Beat Warren Buffett's portfolio with this golden pick

By Brett Arends

Gold is not considered a respectable investment in polite circles, but maybe it should be

U.S. large-company stocks SPY had a sucky April.

So did U.S. small-company stocks IWM, international stocks VEA, Treasury bonds IEF, real-estate investment trusts VNQ and energy companies XLE.

Gold GLDM? That was a different story. The precious metal rose another 3%, continuing a run that has seen it rise more by than $200 an ounce, or about 11%, so far this year. In mid-April it hit a record.

Gold is not considered a respectable investment in polite circles. You don't find many bulls on Wall Street. Your financial adviser is very unlikely to recommend it, especially if they have letters after their name. It probably doesn't appear as an investment option in your company's 401(k) plan. Gold is a legacy asset left over from the days of the horse and carriage, goes the standard argument. It has little utility and generates no cash flow. The gold standard is a "barbarous relic," in the famous phrase of economist John Maynard Keynes.

Warren Buffett has mocked it as an investment multiple times. Among other issues, gold "has two significant shortcomings, being neither of much use nor procreative," he has said.

But if gold is such a quack investment, one simple question springs to mind. Why are the world's governments such fans?

Central banks are currently buying about 100 metric tons a month, worth about $7 billion. China, India and Turkey are leading the way. Over the past 15 years, since the 2007-09 global financial crisis, India has more than doubled the size of its gold reserves and China has nearly quadrupled its holdings. Meanwhile Vladimir Putin has hiked Mother Russia's bullion reserves by 340%. He probably wishes it was much more. Russia also holds about $300 million in foreign-exchange assets within the global banking system - assets that have been frozen since the invasion of Ukraine and may be seized.

The U.S. government holds about $600 billion in gold, and other developed countries, especially some in Western Europe, such as Germany, hold the majority of their foreign-exchange reserves in bullion. The British government looks like a bunch of idiots - not for the first time - for selling off a lot of bullion just over 20 years ago at prices as low as $250 an ounce.

What does the financial-planning industry know that governments and markets don't?

The key question is whether gold is to be considered an investment, to be compared with stocks, or a currency, to be compared with dollars, yen and the like.

Warren Buffett has given instructions that when he dies, he wants his estate invested very simply: 90% in stocks, through a low-cost index fund that tracks the S&P 500, and 10% in short-term Treasury bonds or bills.

As a substitute for the S&P 500, gold would be abysmal. It has none of the growth characteristics of stocks. Its long-term returns are far lower.

But as a substitute for bonds, bills or deposits in that other 10%, it stacks up really well.

Long-term data going back to 1928 show that, over time, gold has outperformed Treasury bills and even 10-year U.S. Treasury bonds. The average return from bullion has been 5% a year. Treasury bills: 3.3%. Over an investing lifetime - or at least, let's say, 35 years - that difference would more than double your total gain.

Gold has also beaten 10-yearTreasury bonds over that period by nearly half a point a year.

OK, so for about 40 years it was extraordinarily difficult to invest in bullion, because Franklin Roosevelt had, in theory anyway, confiscated it. But if we only look at the period since 1972, after Richard Nixon took the U.S. dollar off the gold standard and effectively let the price float, the picture is similar. Since then, gold has trounced Treasury bills. And while the compound return trailed 10-year Treasury notes by 0.1 points per year, gold was a much better counterweight to stocks in your portfolio. It was much more likely to zig when stocks zagged, and vice versa.

Gold boomed in the 1970s and the 2000s, when U.S. stocks did poorly. Gold did poorly in the 1980s and 1990s, when stocks boomed. Gold's annual returns since 1972 have a significant negative correlation with the stock market, meaning the two typically move in different directions. Both bonds and bills have had positive, albeit very small, correlations with stocks.

Put another way: If you'd followed the Buffett portfolio since 1972, you'd have made just over 17 times your money in constant dollars (after deducting inflation). If you'd done the same thing but substituted gold for Treasury bills, you'd have made more than 25 times your money, or about 40% more than with Treasurys. And you would have experienced much less misery along the way. One of the biggest risks to retirement investors is a "lost decade" when you earn nothing (in real, inflation-adjusted terms) for 10 years. Since 1972, the Buffett portfolio has produced a "lost decade" of no returns almost twice as often as the golden one.

Call it Golden Buffett - 90% stocks, 10% gold.

This isn't a recommendation, but anyone who wanted to do this could do it easily with two low-cost exchange-traded funds. The Vanguard S&P 500 ETF VOO charges 0.03% in annual fees. The Abrdn Physical Gold Shares ETF SGOL charges 0.17%.

Total portfolio fee: 0.044%.

Gold has been rising lately. It may be due for a significant correction. Notably, though, there has been no mania among regular investors. Exchange-traded funds that invest in gold bullion have been losing assets, not gaining them. So it's hard to argue there's too much enthusiasm around.

It's impossible to value gold. And it's impossible to dismiss Warren Buffett's critique. But although gold hasn't worked as a long-term investment, for at least the past century it has worked remarkably well as a hedge, or counterweight, to stocks. Make of that what you will.

-Brett Arends

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05-04-24 1014ET

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