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Warren Buffett is right — gold is incapable

It’s been a good week for share market investors, with the benchmark S&P / ASX 200 closing up 2.5%.

Unfortunately, gold bugs haven’t fared so well.

The Wall Street Journal isn’t known for sensationalist writing or flaky analysis, so when the headline says ‘Gold Sinks Into Bear Territory‘, investors should be taking note.

That article, starts with a stark statement:

“Gold careened into bear-market territory on Friday, slipping below $1,500 an ounce at one point…”

Ouch. Who’d be a gold bug?

Friday’s 4.1% decline was, according to that same WSJ article,

“…the biggest in percentage terms since February of last year.”

It’s what we’ve been warning our loyal Take Stock readers about for months.

We even stuck our necks out further, writing in The Sydney Morning Herald and The Age that gold was a dangerous place to be.

While we don’t try to time markets, we’re not afraid to call something potentially overvalued as I did in February and September last year — and as my colleague Morgan Housel did in September 2011, when he suggested investors should “Dump your gold in favour of shares”.

Whenever we write articles like those, we cop plenty of flak from the gold cheer squad.

Gold: Pretty… useless

Apparently we don’t understand. We just don’t get it. You can hear the hope in their words — ‘Gold will be back, baby!’

Sure, maybe. But let’s just cover the basics for a minute:

– Yes, it’s yellow and shiny

– Yes, it’s romantic and popular for jewellery; and

– Yes, for short periods, the price of gold has increased faster than share prices

All correct and accounted for? Good. Because:

– Gold doesn’t do anything

– Gold costs money to store; and

– Gold can’t be valued by any reasonable measure

Or, as no less than Warren Buffett put it:

“A century from now… [your] gold will be unchanged in size and still incapable of producing anything. You can fondle the cube but it will not respond.”

The ‘fear asset’

I get why people might be inclined to own gold.

They’re worried.

About another financial meltdown. About the risks of inflation. About the volatility of share prices.

Here’s the problem though — when the price of gold has fallen a whopping 20% in 20 months, those ‘risks’ look pretty good!

The true believers will tell us that ‘gold will be back’.

They might even be right.

But let’s be honest — there’s no way to know! And if there’s no way to reasonably assess the future earnings of an asset (gold has no earnings), how can buying gold be called anything but speculation?

Ah, but if the global economy collapses and national currencies become worthless, won’t the holders of gold have the last laugh?

I doubt it — if that all comes to pass, we’ll have bigger problems than who owns the lumps of shiny metal…

More to the point, despite centuries of war, recessions, a Great Depression, high inflation, sovereign defaults and a GFC, the global economy hasn’t come close to collapse.

Yes, our governments and central bankers have had to do some fancy footwork, but that’s what they’re supposed to do!

“If they hadn’t intervened, we’d be in trouble” the doomsayers counter.

Yes, and if my grandmother had wheels, she’d be a bicycle!

Don’t get scared, invest!

Foolish investing isn’t about speculating whether someone will pay you more for your gold in a week, month or year. Or about counting the multitude of imaginative ways the economic world could end.

We’ll leave that to others, and get on with building our financial wealth.

Financial wealth isn’t built in the absence of war, recession, inflation and fear, but despite all of those things.

Sensible investing is ignoring the noise, riding out the volatility and buying small pieces of wonderful businesses when they’re available at attractive prices.

While the pile of gold sits in the corner, costing money to store, companies diligently go about their business — making sales, turning those into profits and enriching shareholders.

Woolworths (ASX: WOW) will sell more groceries a year from now than it does today. Cochlear (ASX: COH) will help more people hear, with even better technology. Telstra (ASX: TLS) will connect more people to each other and the internet — and each will almost certainly earn more profits in the process.

Meanwhile, those who own gold will still have the same amount, still costing money to store, while each of those businesses pays a dividend, either fully or partly franked!

30 years of fear — and profit

Between 1982 and 2012, according to Vanguard, Australian shares have gained a compound 12% per annum.

You might remember those three decades for the introduction of capital gains tax, the 1987 stock market crash, a couple of Iraq wars, terrorist attacks, and the GFC. And the market still managed to gain an average 12% per year, compounded — or enough to turn $10,000 into a smidgin short of $300,000.

Not because of the absence of risk or disruption, but despite it.

To be frank, it’d be easier for us to sell fear, risk and trouble. We could appeal to our readers’ basest fears.

We could point to calamities past and the likelihood of a repetition. We could even make it sound really convincing, and scare the pants off you — then tell you we had the solution. We’d probably end up with more business as a result — nothing sells like fear.

But we won’t. We can’t.

Chances are even if you don’t own Telstra shares directly, your superannuation fund does. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: Buy, Sell, or Hold Telstra?

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Motley Fool Investment Analyst Scott Phillips owns shares in Woolworths and Telstra.

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