Why there is a need for the gold compromise
Gold, long dismissed by Buffett as unproductive, is gaining strategic value as central banks boost reserves and geopolitical risks make dollar assets vulnerable.
For years, I've been firmly in Warren Buffett's camp when it comes to gold. His critique is devastating in its simplicity: gold produces nothing, earns nothing, and just sits there looking pretty. If you took all the gold in the world and melted it into a cube, Buffett once calculated, it would be 68 feet to a side. You could then buy all the farmland in America plus several of the world's largest companies with the money it was worth at the time. Which would you rather own--the productive assets generating wealth year after year, or the inert cube of metal?
I've repeated variations of this argument countless times to readers who've asked about gold. Buy businesses, I've said. Buy equity. Buy anything that produces value rather than something that merely reflects fear and speculation. And I still believe this fundamentally.
But something has changed. Not my principles about productive assets, but the world around them. And intellectual honesty demands acknowledging when circumstances shift beneath your feet.
Shifts in global monetary landscape
The changes are not subtle. Central banks globally have become net buyers of gold on a scale not seen in decades. China, India, Turkey, and numerous other nations are systematically building gold reserves while reducing dollar holdings. This isn't sentiment or speculation — these are measurable policy shifts by institutions that think in terms of decades, not trading sessions.
More significantly, the weaponisation of currency reserves because of the Ukraine war has altered the calculus for many nations. When the West froze Russian central bank assets, it sent an unmistakable message to every other country: your reserves aren't truly yours if they're held in someone else's system. Gold, for all its limitations, cannot be frozen by hostile governments or deplatformed by international banking systems.
Add to this the accelerating discussions about dedollarization, the expansion of BRICS, and persistent concerns about Western fiscal discipline, and you have something more than the usual gold bug hysteria. These are structural questions about the global monetary system that even gold sceptics must consider.
Gold as financial insurance
Now, you and I are not central banks, so why should any of this matter to our modest investment portfolio? Because monetary system instability, however unlikely, carries catastrophic consequences for ordinary savers. And this is where the insurance analogy becomes useful.
When you buy term insurance, you're not investing--you're insuring. You hope never to use it. You accept the cost as protection against a low-probability but high-impact event. A small allocation to gold should be viewed similarly. It's not about gold producing marvellous returns or becoming the foundation of your wealth. It's about having something that might hold value if the monetary system experiences serious stress.
Notice I said small allocation. This is where I disagree with many financial advisors who recommend 15 or 20% in gold. That's excessive. If you accept the insurance logic, then 5 to 10% seems reasonable—enough to provide some protection, not so much that you're sacrificing meaningful wealth creation from productive assets.
How should you hold this insurance? Sovereign Gold Bonds would have been the most sensible option for Indian investors, but it’s fairly obvious that they are now a thing of the past. Gold ETFs work as well. What you shouldn't do is buy jewellery and pretend it's an investment, or accumulate gold coins that sit unproductively in bank lockers whilst you pay locker fees.
Core principles remain
And here's what has definitely not changed: gold remains a poor long-term wealth creator compared to productive assets. Over any meaningful time horizon, ownership of good businesses through equity has vastly outperformed gold. This isn't debatable—it's a mathematical fact. Gold might preserve purchasing power over very long periods, but it doesn't grow it. A gold bar today is exactly the same gold bar it was a century ago. Meanwhile, a business has grown, innovated, expanded, and compounded its value.
So I'm not abandoning my stand. The bulk of your wealth-building should still come from equity—businesses that produce goods and services, generate profits, and compound value over time. That core principle hasn't changed and won't change.
What has changed is my willingness to acknowledge that a small allocation to gold no longer seems irrational, as it once did. The global monetary landscape is shifting in ways that even committed sceptics must recognise. Adding a little bit of gold to your portfolio isn't abandoning logic—it's accepting that the world is more uncertain than it was.
This is what intellectual honesty looks like in investing. You hold firm to core principles whilst remaining open to adjusting tactics when facts change. I'm still a gold sceptic, just a slightly less dogmatic one. And perhaps, in uncertain times, that's exactly the right position to hold.
Dhirendra Kumar is the founder and chief executive officer of Value Research, an independent investment advisory firm
topics
