Guest Post: Ben Graham’s Curse On Gold

Tyler Durden's picture

Submitted by David Galland of Casey Research

Ben Graham’s Curse On Gold

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:

(Click on image to enlarge)

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.

(Click on image to enlarge)

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.

Investors who understand this tenet have an almost unfair advantage over other investors as it allows them to get positioned in gold ahead of the crowd and enjoy the bulk of the ride, while others sit on their hands.

So when you hear commentators ridiculing gold as a barbarous relic, lamenting that they cannot eat it or smugly asserting that it produces nothing, rest contently in knowing that they’re operating with a severe handicap in their own portfolio. Meanwhile, we’ll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing.

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

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Funny how back in the day he tried to corner the silver market and now he is so outspoken against pm's.  Nice one Warren Buffoon. 

ACP's picture

He is no buffoon. He sold his silver too soon and is willing to unleash all hell and brimstone on those who dare question his mistake...with an army of schmuck reporters and other jackasses with degrees in communications and political science who have no hope of paying back their $150k student loans...he says, "Why the fuck not bash PMs? I got all these peon bitches to back me up! Strate gangsta!"

Case in point: I've heard Buffett talk about China's "chink in the armor" several times. Not a GOD DAMN THING from the media.

fourchan's picture

lol he would have been straight paid if he hung on to that billion dollars of 2002 silver.


buffet can go pound sand.

strannick's picture

Goldman buying oil, Buffet buying railroads, Rogers buying agriculture. What more screaming commodities/inflation support do you need. Since they rely on corrupt government collusion (Goldman/Buffet) they cant go screaming gold. So gold goes up most, without any fanfare.

engineertheeconomy's picture

Pan Asia Gold Exchange 

paper currency will most likely begin losing  it's value at an exponential rate once this thing gets rollin. The tale will no longer be able to wag the dog

Gold bitchz

Snidley Whipsnae's picture

" 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? "


Lest we not forget; Buffet made his bucks during the greatest credit expansion the world has ever seen, using a 'buy and hold' strategy after doing excellent analysis of mostly new corporations.

How many believe that the same strategy would work today?

Buffet's switch from new companies like 'Wendy's', a onetime winner for him, to the proven old technology of railroads, that can move more freight for less dollars than all but river barges, is telling us what Buffet sees coming.

During the great credit boom Buffet was correct to avoid gold and go with the booming new industries. Now he is wrong about gold and PMs in general. I don't know if he is too grounded in his old strategy or if he is simply helping the feds keep the price rises in PMs orderly... It doesn't matter.

Gold is money and nothing else... JP Morgan 

duncecap rack's picture

I don't think he tried to corner the market. He just exploited a weakness in the way miners were financing their production by selling futures. When he took delivery of huge ammounts producers were in danger of failing to deliver on the comex. He sold the silver back at a huge profit and walked away. Whatever you think of him he is not a buffoon.

duncecap rack's picture

For those who junked me I actually read about it here on zero hedge. Give it a try- it is a fantastic read.

Exclusive: Second Whistleblower Emerges - A Deep Insider's Walkthru To Silver Market Manipulation
Zola's picture

Buffet is not successful, he is a clown who would have imploded in 2008. Crony capitalist at his best.

Ceteris paribus's picture

He made out like a bandit with his BAC stock.


Jeronimo's picture

Surely he feels secure, surely he serves his own self interest and surely he should as Gov. Christie so eloquently stated on Piers Morgan, shut up and write a check - for some bullion baby.

Cheesy Bastard's picture

Buffett doesn't need gold to preserve his wealth.  He has insider information to do that.

ReactionToClosedMinds's picture

amen to that brother

Used to be deferentially respectful to Mr Buffett........

Then about 2 decades ago .... WSJ tried to peel away some of the "Omaha" veneer ala the 'real' lifestyle ... but all the Berkshire Hathaway shareholder maniacs let the WSJ know (orchestrated?) they were cancelling their subscriptions and going to the NYTimes or FinTimes, etc.

I kid you not ..... WSj was intimidated to shut down on WB ... and never again has anyone in the financial media tried to convey what the 'real' image is.

So keep plowin's Governoer Chistie .... you tell WB to write a check if he is so happy with numb bureaucrats spending  your money wildly & stupidly.   And you know why? ,,, because, as the precieding poster states. .... WB is nothing more than a 'play-for-pay' crony capitalist ..... Hyde Park-style


Seasmoke's picture

and Gold will do better when Buffet passes away

SDRII's picture

the fed is printing f#c#in% money. What more is left to analyze? F o f o a has a much more lucid takedown of buffet

lsbumblebee's picture

Maybe if Warren held his head under water in the bathtub while talking to Becky Quick he could release himself from the powerful hypnotic hold that Benjamin Graham has on his thought processes.

Mercury's picture

Gold isn't an investment exactly...its money.  Sitting on cash doesn't produce an income stream either (unless you lend it out and good luck with that right now).  So, I can understand that its no favorite of (especially) value investors.

But when long term wealth preservation is the benchmark, it's hard to beat.  And more and more people are adopting that benchmark in this environment.

Like I've said before, if the head-on current is strong enough, the best strategy in a sailboat race might be to anchor for a while....

engineertheeconomy's picture

let's say you put down a stack of cash today in exchange for a home. In 10 years you would basically still own a home.

let's say instead you put that same amount of cash into Gold today. In 10 years you could exchange that Gold for enough cash to buy 2, 3 or maybe 5 homes.

Gold is an investment, but only because a percentage of assets valued in fiat currency generally lose 50% of their value every few years or so  relative to the shiny stuff

Mercury's picture

Actually, if inflation/fiat currency debasement is the only factor under consideration, the "cash" price of both gold and the house should rise equally as should just about everything else which retains it's utility value.  But gold has various value storage advantages and investment disadvantages vs. the house.


EmileLargo's picture

Bingo. That's all there is to it. Nothing more needs to be said. Trade it like a currency - its a hard currency. I prefer to keep my liquid assets in gold rather than fiat. Just a personal preference.

Ghordius's picture

no, you left one little thing out: the intrinsic value of gold in soothing my nervous system. medicinal properties, bitchez - watch out for the side-effects: boating accidents

BLOTTO's picture

They dont want us to know the true value and importance of gold.

Anyone that has over 1 Billion dollars - i dont trust for a second. Just how it is.

CvlDobd's picture

My net worth is $975 million and I say buy gold. Good thing you can trust me.

LowProfile's picture

Anyone that has over 1 Billion dollars - i dont trust for a second. Just how it is.

I don't trust anyone that has over 1 Billion dollars...And that doesn't also own at least $100mm in gold.

oldman's picture

I didn't know any of this, but I am grateful to have read it

Thank you     om

halflink123's picture

This is definitely one of the worst articles I have read on zerohedge. Zerohedge does great reporting, usually better than mainline reporters.


But...Graham didn't have "access" to metals?  Are you joking?  Yes perhaps ownership of gold was illegal - that doesn't mean that ownership of silver, platinum, copper, or other metals was illegal. Nor does it mean that ownership of gold stocks was illegal.  If Graham wanted to, he could have invested in metals.

Secondly, Graham IS NOT the father of modern portfolio theory. Quite the opposite. Modern portfolio theory is derived mainly from the Efficient Market Hypothesis, which Graham had nothing to do with.

So yes this article is replete with errors and uninformed writing, I am sad to say, and really is below par for such an excellent site as zerohedge.

In fact you address none of Buffett's criticisms of gold (many of which I disagree with myself).

LowProfile's picture

You missed the point, which was the author was trying to explain why Warren Buttface bashes gold.

halflink123's picture

No you missed the point because you didnt read my fucking post because you are another brainwashed follower.

halflink123's picture

When people start talking down to Ben Graham...that's a sign. Ben Graham was a genius; he was a very, very intelligent man.  To say you disagree with him is one thing; to imply that he's a loon or uninformed is quite another.

Spitzer's picture

Graham was dealing with sound money you fucking fool, not a moving target.

halflink123's picture

No that's the point - he wasn't dealing with sound money. The dollar was heavily debased during his investment career, especially in the '70s. Was Graham buying GOLD in the '70's - NO. In fact, in the 1970s he wrote an essay called "the Remergence of Investment Values" or something to that effect, after the great 70's bear market in stocks.  


This article is as misinformed as the readers.


You shouldn't be so quick to call someone a fool. Coming from you, Spitzer, that means a lot, LOL.

Elmer Fudd's picture

I agree, DG's premise that Graham didnt know about gold cuz he wasn't allowed to buy it is a bit of a stretch.

"Gold is money, nothing else"  JP Morgan


Ben Graham's picture

But I bought PM's when they became undervalued relative to other investments, so of course I added gold and silver to my investment mix.

slewie the pi-rat's picture

PMs have the best dividendReinvestmentPlanTM don't they ben?   L0L!!!

LowProfile's picture

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


I hope the curse (along with fiat) goes with an Earth-shaking explosion, a tremendous cloud of dust, and leaves a gigantic, acrid smoking crater.

That way it will be burned into the collective memory of humanity for 1000 years.

A Lunatic's picture

Bashing gold makes about as much sense as bashing air, or water, or food..........................

lieto's picture

The second chart seems to show that gold has caught up to the two other bubblicious asset classes.

In a world of unrestrained printing I will still mostly take my chances on physical but on a relative basis it ain't cheap today.

I doubt Ben Graham pictured the US with these maniacs in charge of the presses and the country.

Just saying!

astroloungers's picture

I am sick of Warren Buffet, I am sick of his face on TV, I am sick of hearing his ideas, I am sick of the money bunnies fawning over him.

Cult of personality. Did I mention I'm sick of Warren Buffet?

Sokhmate's picture

Do you actually own a TV? Tsk tsk.

Robslob's picture



Let's parade out the dead guys portfolio and see how they would have performed moving forward...probably why they are dead?


When Warren Buffet dies I will find a way to piss on his grave...I am sure to see steam rising form the ground as he burns in Hell!

ebworthen's picture

Of course Buffet and other Wall Street scheisters don't like gold - it isn't infinitely fungible, you can't put parasitic fees on it quarterly, and if you physically possess gold it isn't "MF Globable".

Reese Bobby's picture

Of course Buffet hates gold.  Gold exposes false nominal asset price gains.  But I bet he has a lot stashed away somewhere for himself.

dolph9's picture

Who the fuck cares what Warren Buffett says.  I certainly don't.  That geezer was lucky throughout his life and is now wrong on just about everything.

He sounds just like the lying banksters and politicians.  Full of shit.

jimmyjames's picture

Lastly we should perhaps point out that we think Buffett still has 'daddy issues'. His father Howard Buffett was a conservative/libertarian businessman and Congressman of the 'Old Right', who advocated a return to the gold standard throughout his life. It is probably not too far-fetched that his son's support of a liberal-socialistic worldview and hatred of gold is connected to an ongoing rebellion against his father, even if this is probably only on a subconscious level. We can of course not prove this, but we suspect it plays a role. We have always been baffled by the dichotomy of Buffett's success as an investor and businessman and his support of socialism and all that goes with it in terms of regulations and taxes.

ebworthen's picture

Stalin saw nothing wrong with Socialism as long as he had his caviar, his Women, and the ability to send anyone to Siberia.

sodbuster's picture

Warren Buffet is an inanimate object “incapable of producing anything". He's just a leech.

rosiescenario's picture

"...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?"


No, he would have been buying the pm miners which you could have picked up a few years ago at exactly the kind of valuations that Graham espoused.

rosiescenario's picture

Also, how did WB do on his brilliant purchase of U.S. Air? I was short that terminal dog at the time he went and bought....he couldn't have even looked at that company's balance sheet or understood that the airlines never make money long term.


He is going to look equally stupid on his pm call.

Zero Govt's picture

" any investor holding it instead of stocks is acting out of irrational fear."

Presumably over-confident from Omaha was acting out of "irrational fear" when he tried to buy-up the Silver market not so long ago surrepticiously via brokers in London? for his irrational fear by the Bank of England no less who demanded to know who the big player was playing silly buggers in the London Silver market

Warren clearly pisses his pants sometimes and dips into periods of metallic non productivity