Tags: Buffett | Gold | metal | investor

Buffett: Gold Bugs Have Right Idea, Wrong Strategies

Monday, 07 May 2012 09:36 AM

Those who stock up on gold on fear-based trades are right to be concerned with weakening paper currencies, but they are wrong to view gold as a productive asset, says legendary investor Warren Buffett.

Gold has risen from under $300 an ounce just over a decade ago to peak over $1,920 an ounce in late 2011, mainly due to a weaker dollar and other currencies, which have fallen in value thanks to central bank moves to jolt their respective economies and spur growth.

Gold serves as a hedge against paper currencies, most notably the dollar, but fear-based trades won't last as they aren't based on more lasting fundamentals.

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"They want everybody to be so scared they run to a cave with gold. Caves might be a better investment than gold. At least they're not producing new caves all the time," Buffett says.

Investors should also resist the temptation to buy gold just to keep propping it up and prevent it from falling.

"Where they run from that, and they should run from it, is, in my view, where they make their mistake."

Buffett's second-in-command at his Berkshire Hathaway investment company agrees.

"I think civilized people don’t buy gold, they invest in productive businesses," says Charles Munger, vice chairman at Berkshire Hathaway, also tells CNBC.

Munger says he favors Berkshire holdings such as Burlington Northern railroad, specialty chemicals firm Lubrizol and Geico insurance.

"We just have a wonderful portfolio in business, if you average them out," Munger says. "By and large they're doing productive, useful work."

Gold is trading reasonably stable in wake of European elections that revealed widespread anger at austerity, especially in Greece, where established political parties failed to secure 50 percent of the votes in parliamentary elections, with far-left and far-right parties gaining popularity.

In France, socialist Francois Hollande swept into victory over Nicolas Sarkozy, a move seen as a proxy on the outgoing administration's support for belt-tightening austerity measures.

Talk of Greece leaving the eurozone is increasing, as rejection of austerity measures could prompt the International Monetary Fund to hold up on disbursing bailout payments.

"The Greek election outcome is the ultimate Greek tragedy. Not having a cohesive government means the IMF will not release further funds. Without those funds, Greece will have to leave the eurozone," says Louis Gargour, chief investment officer of London-based hedge fund LNG Capital, according to Reuters.

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