Thursday, October 21, 2010

Quote of the Day: Warren Buffett on Gold

My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"
"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

~ Warren Buffett, interviewed by Ben Stein at Yahoo Finance


  1. Reminds me of 20 years ago when the Imperial Palace in Toyko was said to be worth more than the land of the entire state of California. Too bad the Japanese didn't do that trade. Even with the housing bust they would have come out way ahead.
    When I think of gold I recall that central banks own much of the world's supply and they could dump it at any time.
    As usual Buffett offers great insight.

  2. Wow, that really puts it in perspective.

    What a combo- Ben Stein and Warren Buffett! I wish I could have been there.

  3. I think he's right, but he's missing the reason why someone would want to hold gold. He's right in that all of that gold just sits there and look pretty, and I agree with him 100% there.

    I think his premise is wrong though. Gold isn't an investment, it's a form of money. You hold some in order to hedge against depreciating currencies or against problems in the fiat system. I think it's its role as money that should be examined and considered.

  4. DYI, the central banks could sell gold, but they're not. The Indian Central Bank is buying, and so are the Chinese. The Brits don't have any to sell, they already did that in the 90's.

  5. ...and that is why I have no gold in my portfolio.

    but I do have silver, and that's because it doubles as both PM and Industrial metal...

  6. @Investitwisely: You are partially correct. It has historically served as a form of money (though it does not do so currently), but it is also a commodity with use value in things like jewelry and electronics, and it is traded on a commodity exchange with a price that fluctuates.

    This is where the gold investors' thesis goes awry. Buffett says don't invest in it because the cost is unjustifiably high compared to other alternatives for the same price, but goldbugs want to say it is all about the potential to hedge against deflationary alternatives such as federal reserve notes. But if have paid too much for the gold in the first place, its potential as a stable store of value is gone, as much of the price I paid for that gold on the front end was likely it's speculative bubble price. What Buffett is asking is for you to rationally evaluate what you are getting in exchange for what you are giving up. It already is a dead investment, in that it just looks pretty and produces no income, but at this point you also are buying in at a highly speculative price.

    Similarly, if I had bought Coca-Cola stock in 1999 when it carried a p/e ratio in the 60s, I would have encountered the same issue. It is a company that will no doubt continue to produce returns that are superior to that of holding inflation-threatened cash, but if I paid too much for it's earnings on the front end, then I didn't get enough proverbial bang for my buck and those potential returns would be illusory.

    Chris Goodell
    Memphis, TN