Warren Buffet is famous for his criticism of gold as an investment. He might as well argue that stamp collecting is not a team sport.
Gold is not an investment. Your primary residence is not an investment. These are not investments any more than a cup of tea is. They are assets.
What’s the difference between an asset and an investment?
The Asset Fondle Test
We’ll use Warren Buffet’s criticism of gold* to forge a definition of an asset:
“If you take the gold you own, melt it down into a cube, and check back years later, he observes that the cube “…will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond”
We can define an asset as something that you can touch, fondle if you wish and own. (Since spouses and significant others generally respond to fondling they should NOT be considered assets!)
Examples of assets include, gold, silver, real estate, cars and commodities. Most assets depreciate. If you don’t take care of assets they will depreciate (think neglecting home & car repairs) or time will ravage them (think rotting silos of corn or old cars).
Gold and silver do not require any special attention as they have immutable characteristics. Again, the Oracle of Omaha makes the point for us: “True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”
People generally don’t expect assets that they buy, like cars, to appreciate in value. People get confused, however, when assets like gold or real estate go up and mistakenly refer to them as investments. You’re in good company, Buffett makes the same mistake.
The Anti-Asset Investment Test
Assets are defined as items can own/hold which in the words of Mr. Buffett “itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”
Investments, in contrast have the potential to grow (or shrink) and pay income in the form of dividends based on whether the owner/manager of the company can create value. Assets like gold and primary residences are non income producing passive lumps with intrinsic value while investments are active vehicles that require skillful management.
Here is a list of assets and their investment counterparts:
Primary Residence/ Rental Property;Real Estate Investment Trust
Gold/ Gold Mining Shares
Silver/ Silver Mining Shares
Commodities/ Commodities ETF
Bitcoin/ Bitcoin Exchange
You own a home or a bar of gold vs. you invest in a rental property or in Barrick Gold Corporation shares. You have a car vs. you own a taxi as an investment.
You don’t expect to make money from owning a car. Indeed, it is a depreciating asset and an expense. As a rule you should not expect to make money from holding assets. A home can appreciate in value if it is maintained, the neighborhood remains good, jobs are plentiful and interest rates are favorable. Gold can rise in value, through no effort of its own, but in relation to other asset classes like debased currencies.
A great investment, like Buffett’s Coca-Cola will not only pay dividends but appreciate in price, but you can’t hold it. A poor investment can become worthless.
A great asset will retain its value, but won’t produce anything for you. An out of favor or neglected asset can lose value but generally won’t become worthless.
Here is a chart showing how gold has held its value and appreciated against the United State dollar from 2001-2012:
Gold Percent Annual Change vs. US Dollar
Gold Appreciation from 2000-2012: 487% (Jan 1 2000 $282.05/oz-$1655.50/oz. December 31, 2012)
Source: USA Gold
The chart shows that it was better to hold one’s assets from 2000-2012 in gold instead of dollars (which you can also fondle and they won’t respond).
Gold is money, a store of value, a hedge against calamity, debasement, it’s an asset to hold as insurance. The reason gold did so well against the dollar had nothing to do with gold, but rather what the dollar did. It was issued in massive quantities during the period of 2000-2012. The supply of gold is generally constant, subject to mining output.
Median U.S. Home Prices
Total appreciation since 2000: 25%
Sources: US Census and Zip Realty
The housing chart also shows that from 2000-2012, it was better to own a home than to hold dollars in a bank account and as seen below was also better than owning shares in the S&P 500. This highlights that owning an asset like a home or gold can provide better returns than investing in the stock market. But that doesn’t mean that asset purchases are investments!
Owning a home also provides the benefit of the mortgage interest deduction, whereas there is no credit given for holding dollars other than anemic depositor interest.
The Depreciating Honda Accord
A 2000 Honda Accord bought for about $20,000 can be sold for about $3300 which represents a more than 80% decline in asset value.
In contrast an investment in the S&P 500 on January 3, 2000 would have grown just .5% by December 28, 2012! (S&P @ 1394.46 on 1/3/2000 -S&P @1402 on 12/28/2012.
The prices of assets (gold and real estate) and investments (the S&P) have changed dramatically in 2013 with gold down about 15%, home prices up around 10% and the S&P up around 15% year over year. This changing dynamic raises the issue as to where people should put their money- whether to hold assets or make investments.
*While Warren Buffett has been an outspoken critic of gold, he once owned a large silver position. See #8 in 12 Differences Between Gold and Silver.
Buying Gold and Silver
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