March 25th, 2011 
Category: 
The legendary investor, Warren Buffett, is an iconic figure in the world of investing. He had an interesting interview earlier this month on CNBC in which amongst other things, he discussed commodities in general and gold in particular. I always find it fascinating when someone, regardless of his fame or status, sticks to his thoughts in public even if it means going against mainstream preaching on a particular subject. Here’s the part I found to be interesting regarding assets to buy, particularly gold:
“So there are two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there are assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And those are two different games. I regard the second game as speculation.
Now there’s nothing immoral or illegal or fattening about speculation, but it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something you expect to produce income for you over time. I bought a farm 30 years ago, not far from here. I’ve never had a quote on it since. What I do is I look at what it produces every year, and it produces a very satisfactory amount relative to what I paid for it.”
“If you took all of the gold in the world it would roughly make a cube 67 feet on a side. So if you took all the gold in the world, we could have a cube that went down there 67 feet… 67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today’s market prices about $7 trillion. That’s probably about a third of the value of all the stocks in the United States.
Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They’re valued at about $2 1/2 trillion. It’s about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,’ and it says, `I don’t do anything. I just stand here and look pretty.’ And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I’ll take the farmland and the ExxonMobiles”
Even though I am clearly biased toward oil and gas, I have nothing against gold or gold bugs, even the amusing kind that thinks gold should be stacked right next to canned food, guns and ammo because of impending doom. I personally prefer silver as it doubles as an industrial metal and I missed a very nice run-up in silver stocks recently. But when it comes to gold, I will have to agree with Warren. I look at my behavior as a gold consumer and I don’t see anything compelling in buying this metal. I stopped buying gold jewelry right after my marriage years ago simply because I felt it was a waste of money. Guess where most of the gold jewelry is sitting now? In a bank vault, so it’s actually costing us money to protect from loss instead of paying us a dividend. That does not mean one should avoid having exposure to gold in his portfolio so long as the printing press is on in the US. But since energy investments also provide the same protection, I’ll stick to them as they have more utility. Can the world economy survive a day without hydrocarbons?
Is gold in a bubble right now? I guess it is, but many people will deny it just like many people denied there was a bubble in tech stocks a decade ago. No one knows how long the commodity boom will last or how high gold and silver will go. I think that the first uptick in interest rates in the US will turn out to be the needle that will deflate the gold bubble.
What is your opinion regarding investing in gold?
My DIY stock portfolio is overweight in Canadian oil producers for a reason. I believe Oil consumption is on the path of growth for the next decade and I intend to take every advantage possible of it:
(1) Industrial use: I think that gold would be used more if it wasn’t so precious. It has many great qualities, but other metals, which are not as good, serve as substitutes.
(2) Buffet is right that gold is not an investment; but then neither is a stock pile of oil, or whatever the commodity happens to be. It is rather store of wealth; it may even be a speculation depending on the function that person has for it. But for a large number of investors, gold is not a speculation but a store of wealth. It is a traditional form of savings.
(3)It is losing venture to put money at interest and to find that the inflation rate exceeds the interest rate. Then the investor has nominal gains with substantial losses. With an inflating currency like most fiat currencies, gold holds its value better.
(4) The above quote by Buffet has done and will do real harm to everyday investors who would do well to put a certain percentage of their wealth in the precious metal sector. This sector has been very good to me and it is related to the monetary policy which makes fiat currencies uncertain and ephemeral vessels of value.
(5) Gold and silver are not the only protections against inflation. I’ve thought of some others that can help retail investors (at least me as an investor): dry beans, wine kits, and a new car.
(6) Finally, standing around and looking pretty has great value that the utilitarian Buffet who is practically autistic in his relations with real people, doesn’t apparently understand.
I definitely think gold is in a bubble, it just continue to be driven up by speculative buyers. There are definitely far less physical gold buyers, than in the past because of the drastically high prices. Lets hope that the dollar makes a run, so that the prices of gold will drop.
Jeff: please compare the 30 year gold chart http://goldprice.org/30-year-gold-price-history.html with the 30 year money base chart http://research.stlouisfed.org/fred2/series/BASE
Gold is just keeping up with the money base. That is not an indication of a bubble, but an indication of the debasing of a currency.
Buffett is impressive putting things in perspective.
I’ve always thought of Buffett as a bit of a boob, not the least reason being his social views on taxes. Although I agree with his take on productive farmland, the argument about comparing *all* the gold in the world to other assets is foolish. We would also compare all the tractors in the world against all the semiconductor companies: which would you rather have? And what would you do with millions of tractors? Silly.
As for gold being in a bubble? Until people at work start giving out hot stock tips on gold mining companies, I don’t thing we’re there yet. Just an opinion.
[...] Warren Buffet On Gold Investing Mich takes a look at the increasing price of gold, and how warren buffet explains this phenomenon. Though there is no longer any real physical gold buyers, speculative buyers continue to drive the price up. [...]
I love the wide spectrum of opinions. For some of us Gold is in bubble territory while for others it is simply reflecting a debased currency.
I think the safest place to be inside this wide range of views is to keep ~10% exposure to metals in a balanced portfolio and re-balance as the market evolves.
You already know my opinion on this Mich.
I agree on the ~10% exposure and rebalancing; that is my own personal take on things too.
WB is very wise! How can one argue against his logic!
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Apparently standing around and looking pretty can fetch 1/4 million british pounds per hour: http://www.virginmedia.com/celebrity/pictures/how-much-to-hire-a-celebrity.php?ssid=1
This is perhaps something that the value investors and his sheep don’t really seem to understand. Of course gold will never tarnish, but in about ten years, Paris Hilton is already starting to show signs of wear and tear.
Its always funny that when you post about gold, you get some very far reaching opinions!
I thought gold was sky high, until I learned it’s simply tracking the true cost of inflation (not the fake CPI). I still think it’s due for a correction, but I wish I had of bought some when it was $600 an ounce. Over the long-term, if it only paces inflation, then it’s just a store of value.
There’s a reason Warren Buffet became the richest man in the world. He understands the value of an investment is based on earnings. Everything else is speculation. That’s why he avoided unprofitable tech stocks and other popular investments that wound up worthless. Templeton, Graham, Lynch and other great investors looked for earnings.
@PWD, since we’re talking about gold, Imagine how much more it would fetch if you add fondling as an option
@robert, that’s the fun part!
@Bret, very well put Bret, in hindsight, buying gold at $600 or $900 an ounce would have turned out very profitable!
Do you think we might look back to $1400 gold and regret not buying next year?
[...] Warren Buffet on Gold Investing (Beating The Index) [...]
Can’t argue with the Oracle, but could he be using 20/20 hindsight to make his argument? Since gold has run up so much, isn’t it a safer than safe bet to go with “farmlands and ExxonMobils” anyway? I always thought the super rich were very aggressive and speculative. But WB pretty much trumps that.
I believe gold is in a bubble right now and will be as long as it exist.
I fully understand what Warren Buffett is saying, but I do find it rather hard to reconcile with the fact that he purchased 130 million ounces of silver in the late 90′s. Has he changed his investment philosophy? Is he commenting about the current price of gold? Is he bitter that he missed the silver move? Think about his profit if he had sold silver at $37 an ounce. That is about $4.8 billion sale and about $3.9 in profit. He could have quadrupled his investment in 13 years which works out to 28% annually.
[...] the controversial Warren Buffett on Gold Investing article, I thought it would be interesting to read a different opinion on gold. I asked my fellow [...]
@Buck, I would go with “farmlands and ExxonMobils” as well, it’s the safer bet!
@Aybi, In this case I guess you’re holding a lot of gold in your portfolio?
@options, that would have made an excellent question to Warren on that interview given where silver is today!
[...] the controversial Warren Buffett on Gold Investing article, I thought it would be interesting to read a different opinion on gold. I asked my fellow [...]