It’s not new that Berkshire Hathaway’s Warren Buffett prefers productive assets to unproductive ones, but his latest letter to shareholders sets out his compelling argument…
…The major asset in this category is gold, currently a huge favorite of investors who fear almost all otherassets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however,has two significant shortcomings, being neither of much use nor procreative. True, gold has someindustrial and decorative utility, but the demand for these purposes is both limited and incapable ofsoaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will stillown one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During thepast decade that belief has proved correct. Beyond that, the rising price has on its own generatedadditional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.As “bandwagon” investors join any party, they create their own truth – for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excessesthat can be created by combining an initially sensible thesis with well-publicized rising prices. In thesebubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market,and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubblesblown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wiseman does in the beginning, the fool does in the end.”
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, itwould 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 (400million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s mostprofitable company, one earning more than $40 billion annually). After these purchases, we wouldhave about $1 trillion left over for walking-around money (no sense feeling strapped after this buyingbinge). 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 annualproduction of gold command about $160 billion. Buyers – whether jewelry and industrial users,frightened individuals, or speculators – must continually absorb this additional supply to merelymaintain 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 thecurrency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to itsowners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The170,000 tons of gold will be unchanged in size and still incapable of producing anything. You canfondle 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’mconfident, however, that the $9.6 trillion current valuation of pile A will compound over the century ata rate far inferior to that achieved by pile B.
Related links:
Chairman’s letter — Berkshire Hathaway
Warren Buffett chooses his successor — FT Alphaville