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Saturday, March 26, 2011

Buffett on Gold

Mich, at Beating the Index, presents some comments made by Warren Buffet on the difference between investing and speculating, specifically in reference to gold. Buffett relates the value of gold to real productive resources - the resources from which value is created. This puts the value in "real terms." Understanding economics requires looking at magnitudes in real terms. For example, forget inflation and the value of the dollar for a minute. How long does the average worker today have to work for an automobile or, say, 100 gallons of gasoline, or, for that matter, an ounce of gold?

Think back to '73/'74 and OPEC quadrupling the price of oil overnight. In effect, they were saying a U.S. auto was worth so many barrels of oil and then turning around and saying the U.S. needed to pay 4 times as many autos to get the same number of barrels of oil. Obviously the U.S. couldn't do that, especially in the short-run, and had a choice between paying them funny money, i.e. deflating the currency or going into a severe recession. We chose a combination of the two. Take a look at the inflation rate in the early '80s.

The same sort of analysis was done in the late '80s with respect to Japanese real estate. A square meter of land in parts of Japan was going for approximately $100,000! The sport du jour was comparing Japanese land prices to land prices in prime locations around the world. The end result wasn't pretty.

In his analysis, Buffett figures that all the gold in the world would amount to a cube 27 feet/side. It would be valued at approximately $7 trillion. Compare that to the value of farmland in the U.S., at roughly $2.5 trillion, and 7 ExxonMobiles along with $1 trillion left over. Buffett points out that you are comparing something pretty to look at with something that is productive. Gold is bought not because it is used to produce something valuable but because the buyer hopes someone else will come along and be willing to buy at a higher price.

In the end, Buffett chooses the farmland, etc., and Mich agrees. I agree also. What about you?


  1. I also agree with Buffett. I'll take the farmland, stocks, etc. Perhaps gold will turn out to be an excellent investment, but the lack of cash flows make it a very difficult asset to value.

  2. Buffett makes a similar argument towards the dollar! He is all for money that is 'earned' and not printed or speculated!

  3. If it's a choice between all the gold and all the farmland + some to spare, then I take the farmland. However, I think Buffett is ignoring the utility of gold as money. It's not just something pretty to look at, but the mere fact that it is scare and has historically been used as money is what still gives it value today.

    Buffett is really setting up a strawman because one should look at gold as a currency, not as a quasi-stock or bond. I do agree that some people are just looking to trade up the value, but isn't this true of basically anything that can be traded?