Warren Buffett: What’s So Great About Gold?

Gold coins and ingotsWarren Buffett, in a recent article in Fortune (“Warren Buffett: Why stocks beat gold and bonds,” 9 Feb 2012), identifies three major categories of investments — currency-based investments, sterile assets, and productive assets.

In his article, Buffett makes some comments about gold that are sure to be controversial. He classifies gold under the category of sterile assets — “assets that will never produce anything, but that are purchased in the buyer’s hope that someone else — who also knows that the assets will be forever unproductive — will pay more for them in the future.” (Photo: Linked fromĀ Buy Silver Gold)

Then he goes on to write,

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional 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.

He then goes on to draw a contrast between the investment value of today’s $9.6 trillion of gold and an equivalent amount of truly productive assets. With that same $9.6 trillion, he says, “we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge)” — a set of investments much more likely to produce value in the future than that big block of gold.

I’m certain there are good arguments against it, but I find his reasoning sensible and interesting. He also refers to the 17th-century tulip bubble, which I have written about previously — see “The ‘Tulip Mania’ Economic Bubble: Source of a Myth?

AB — 10 February 2012

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