Gold, Silver, and Warren Buffett's Warning

Source: Mark Herpel via Flickr.

There is an air about gold and silver that just exudes wealth. Because of that, many believe that if they invest in gold or silver, it will create wealth for them over time. And while it's true that the price of gold or silver can increase in time, it does not necessarily mean that any wealth is being created. This is due to the fact that while gold and silver are assets that hold value, they don't produce more of it. This is why investing legend Warren Buffett has warned against investing in precious metals if creating wealth is the goal.

A store of value and not much moreBecause of their unique properties of strength, rarity, resistance to corrosion, distinct color, and ease of minting gold and silver have become highly sought-after metals. While that desirability makes gold and silver both precious metals, it's the physical properties of both that drive their ability to hold wealth. The fact that they are resistant to corrosion as well as the fact that they can resist the attack of most acids means that both can withstand the test of time. Because of that, there is a confidence that their intrinsic value won't be corrupted over time.

Having said that, the ability to hold value isn't the same as an ability to compound or create value. In other words, while gold and silver can protect against a drop in the value of currencies, or hedge against inflation or deflation, neither can make one truly wealthy outside of the shear collapse of the global economic system.

Warren's warningThis is why in 2012 Warren Buffett railed against gold and other non-equity investments like silver and bonds in an article in Fortune as well as his annual shareholder letter that year. He summed up gold's shortcomings as an investment suggesting its "being neither of much use nor procreative." Instead, he argued that what motivates gold buyers is the belief that gold will rise in value because more people will want it as a store of value due to fears of currency weaknesses or hyperinflation. He warned, however, that this isn't a long-term investment thesis but more of a bet on fear. He then painted a picture of gold against the productive assets he prefers. As Buffett wrote:

Now, a little bit has changed since he wrote that article as the price of gold is down to around $1,100 at the moment. In fact, it would actually seem like Buffett called the top in gold when he penned those words.

Gold Price in US Dollars data by YCharts.

Further, ExxonMobil is no longer the world's most profitable company as its profits and therefore its value have been hit by the drop in the price of oil. That being said, what Buffett is suggesting is that the pile of gold is just that, while the crop lands and ExxonMobils are productive assets that are generating cash flow each year. It's why Buffett would then point out that:

In other words, the price of gold, or silver for that matter, likely will increase over time and that increase could be substantial during a time of fear. However, that rise will pale in comparison to the value created by productive assets held for the long term. It's why those seeking to create wealth should steer clear of assets that are intended to preserve it, which is the role of gold and silver.

The article Gold, Silver, and Warren Buffett's Warning originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.