Class Assignment and Discussion: Warren Buffet’s Thoughts on Gold

If you stay up very late and end up watching TV in the wee hours of the morning, you’ve probably heard one of those “turn your paper IRA into a gold IRA” commercials, touting the superiority of gold over other investments.  But, exactly how well gold has done depends upon the time period you look at.  In 1980, when the DJIA was below 1,000, gold peaked at around $850 an ounce. Since then gold has bounced a bit and recently has done very well, rising to around $1,900 an ounce in September 2011. While gold did very well in 2010 and early 2011, the average annual return on gold since 1980 is just under 3 percent per year. Over that same period a typical New York Stock Exchange stock increased at an average annual rate of 10.6 percent. Still, on late-night (or early morning) infomercials you continue to hear gold proclaimed as “the place for your savings.”

In Warren Buffett’s recent letter to the Berkshire Hathaway shareholders and in a recent Fortune magazine article written by Warren Buffett, “Why Stocks Beat Gold and Bonds,” he takes aim at gold as an investment. His thoughts echo those in Chapter 14 of Personal Finance, Turning Money into Wealth.  In fact, we even quote him in Chapter 14: “[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 Buffet, Harvard, 1998.

Discussion Assignments and Questions:

  1. Read the MarketPlace.org article, “How risky is the modern gold rush?”  Explain why Warren Buffett is not a fan of gold.  Be prepared to discuss your answer in class.
  2. Read the Fortune article written by Warren Buffett “Why Stocks Beat Gold and Bonds.”  What are his investing principles and why doesn’t he favor gold?  Be prepared to discuss your answer in class.
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