By John Devine
Since the days of the ancients, gold has been prized, coveted and viewed throughout the world as an asset with real inherent value. It's still highly esteemed today and is considered variously a hedge against inflation, a tool for diversification and a currency in its own right.
Many goldbugs cite the troubling depreciative nature of fiat paper currencies that aren't backed up by anything real. How valuable can a currency be, they say, if you can print it in unlimited supply?
Warren Buffett, the CEO of Berkshire Hathaway (ticker: BRK.A, BRK.B) and perhaps the greatest investor of all time, understands that fear. Gold investors, he says, are "right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money."
"But where they run to is the mistake," Buffett adds.
Taking a closer look at gold's qualities as an investment, it's easy to see why the Oracle of Omaha has stuck to stocks. Here are five characteristics that show gold isn't a great place to put your money:
Poor long-term returns. Let's start with the biggest one. Investors are familiar with the phrase "past performance is not necessarily indicative of future results," which is a sober reminder that mutual funds and managed accounts frequently mean-revert (or move back toward their average).
However, that implicit warning holds less muster when looking at the performance of entire asset classes over time. This, says Robert R. Johnson, president and CEO of the American College of Financial Services, is where gold's inferiority comes clear.
Johnson and his colleagues in the book "Invest with the Fed" wrote that gold underperforms equities in all interest rate environments, despite its celebrated popular status as a hedge against inflation.
"From 1972 through 2013, common stocks returned 14.68 percent in falling rate environments while gold futures returned 7.85 percent. In rising rate environments, stocks returned 8.47 percent while gold only returned 4.86 percent. When rates were flat, stocks provided a gain of 10.61 percent and gold returned 8.61 percent," Johnson says.
The first full year the dollar wasn't tied to a set price of gold was 1972, so it's an important year for comparison's sake.
How do you value gold? Finance nerds will tell you that the value of any asset is the present value of all future cash flows. Old-school Wall Street firms live and die by this concept, and many a blue-chip stock is bought or sold when the "models" – rigged with well-researched growth and interest rate assumptions – flash "buy" or "sell."