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?