Warren Buffett’s View Of Gold
April 4, 2012 5 Comments
“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
~ Warren Buffett, Berkshire Hathaway 2011 Annual Report
Warren is a well known critic of gold but note that even he will acknowledge that when people a century from now are fearful, it’s likely many will still rush to gold.So gold is bound to be worth more than zero in any currency, a century from now.Moreover who can say what will happen to the Exxons of today?Will they go the way of Kodak or Enron?Will I or my heirs have the good sense to jump onto other winners as the winners of today go under?Will we be able to do this time and time again?Remember one fatal mistake can reduce the value of one’s securities to zero.Thirdly,how many of us can own America’s farmlands or any other farmland and for how long?Land always belongs to the person with the strength to seize and hold it.Who knows what will be the fashionable political ism a hundred years from now or the political boundaries then?But it’s a cinch that as gold will still be worth something,so we can use some of it to buy farm produce or farmlands.So while Mr Buffett’s words are worth pondering over he has made no convincing case to eschew gold altogether.It is far simpler to pass on gold to one’s descendants and charge them to keep it safe and use it sparingly to buy other productive assets as required and to periodically use a little of one’s current income to buy a bit of gold to replenish and add to one’s stock.