Where Allan Gray and Warren Buffett differ
Hint: it involves a view on a peculiar metal.
Julius Cobbett
4 June 2008
Allan Gray, a local fund manager, has more than a few things in common
with Warren Buffett, one of the world’s most-admired investors. Both have
long-term records of market-beating returns, are unperturbed by investor
trends and fashions, and both adopt a similar approach to investing – buying
stocks they believe to be unfairly discounted by the market and waiting as
long as it takes for a rerating to occur.
However, there is one area in which the two investors appear to differ –
and that is over the investment merits of gold and the companies that
produce it.
To the best of Moneyweb’s knowledge, Buffett has never purchased gold or
gold-producing companies. Indeed, his public comments on the metal have been
fairly disparaging.
Allan Gray, on the other hand, had about 10% of its clients’ funds – (at
least in its flagship Equity Fund) – invested in two gold-producing
companies: Harmony (JSE:HAR) and AngloGold Ashanti (JSE:ANG) at the end of
the first quarter of 2008.
Buffett’s most-quoted comment on gold was in a speech made ten years ago
at Harvard, “It gets dug out of the ground in Africa, or someplace. Then we
melt it down, dig another hole, bury it again and pay people to stand around
guarding it. It has no utility. Anyone watching from Mars would be
scratching their head.”
To say gold has no utility is a rather harsh comment to make, especially
considering how much blood, money and sheer human ingenuity has been spent
on digging it out of the ground, hoarding it and flaunting it.
However, there is an element of truth to the statement. Gold has very few
industrial uses, which makes it very different to virtually every other
metal that is mined in quantity.
Demand for gold is limited to two main sources: for jewellery and as an
investment or store of wealth. According to the most recent statistics
published by the World Gold Council, jewellery accounts for about 63% of
total demand and investment accounts for 21%. Industrial demand, including
electronics and dentistry, accounts for the remaining 16%.
Buffett did once acquire a lot of silver, which is similar to gold in
that it has a history as a currency and is used in jewellery. However,
silver has several industrial applications. Industrial uses account for
about half of total demand for silver.
Allan Gray has for some time held the view that gold shares are a good
investment. It took a positive view on gold shares in early 2004. Since
then, the gold index has underperformed the resources, industrial and
financial indices by a substantial margin.
The investment was made on the rationale that the dollar gold price would
rise and that the rand would weaken. Both events have occurred.
Unfortunately gold companies have struggled to turn these positive
circumstances into higher profits thanks to rising costs and, recently, the
crippling power crisis.
Allan Gray’s most recent quarterly commentary contains an article written
by fund manager Sandy McGregor titled: “Gold back to the 1970s”. McGregor
argues that after “25 years of behaving as a normal commodity, gold’s
traditional monetary role as a store of value and an inflation hedge has
started to re-emerge, boosting its price to record highs”. McGregor says
that the world is returning to a situation similar to the 1970s where fears
regarding currencies, monetary policy and inflation determined the gold
price.