Ben Graham’s Curse on Gold or the Counter-Argument to Buffett’s Attack on Gold

Our Goal as An Investor Is to Maintain THE Purchasing Power of our investments

Ben Graham’s Curse on Gold

By David Galland, Casey Research

It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold’s most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object “incapable of producing anything,” so any investor holding it instead of stocks is acting out of irrational fear.

How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?

Perhaps it has something to do with his mentor, Benjamin Graham.

Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history’s most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham’s work.

According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over-or-undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham’s theory clearly shows periods when one asset class offered a better value than the other:

But what of the periods when both stocks and bonds stagnated or fell together? For much of the 1970s and again from 2001 through today, any portfolio allocated solely between stocks and bonds would have at best treaded water and at worst drowned in a sea of stagflation. To earn any real return, an investor would have needed to seek alternatives.

It’s clear from this next chart that gold was exactly that alternative, a powerful counter-trend investment for periods when both stocks and bonds were overvalued. Yet gold is conspicuously absent from Graham’s allocation model.

But this missing asset class is entirely understandable: for most of Graham’s adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn’t re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds.

All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?

We can never know.

We can know, however, that given Graham’s outsized influence on investment theory, there is little question that his lack of experience with gold, and therefore its absence from his observations, has had a profound effect on how most investment professionals view the yellow metal. This, in our opinion, goes a long way toward explaining the persistently low esteem in which gold is held by the mainstream investment community. And, as a consequence, its widespread failure to even be considered as an asset class.

A couple of takeaways: first, perhaps now you can stop wondering why your broker, the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding. More importantly, however, is that in order to have sustained, long-term investment success, one must accept that an intelligent portfolio allocation needs to include not two but three broad categories of investment – stocks, bonds and gold, with the amounts allocated to each guided by relative valuation.

Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

My take: Gold is not an investment; it is simply non-fiat money or gold is the reciprocal of the market’s view of current and future debasement of fiat currencies.

Your thoughts?

11 responses to “Ben Graham’s Curse on Gold or the Counter-Argument to Buffett’s Attack on Gold

  1. You scared me for a minute, I thought you wrote this.
    I think gold is not money but a commodity, and while graham writes on how to approximate the value of bonds vs stocks (compare div yield, bond yield) you can’t appraise the value of gold, so saying you should base this on “relative valuation” doesn’t help.

    The writer of the article assumes that your goal should be to minimize volatility, when I think you should try to maximize expected value. While commodities keep up with inflation, that’s all they do (almost by definition), and I doubt anyone would hold his gold after 20 years of falling prices (80s,90s).

    What is measuring the S&P in gold for the last 4 years supposed to show?.. when gold (and stocks, unlike what the write claims) crashed in 1981(and rose together a year later, and fell together a year after that…), should I take comfort in the fact that the S&P actually rose in gold terms? what does that even mean?

    • No, I did not write the article. The reason there was a gold standard to begin with was because gold had some worth or “commodity” value in order to become marketable and fungible enough to be a medium of exchange. But most of the $1750.00 value today has to do with its value as a medium of exchange. Money is like an index of the prices of all the goods and services and titles to goods that it can be exchanged for. Money is a difficult subject. Those who want to take a free course on money and credit–video lectures, readings, notes and quizzes on the seminal Money and Credit by von Mises, email me at

      The author’s use of the chart actually shows there may not be a correlation or even inverse relationship between stocks and gold. But, as humans, our eyes are quick to make them. The goal of the post is to have people think whether the article makes sense. I try to post articles that I disagree with to have an opposing view and to allow others to come to their own conclusions.

      Also, the writer focuses on Gold investments so perhaps incentive based biases may influence his opinion.

      Your comment: While commodities keep up with inflation………… a bit misleading. In fact, this evening I will post on what is inflation and about reading critically on my suggested reading/posts.

      But if I did write the article, I hope you would NOT spare the rod. Criticism is welcome.

  2. Have you heard of the Harry Browne Permanent Portfolio? The idea is to invest money equally into 4 asset classes: US stocks (as an index), long-term US treasury bonds, cash (money market), and precious metals (esp. gold).

    Each has their own specific characteristics:
    * stocks do well in times of prosperity
    * long bonds do well during prospertity and deflation
    * cash is good in periods of “tight money” and recession
    * precious metals provide protection during periods of inflation

    Its returns have been quite good – slightly outperforming the highest asset class, which is the stock market. However, it does so with considerably less volatility. Interesting, no?

  3. Thanks Mark for the link.

    Munger was always skeptical about asset allocation. I bought some gold coins back in 1999 because gold was priced below the high cost marginal producers cost and there was little monetary value as part of the price, because I thought so much money had fled hard assets into stocks. Gold seemed cheap and contrarian, but I had no forecasting ability as to today’s and tomorrow’s price. Gold continued to decline into 2001 for another two years, but I didn’t care.

    I still hold some gold because I do not see change in the authorites willingness to paper over debt and deficits and so I hold. But I can NOT VALUE GOLD. My preference lies with compounding machines then franchises.

  4. Graham actually commented on inflation closer to the end of this book:

    He even suggested a commodity basket at one point.

  5. I read Buffett’s article on gold, bonds, and stocks, and how stocks are a better long term investment. I totally agree with what he says in that, over the long term companies with pricing power and/or limited capex requirements will certainly out perform gold or bonds in inflationary periods. This is hard to argue with and if I could find (and be certain that I had found) enough of these great companies at the right price, i would always be fully invested. That said, I recently heard David Einhorn speak about his investment in gold. DE admitted that he read Buffett’s article (which I believe he probably agrees with although he didnt say it directly). DE explained the rationale for owning gold in pretty simple terms. Gold is money. Just like US dollars or Euros. The difference is that gold “money” only gets “printed” at 1% per year (or whatever rate at which it’s taken out of the ground). US dollars and/or Euros get printed at a far greater rate and this will most likely continue for a while given the alternatives. John’s point that “gold is simply non-fiat money or the reciprocal of the market’s view of current and future debasement of fiat currencies” is a shorter way of saying the same thing, but until i heard DE explain it in that simple context I didnt really understand that. But i’m not that bright, so this isnt a huge shocker. So, a question for anybody that reads this…since Buffett is clearly no stranger to holding cash and gold is really just another form of cash (albeit with more articles/blog posts about it), does anybody think WB would argue with holding gold for the reason laid out by Einhorn?

    • I can’t speak for Buffett, but I agree with Einhorn’s reasoning on why he holds some gold. If he held ALL his assets in gold, I would wonder if he is speculating on a complete CRACK-UP boom/bust or a hyperinflationary bust. A fiat currency ends when NO ONE is willing to hold FIAT CASH BALANCES. If you gave me a fresh apple for $1 million dollars, but in fifteen minutes, the price of an apple will be $100 million or $200 million, I doubt you will nest do anything but sell your dollars as fast as you can–like when the market tries to sell stocks all at once and there are NO BUYERS for dollars at the terminus of the hyperinflation. READ When Money Dies by Adam Fergusson. A ripping read.

      Buffett’s father was a hard-core Libertarian who believed in the Gold Standard (coins) not the gold exchange standard whereby only major banks could exchange gold.

      Gold is simply the market’s choice as non-fiat money. If people were 100% confident that the US dollar was redeemable in a fixed weight and fineness of gold or silver, then most would prefer paper. The problem is that the government prints money without producing the gold and silver to back the money–hence they are simply stealing from those who produce and exchange goods and services.

      To those who say we are stealing from ourselves or a little theft is good to share the pain, I say, “nonsense.”

  6. Thanks for the lecture! I’m Listening to it, interesting.

    Is the conclusion from this course, that I’m only starting, That fiat money makes sense or that it doesn’t, and we should switch to gold?

    I also loved the mental model course (What they uploaded until now at least)

  7. Dear Arden:

    Great. Let me know (and others out there) if you want me to make a Money and Credit folder for the lectures so you can download them. If you can tackle Mises’s Money and Credit, then you will have a solid grasp of money and the credit cycle. I bet Bill Miller wished he knew about what happened to his portfolio.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.