Offshore Capitalist

Gold is not luring Warren Buffett

NEW YORK Commodity Online: A gold boom is on and despite the ‘bubble talk’ on gold, every investor worth the name is running after the shining metal. From Jim Rogers to John Paulson, most investors or investing analysts have argued that gold is the best investment bet against rising inflation and declining US dollar value. They all are waiting for a gold bull run that will go past $2000 per ounce in 2010.

But Warren Buffett, the world’s richest investor and billionaire businessman, has not yet fallen for gold. His ideas on gold and why he is not interested obsessed with investing in the shining yellow metal should be an eye opener for all those who are running after gold.

Here are some reasons why gold is not luring Warren Buffett, and why there are better, erudite and lasting investing options than gold.

”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.”

Buffett feels that unlike other precious metals like silver and platinum, gold is too soft to be put to use in the industrial, construction and automobile sectors. Instead, its valuation is largely based on the public’s fear and economic uncertainty.

Warren Buffett lists no gold mining companions among his holding in his latest filings. Buffett doesn’t necessarily hate commodities—the filing shows he’s bought into Exxon Mobil Corp., the oil and gas producer, and continues to hold shares in ConocoPhillips, another energy company. But he doesn’t appear to be a fan of gold at all.

The omission of gold is telling, because, in many ways, the yellow stuff would seem to fit with Buffett’s worldview. He has frequently spoken of his belief that inflation will rise in years to come as governments try to deal with large and rising amounts of debt. Gold would seem to be a natural refuge.

But Buffett appears to have his own strategy for dealing with inflation. In addition to his purchases of Exxon stock and his massive new investment in the railroad company Burlington Northern Santa Fe Corp., he has doubled his investment in Wal-mart Stores Inc. and bought shares in Nestle S.A. He continues, of course, to hold major stakes in financial services firms such as American Express Co. and consumer products companies like Coca-Cola Co.His theory seems to be that the best protection against inflation comes by investing in companies that have the ability to pass on price increases.

A company can have pricing power if it controls a scarce resource Exxon and Burlington Northern or if it owns a favored brand Nestle and Coca-Cola or because it’s the biggest and most effective competitor in its field Wal-mart. All those companies occupy large places in Berkshire’s investment portfolio

via Gold is not luring Warren Buffett | 06 December 2009 |

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