Market Overview

Warren Buffett Warns Against Gold Bubble

Famed billionaire investor Warren Buffett warned investors of the dangers associated with gold and bonds in his recent annual letter to shareholders.

The Chairman of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) said that he considered gold to be a member of an asset class that never produced anything of value and that "if you own one ounce of gold for an eternity, you will still own one ounce at its end."

While critics of Warren Buffett's investment strategy like Jim Cramer have questioned Buffett's aversion to gold during a time that the commodity has seen its value climb ever higher, Buffett criticized them for investing in an asset that is "neither of much use nor procreative."

Buffett said that gold investors were mostly motivated by a fear of of almost all other assets and a belief that the number of investors who shared their fears would grow. He said that the rising price of gold attracted investors who saw the rising price as a validation of the gold enthusiasts' investment thesis.

Buffett went on to warn that gold's “bandwagon” investors were in danger of creating another investment bubble, saying that "over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the 'proof' delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop."

Buffett also had nothing good to say about currency denominated investments such as bonds, cash, money market funds and mortgages. He noted that several times over the past century these investments had eroded the value of their owners' holdings, despite the fact that they received regular payments of interest and principal.

Because governments ultimately determine the value of money, Buffett said that currency denominated were at great risk when governments turn to policies that create inflation.

While Warren Buffett's timing hasn't always been perfect, he's more often right than wrong when it comes to long term investing. He's faced criticism during similar situations in the past, such as when he avoided internet stocks. If gold turns out to be the latest bubble investment, investors who heeded the advice of Warren Buffett will be thankful once again.


ACTION ITEMS:

Bullish:
Traders who believe that Warren Buffett is overstating the risks associated with gold and bonds might want to consider the following trades:
  • The SPDR Gold Trust (NYSE: GLD) and the Market Vectors Gold Miners (NYSE: GDX) ETFs could both increase in price if Buffett is proven wrong.
  • The iShares Barclays Aggregate Bond Fund (NYSE: AGG) and the Vanguard Total Bond Market (NYSE: BND) ETFs could also climb higher if the "Oracle of Omaha" has lost his touch.
Bearish:
Traders who believe that considering his track record, it's worth listening to any investment advice given by Warren Buffett may consider alternative positions:
  • The PowerShares DB Gold Double Short ETN (NYSE: DZZ) and the ProShares UltraShort 20+ Year Treasury Bond (NYSE: TBT) ETF could both offer significant upside if Buffett is proven right once again.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas News Sector ETFs Bonds Jim Cramer Short Ideas Specialty ETFs Movers & Shakers Best of Benzinga

 

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