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It's About Purchasing Power: Why the Dollar Remains Inferior to Gold

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Warren Buffett just made a correct, yet brilliantly flawed statement on gold this month.

The Berkshire Hathaway annual shareholders meeting took place on May 4 and 5 It was held by two legendary investors, Warren Buffett and Charles T. Munger.

Neither Berkshire Hathaway nor its chief investors Buffett and Munger need introductions. To paint a picture of the massive scale of Berkshire’s accomplishments, let’s say that if you had invested with them beginning in 1965, you would have seen a return of 2.4 million percent; that’s $1,000 turned into over $24,000,000.

Without a doubt, they know what they’re doing when it comes to stock investments. Very few investment companies can boast such returns.

But this knowledge doesn’t always translate into other asset classes, particularly gold, as their statements on gold expose a glaringly misguided assumption.

You can’t compare apples with oranges, and this is exactly what Buffett and Munger just did.

Buffett pointed out that if you had invested $10,000 in a broad basket of US stocks in 1942, the value of your stocks would now have a market value of $51 Million. Okay, there’s truth to this.

But here’s where Buffett’s wise perspective goes somewhat askew: if you had invested $10,000 into gold in 1942, your holdings would only have a value of $400,000.

This is “technically” correct, but there’s a major error in this statement. Can you figure out what it is?

No? Okay, let’s break it down to give you a clearer picture:

  • Is gold an asset, similar to stocks or real estate? Yes, but that’s only part of the picture.
  • Is gold a commodity, as in something to “consume” or make something with? For most investors, the answer is “no.”
  • Is gold money? Think about this one carefully.

The last point--gold as money--is the clincher. Sure, many people might consider gold to be an asset or commodity. But gold’s safe haven status, one that’s recognized across the globe, is attributable to the fact that it is viewed first and foremost as a “money.”

This has been the case throughout history, and it will probably always be the case.

So a fair comparison would be to compare gold to the US dollar, and not to stocks or other commodities. And this is where Buffett and Munger got it all wrong.

So, what might happen if we were to compare gold with “money” in terms of the critical factor that makes money valuable, that is, purchasing power?

Here’s what we’d come up with (starting from after the abolishment of the gold standard).

From 1972 to 2018:

  • The US Dollar’s purchasing power declined by 84%, while...
  • Gold’s purchasing power increased by 394%!

This tells you a couple of things:

First, gold can be viewed as an asset and commodity. But that’s not why most people across the world are buying gold. Certainly, China and Russia are not loading up on gold to flood the international market with more jewelry, nor are they merely diversifying their portfolios with yet another asset class alongside real estate, equities, and whatever else. They are buying gold because it’s the only form of money that can legitimately back up their own fiat money, something they need to do in order to dethrone the US dollar!

Second, given the proper comparison between gold and the dollar--minus 84% in the dollar’s purchasing power in contrast to gold’s plus 394%--not only does this establish that gold is indeed money due to its purchasing power, but that as a form of money, gold is far superior to the US Dollar!

So, think about this the next time you compare gold to stocks, bonds, real estate, oil, soybeans, or any other “asset” or “commodity.” For you may be missing the point. Gold is money. And the only smart comparison would be to compare gold with money, pitting the purchasing power of one against the other. And the “smart” answer is clear if you do the math. Gold wins.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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