“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Warren Buffett, one of the greatest investors of all time.
Yet, Peter Munk, founder of Barrick Gold Corp, the world’s largest gold producer, made so much money in gold that he was able to contribute over a hundred million dollars to higher education, healthcare, and public policy. Eric Sprott, another significant gold investor, also made so much money that he was similarly able to engage in major philanthropy.
Could Buffett be wrong? Gold has no utility? What about its use in dentistry and jewelry? Let us look at the 10-year charts below comparing the S&P500 to Barrick Corp. and Sprott Inc.
S&P500 (top line) vs. Barrick Corp.
S&P500 (top line) vs. Sprott Inc.
The charts above cover a ten-year period. What about a very long period? How does a longer-range a return on the S&P500 compare to the return on gold?
Over the 92 years since 1926, the S&P500 has returned 11.96% annually. Gold has returned 0%!
Let us take a look from another perspective and compare the S&P500 to gold, decade by decade.
The use of gold in dentistry is slowly disappearing and is being replaced by lower cost materials that are even more biocompatible. The largest dental laboratory in North America no longer accepts prescriptions for goldwork. As far as jewelry is concerned, the amount of gold used is such a small percentage of the world’s gold stores that we can ignore it.
If it is such a poor investment, how did Munk and Sprott make so much money in gold?
By developing mines, Munk took gold ore, not particularly valuable, and refined it into gold which does have value.
Sprott successfully played the gold price fluctuations which you can see in the decade-by-decade chart above until his luck ran out. He did retire a billionaire. His shareholders did not do nearly as well. They lost money in a rising stock market. A rising tide lifts all boats as well as the garbage. Losing money in rising market is almost impossible but Sprott Inc. did it.
Gold buyers rely on the greater fool theory. That is, they hope to find a greater fool who will take their gold investment off their hands at a higher price.
So, what is the best way to profit from gold? Well, the S&P500 companies are grouped into 11 sectors. Energy, healthcare, real estate, telecom, and so on. There is a subsector within the materials sector which includes gold.
Given the evidence shown in this blog, can you think of a better way to profit from gold other than to invest in the S&P500?