company.
Three Decades When Gold Beat Stocks
Buffett’s short-lived gold investment shows that the debate between gold and stocks is not as clear-cut as many value investors say.
As mentioned above, stocks have well-outperformed gold in the last 100 years. However, in the last 50 years, stock and gold were almost tied in performance.
That paints an entirely different picture than one usually touted by mainstream investors.
How is that possible? Well, while stocks did (so far) beat gold in the long run, there were still large periods of time when gold outperformed the stock market.
In the last one hundred years, there were three such periods.
First, from 1929 to 1941, a period coinciding with the Great Depression and lasting until the U.S. entered World War Two.
The second period was from 1972 to 1980, following the collapse of the Bretton Woods system. That was when the U.S. finally left the gold standard. Between 1972 and 1980, gold appreciated 1256%, while S&P 500 only went up 97%.
Lastly, from 2000 to 2011, following the bursting of the dot-com bubble, all the way through the 2008 financial crisis. Gold was up 443% while the S&P 500 was only up +7%.
Gold Is Expected To Be On Top Again
The precious metal consistently outperformed the market in periods following a market crash.
The coronavirus pandemic could have been a trigger for one such crash. Many, including Buffett, expected that to occur (which is why he hedged his bets).
The crisis was averted, thanks to the Fed’s firing up of its money printers – for now.
However, reckless money printing won’t be without consequences. By delaying the inevitable correction, the Fed has only made the coming crash bigger.
A major crisis will come sooner or later – that’s unavoidable.
When it does, that’s when gold will really shine – for those that hold it.