Buffett, Mocking Gold, Sidesteps Slump as Berkshire Bets on Stocks

NEW YORK (Bloomberg News) -

Investors, including hedge fund manager John Paulson, faced losses this week as gold suffered its biggest rout in three decades. Warren Buffett told them there were better places to put their money.

The billionaire chairman of Berkshire Hathaway cautioned against investing in the metal in February 2012, when an ounce sold for more than $1,700, because it’s not productive like a farm or company. Gold fell 14 percent, to $1,348.21, in the two trading days through April 15, the biggest decline since 1983, and wiped out almost $1 billion in Paulson’s wealth.

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” Buffett wrote last year in a letter to shareholders. “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”

Buffett, 82, has said his preference is to build Omaha, Neb.-based Berkshire by investing in companies, such as chemical maker Lubrizol Corp., which he bought in 2011. Since his comments about gold, his firm has struck a deal with Jorge Paulo Lemann’s 3G Capital to take HJ Heinz Co. private, acquired more than two dozen daily newspapers, bought retailer Oriental Trading and added to its $87.7 billion stock portfolio.

“The shareholders are probably happier that he has Lubrizol and Heinz than gold,” Andrew Kilpatrick, a Buffett biographer, said in a phone interview. “He made a very cogent argument” for why the metal was an inferior investment.

Buffett is unlikely to invest in gold after the price declines, because it doesn’t fit his investing philosophy, said Luke Sims, co-portfolio manager of the Eagle Capital Growth Fund, which counts Berkshire among its largest holdings.

“If you put your money into gold or other non-income-producing assets that are dependent on what someone else values that in the future, you’re in speculation,” he said. “You’re not into investing.” Buffett didn’t respond to a request for comment sent to an assistant.

Paulson, whose firm earned $15 billion in 2007 betting against mortgage bonds, has said gold is the best hedge against inflation and currency debasement as central banks pump money into their economies to stimulate growth. Buffett said he shares concerns about paper money losing its purchasing power. Still, he wrote, investors could get more from productive assets.

To illustrate the point, he asked readers to picture the world’s entire gold stock melded together into a cube 68 feet (21 meters) on each side, valued at $9.6 trillion at then- prevailing prices. For the same amount, an investor could have purchased all the farmland in the United States, 16 replicas of Exxon Mobil, and still have about $1 trillion of “walking-around money.”

A century later, the farmland will be producing valuable crops no matter the currency, and dividends from the companies would probably have added up to trillions of dollars, Buffett wrote.

The 170,000 metric tons of gold “will be unchanged in size and still incapable of producing anything,” he wrote. “You can fondle the cube, but it will not respond.”

Buffett has spent his company’s cash on stocks. He’s added to Berkshire’s more than $16-billion holding in Wells Fargo and increased the funds overseen by his deputy investment managers, Todd Combs and Ted Weschler. The two have used that money to buy stakes in companies including DaVita HealthCare Partners.

Berkshire has also been making deals. Managers at the company’s more than 80 operating businesses spent $2.3 billion for 26 acquisitions in 2012, Buffett wrote last month. In February, Berkshire agreed to spend about $12 billion on the Heinz deal. The agreement includes $8 billion of preferred shares in the condiment maker that pay a 9 percent dividend.

Capital spending at Berkshire is also set to rise, led by the energy unit and railroad, Burlington Northern Santa Fe. The company spent a record $9.8 billion on plant and equipment last year, Buffett wrote in a March 1 letter.

“We will keep our foot to the floor and will almost certainly set still another record for capital expenditures in 2013,” he said. “Opportunities abound in America.”

Buffett hasn’t always been averse to investing in metals. Berkshire made a pretax gain of almost $100 million by investing in silver in 1997. He said he made the wager because bullion inventories had fallen and he expected the price would climb. The bet wasn’t predicated on inflation expectations, he wrote.