Gold, Buffett, and The Real Question

03/05/2012 8:30 am EST

Focus: MARKETS

Warren Buffett isn't going to buy gold as an investment, and neither should you, writes Kevin McElroy of Resource Prospector Pro.

I'm not going to bash Warren Buffett—and I'm not going to go through all of his tedious points about why he doesn't like gold. I'm also not going to disagree with him!

I'd like to use the press and notoriety that Buffett brings to this discussion to highlight a huge misconception about the role of gold in anyone's portfolio. Before I do, I'd like to point out something that should make you think twice about taking Buffett's remarks about gold at face value.

Buffett bought 130 million ounces of silver back in 1998. He sold all of it by the end of 2006. Why did he own it in the first place? Well, his reason back then: "equilibrium between supply and demand was only likely to be established by a somewhat higher price."

In other words, Buffett bought silver back then for much the same reason that many investors buy it today: he was convinced that higher prices were on the way. This kind of price speculation certainly has a part in anyone's portfolio.

But I still think it's asking the wrong question about why anyone should own gold or silver.

It seems like Buffett is being asked, "Would you own gold as an investment?" Which opens the door for him to talk about the nature of his best investments, and how they crush gold in a number of ways.

It's the wrong question to ask, and I think Buffett realizes it. Because gold is not an investment.

I've written that statement many times, and I know some of my colleagues are tired of arguing with me about it—but if you can't make a distinction between the idea of "money" and the idea of an "investment," you will likely make the wrong decision about gold ownership—or stock ownership for that matter.

For instance, you wouldn't ever confuse a stock certificate with a paper dollar bill, and try to pay your bar tab with shares of Exxon Mobil (XOM).

But for some reason, Buffett wants to confuse the issue—and compare shares of Exxon with physical gold. Money serves an entirely different purpose than shares of a publicly traded company.

They each have their own drawbacks. For instance, shares of publicly traded companies regularly go to zero. It happens every day. But gold has never gone to zero.

I could go on...but the point is that gold is money. It should be compared to other forms of money if you want to make a reasonable comparison. There are times to hold some large portion of your net worth in stocks, and times to own different forms of money.

Warren Buffett knows that—and the fact that he chooses to own most of his liquid money in Treasuries and dollars tells me more about his preference for stock ownership. He's a stock expert—not a metals expert.

I own gold and silver because they're a reliable form of money. I believe that the United States government and Federal Reserve are either incapable of or unwilling to prevent the devaluation of the dollar. Their actions tell me that the dollar is in big trouble. So I prefer to hold some portion of my cash in gold and silver.

Buffett likes the dollar—but even he says the dollar is in trouble, as he said last year "No question that the purchasing power of US dollar will decline over time. Only question is at what rate it will happen."

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