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Is gold a good investment for Christmas?

It appears that investors have decided that there should be a “Santa rally” after all, with the market enjoying a bout of optimism in the past few days. More than likely there is a similar bout of energy amongst consumers with some last minute shopping to buy gifts for loved ones before Christmas. No doubt a few gold necklaces and gold bracelets will be amongst those gifts, and while gold can make a great gift it’s questionable whether it makes a good investment.

Warren Buffet’s golden tale

Regular readers of billionaire investor Warren Buffett’s annual letter to shareholders will remember the story he told in his February 2012 letter. In the letter Buffett explains that if you took the entire world’s gold and melded it together it would form a cube roughly 21 metres on each side. The current value of this cube would be about $9.6 trillion.

Conversely an investor could take this $9.6 trillion and buy all of the USA’s cropland, plus the equivalent of 16 Exxon Mobils and still have $1 trillion to spend! Buffett’s point is that you could either own an innate object which has little tangible or productive value or you could own some of the finest businesses in the world which can reinvest their earnings at attractive rates of return.

The gift that keeps on giving

The gold price has fallen significantly this year and gold miners such as Newcrest Mining (ASX: NCM) and Regis Resources (ASX: RRL) have followed suit falling 66% and 44% respectively. While this has potentially created some value in the sector for investors or traders with short-term horizons, in the long-term Buffett would likely suggest it is far better to own a slice of a great business such as Woolworths (ASX: WOW), Coca-Cola Amatil (ASX: CCL) or CSL (ASX: CSL).

Foolish takeaway

Treating stocks as a part share in a business rather than as a price on a screen is important. Focus on buying high-quality companies run by competent managers and own them for the long-term. This is a proven system for increasing wealth and can be the ‘gift’ for your portfolio that keeps on giving.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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