Everything That Glitters

Warren Buffett had an abbreviated version of his annual shareholder letter in this week’s edition of Fortune. No matter how one feels about his socio-political homilies, the man is a genius at investing and thinking about investing.   

Gold, he says, cannot ever rise to the level of a stock investment because it has no inherent way to grow. Its purchasers, he argues, are always fearful. Gold does not pay dividends. It has no product attached — you can’t drive it, fly it or use it for recreation. In short, gold is pretty useless stuff, except for a few electrical and chemical uses and for adornment. In the Fortune piece, he compares it to equity investments. It’s a great read.    

I buy what Mr. Buffett says (and you may see the entire text of his 2011 letter to shareholders soon at www.berkshirehathaway.com). However, I have a question: if India (as discussed in last week’s blog), is responsible for buying 32% of the world’s gold and its middle class is growing exponentially, will increased demand there (middle class growth x new gold purchases = high demand) keep prices artificially high? Remember, folks who live in India don’t think of gold as a hedge or even, as you might guess, given the bling worn there, as jewelry. Instead, Indians think of gold as savings.