Thursday, February 9, 2012

Warren Buffett as a Gold-Hater

Warren Buffett is out with an anti-gold rant in Fortune magazine:
Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would 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 about $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 (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). 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 annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain 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 the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Here's the problem with Buffett's rant. Gold is an alternative money. It is not productive land or a piece of capital. It shouldn't be compared to farmland, to Exxon Mobil etc. It is a means of exchange.

Gold needs to be compared to its alternative, in the U.S., the dollar. The proper way to look at the difference between the two is this way. If you take that 170,000 metric tons and put it into a baseball field and next to it you put the total money supply, over time you will see that the gold supply increases by roughly 2,500 tons per year.

According to the World Gold Council:
The stability of production comes from the fact that when new mines are developed, they’re mostly serving to replace current production, rather than expanding global production levels.

Gold production does experience comparatively long lead times, with new mines taking up to 10 years to come on stream. That means mining output is relatively inelastic, unable to respond quickly to a change in price outlook. Even a sustained price rally, as experienced by gold over the last seven years, doesn’t translate easily into increased production.

Contrast this with the supply of money (M2), which is controlled by the Federal Reserve. Rarely is money growth below 5% on an annualized basis. What's more there is no natural check on the increase in dollars as there is with gold, which has to be mined out of the ground.:

FRED Graph

Looked at this way, which is the correct way, gold is a damn good place to put your money because if money growth continues at current rates, the cost of farmland is going to be much more expensive, but the price in terms of gold is likely to keep up, but if you tuck that same amount away in physical dollars, you are going to come up way short in terms of being able to buy the same amount of farmland.

Further, if we can use voter support for Ron Paul as a rough proxy for how many people currently hold gold, then it's only around 10% to 12%. As prices climb the potential exists for many more people to want to hold gold. Since current gold holders aren't likely to give up their gold cheaply, the price of gold is likely to climb much faster than farmland.

Of further note, Buffett is becoming quite Keynesian in his manner of aggregating things in ways that can't be aggregated. In his argument, he talks about an individual buying 16 Exxon Mobils, well damn, there aren't 16 Exxon Mobils. It's a phony proposition. Someone with $9.6 trillion to invest is going to have a very difficult time investing most of his money in anything close to Exxon Mobil returns. Indeed, Buffett in the Berkshire annual report proves this point when in recent issues he always "advertises" that he has money for the right acquisitions. If these great returns are so available, why isn't Buffett just investing in them?

Bottom line: The more of an oligarch Buffett becomes the more absurd his arguments become. The man is now dishing full out monetary quackery, ignore the nonsense, buy gold.


  1. "Can you imagine an investor with $9.6 trillion selecting pile A over pile B?"

    you mean the fed, buffy? they sure do have a big pile of it hoarded in their basement.

    and what does buying or "investing" in gold have to do with a free-market money that surely would elect one grain of gold as its basis?

  2. Warren's late father, Congressman Howard Buffett, wrote in 1948:

    ***I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it. Also those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money.***

    I'm sure Howard had no idea that he would be writing about his 18 year old son Warren.

    (quote from:

    1. Chris is dead-on.

      Arguments about what money should be are meaningless. Gold is the primary monetary metal, and silver secondary, and it has been so for over 6,000 years, regardless of the lies Helicopter Ben tried to foist on someone as knowledgeable as Ron Paul when Ron Paul simply asked Ben if gold was money.

      All the Establishment Banksters can do is lie at this point, in a vain effort to buy time. Their system is failing, and can't do otherwise. EVERY fiat currency dies, sooner or later. Ours is no exception to the rule. I believe the next financial earthquake will come when the Chinese are no longer willing to purchase our debt, and the dollar loses its reserve currency status. These events are coming, whether we choose to look at them or not.

    2. Anonymous, it is now May 8th, Warren Buffett and Charlie Munger have spoken again and Gold has dropped to 1604 and falling. I clearly understand the downside of the over printing of fiat currencies but Buffett states "Gold was selling for $20.00 and once and our stock sold for $15.00 a share when we started out. Now gold sells for about $1600 and ounce and our stock sells for $120,000 a share". Thats about it Anonymous, you and I both know the stock buying herd WILL listen to Warren Buffett. Look out below for gold if falls below support at 1600.

      As for China.. don't worry, they will not renege on their deal to purchase US debt now or in the future as that would be bad for business.

  3. I wonder how deep that gold would sink into the baseball infield?

    1. Warren,

      Is one of the Greatest Financial Minds of our Time! Much like an Einstein, I will lsiten to warren Buffet. He makes way too much sense to me...

      Go rub your Gold...Its worthless, just like paper.. But Exxon Mobile, Apple computer, Intel, Wal-mart have real Value...

  4. BS Buffet is backing up the truck on Gold. He just said the ones holding bonds will be in the soup lines?

    The man is a propagandist fool. Thanks Warren I'll buy your Gold...

  5. He obviously doesn't view gold as money. If he did he would realize pile A was all of the money in the world which would buy all the assets in the world not just farmland and non existent Exxon mobiles. I would be the investor that would take that pile.

  6. Warren needs to retire and get out of the public lime lite. He is destroying what little respect the business world has for him with this kind of bizarre thinking.

    Anyhow, since he's now into absurd analysis, here's one for him to ponder. A $10000 wrap of $100USD weighs 3.2 Toz and can be exchanged for 5.8Toz of gold. Amazingly 9.6Toz of paper $100/bill can buy a car that weighs in close to 2T and is far larger then the size of the money being exchanged. It could also buy an acre of land where I live, that weighs even more then then car and is far larger then the three $100 stacks of cash exchanged for it. Amazing!!!

  7. "The more of an oligarch Buffett becomes the more absurd his arguments become."

    No, what's absurd is this blog post. Hopefully your readers aren't as intellectually lazy as you make them out to be... and, instead, will actually click through to Buffet's article. Amongst other things, there they'll find a lengthy discussion of dollar devaluation, inflation tax and gold's specific valuation w.r.t "fears of currency collapse". They'll also see a nice picture showing returns on gold, t-bills and stocks since 1965, and Buffet's personal assessment of why equities constitute the superior investment.

    How about critiquing Buffett's logic instead of straw manning his positions and imagined oversights?

    "Buffett is becoming quite Keynesian in his manner of aggregating things in ways that can't be aggregated. In his argument, he talks about an individual buying 16 Exxon Mobils, well damn, there aren't 16 Exxon Mobils."
    Groan. Yes, because the world's foremost investor truly believes that there are 16 Exxon Mobils out there, instead of making a perfectly simple point for illustrative purposes. I enjoy how you accuse Buffett of unjustified aggregation and yet, in the immediately preceding paragraph, use voter support for Ron Paul to draw conclusions about the percentage of gold holders in the world.

    1. Hey GM,

      Chill. There's a big difference between imagining 16 Exxon Mobils and speculating that Ron Paul supporters are gold owners.

      As for Buffett's dance about devalued currencies, he still comes out anti-gold and does so because as Wenzel points out, Buffett doesn't understand the difference between money and capital.

      Further, Buffett comes pretty close to making the "you can't eat gold argument" when he writes:

      " Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production"

      You can find better evidence of Buffett's misunderstanding about the role of gold than this.

    2. "There's a big difference between imagining 16 Exxon Mobils and speculating that Ron Paul supporters are gold owners."

      The point isn't that Ron Paul supporters aren't gold owners; I'm sure most of them are. Rather, it's that the number of Paul voters somehow provides an insightful metric for determining what portion of people around the world -- even in the US -- hold gold investments. Of course it doesn't and that's your bad aggregation right there... Not this bizarre hand-wringing over a simple illustration that very effectively conveys financial scale (i.e. 16 Exxon Mobils).

      As for Buffett's misunderstanding of gold's value... I still think that you are unfairly giving him short thrift. Indeed, just look at the sentence immediately preceding the one that you quote from Buffett's article:

      "The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful)."

      Now, call me crazy, but I think the person who wrote that has a pretty good handle on gold's value as an alternative to fiat money.

    3. GM, if I may. Wenzel points out the most important problem with Buffet’s article, he does not distinguish between capital investment and holding money. Gold bullion is valued because it is considered “real” money by some people, in addition to its industrial/jewelry uses. People hold gold like Buffet holds T-Bills. Since Buffet prefers T-Bills he simply calls gold an irrational bubble like internet stocks whose bubble he doesn’t understand was caused by the Fed. He further offers his opinion that gold has a “staggering” value. Ho offers only uninformed opinions not any arguments to refute.

      Of course investments are meant to appreciate over time as opposed to money holdings. As Wenzel points out the comparison should be between like money holding investments. Would any investor pick the pile of gold or a pile of US T-Bills (lets not mention Euros) for his hypothetical 100 years? He does seem to indicate a fondness for hard asset companies (oil, agriculture, gold miners?). which most “gold bugs” would find suitable investments. He seems way off base suggesting that it is a certainly that KO, IBM or AIG are guaranteed survival at least if we have some form of free markets. Yet he implies a rejection of index investing, so how can anyone know which companies will survive? I think it is best described as a rant, devoid of little if any insight.

    4. The other thing to realize is that when I buy gold, I'm not investing. I'm storing the value of money I used to buy the gold in it.

      In other words, gold isn't a tool for investing. It's a tool for storing my wealth.

      Looked at in that way, the comparison Buffet makes is apples to oranges.

      For fun, though, go and assess the value of the S&P 500 in gold for the last decade, and then tell me just how much the value of the S&P 500 has increased.

    5. Josiah, you may and let me respond in kind:

      Indeed, Buffett does talk about capital investments and holding money at some length. It is abundantly clear that he understands the difference and, moreover, that he understands gold's current valuation in the context of this difference. Again, why do you think spends all that time talking about inflation tax and the (tail) risk of complete fiat insolvency? It takes a most uncharitable (at best) or willfully ignorant (at worst) reading of Buffett's piece to arrive at different conclusion.

      My problem with "gold bugs" is they take any contrary opinion on the virtues of "sound money" as an affront to all that is sacred. Here Buffett makes some perfectly sensible comments -- covering much more ground than might necessarily be expected in an excerpt of that length -- and the knee-jerk response on this forum? "What a moron! It's amazing that someone so dumb has made so much money! It has to be all his crony/statist/scumbag connections!" Straw-manning and churlish nit-picking (read: 14 Exxon Mobils) soon replace any kind of rational response.

      Now, as it happens, I hold some gold and even advised others close to me to invest in the stuff back in early 2008 when the crisis started unfolding in earnest. It has obviously turned out to be profitable decision for all involved. However, I also maintained that CPI inflation would not go through the roof, while T-bill yields would stay low as well. And, guess what? I feel pretty satisfied with those predictions to date. My valuation of gold has had very little to do with a belief in the superiority of the gold standard, and much more to do with recognising the value of tail-risk investments; especially in this age of sovereign insolvency and the relative dearth of alternative investment opportunities out there.

  8. It seems that once a person becomes super wealthy, Soros, Buffett, Bloomberg, Trump, Koch, Rockefeller etc., they instantly embrace the state, promote regulating every thing under the sun and get massive media exposure in doing it.

    1. This seems to be a sad fact for *certain* wealthy individuals.

      I think the situation you described is a result of several things:

      A wealthy person has to consciously resist the temptation to believe he/she is better (or superior) to others who have less money. If the wealthy person accepts the belief that they are some kind of superior being, then this is where I believe the slide to statism begins.

      Second, while I've never been around the super-rich, I would bet that they are surrounded by droves of yes-men. With super wealth, I'm sure you can buy the best yes-men around. And if one deviates, you easily fire him and buy a replacement (of which I'm sure there's an endless supply).

      So if a person is super wealthy, believes him/herself to be a superior being, and is surrounded by yes-men every second of the day, I see the transition to statism to be an easy one.

      After all, here is a tool (the monopoly on the use of force) that can be used to bring about his/her superior vision for the rest of the unwashed barbarian masses.

      That's why the down-to-Earth, live-and-let-live wealthy get much respect from me. They are the ones who passed the test in my view.

      Especially if they surround themselves with yes-men.
      -Fear of losing

    2. Don't forget that if they establish positions they don't want to have to compete to keep them and therefor embrace the entity that can crush their competition

  9. Gold isn't supposed to earn you 'returns'. It's money. The 'returns' you're making are from currency devaluation. Right?

  10. I don't know why Buffet decided try and scare people away from gold by mentioning the annual production.

    160bn in annual production with 9.6tn in current stock means gold supply is growing at a mere 1.6%, far less than paper money growth and when you consider a portion is also consumed in jewellery and industry growth is even smaller.

    Why not mention money supply aggregates and their growth that "need be absorbed" you crony scumbag?

  11. Like most wealthy people, Buffet is a one trick pony. A genius at valuing a company but lacking in common sense about much of anything else(like his incoherent take on taxing the rich)

  12. Since Buffet is a "value" investor, I would think the logical question is which pile is more likely to outgrow the other in value, not in size or productivity. Also, all U.S. cropland and 16 ExxonMobils sounds like a lot, but from a global perspective, it is not.

  13. WB is surely a smart individual and savy investor. He would buy whatever he feels will turn a profit or make good monetary sense, including Gold & Silver. Gold and to a lesser extent silver is the antithesis of fiat currency. By disrespecting gold he is in essence supporting fiat currency. Here ia a thought to ponder; JP Morgan was thought to be one of the richest men in America and the world. It has been revealed recently that he was not as wealthy as first thought, altough he was worth ~ a million dollars, which was a sizable sum at the time, he was actually a front man for the Rothchild banking dinesty of Europe, who actually bankrolled and owned everything even to this day. Perhaps someday it will be learned that Warren Buffet is also just a front man for the same interests.Gold & Silver provides/preserves the power to the prople, fiat currencies transfers the power to the Political Class/Oligarchy.

    1. WB also took a trip to the Rothschild mansion in England along with Schwarzenegger

    2. Exactly, nothing else needs to be said.

  14. Well Gold might be the purchase of a life time even at $1745.00 an ounce but the assumption is that this extra printed money will find its way into the system as in inflation or hyperinflation. It may come as a complete shock to most but Brenanke is right. Core inflation is not a problem. Deflation is still in charge all be it ever so silent. Don't be shocked this year when deflation again hits the markets and demolishes the bulls and bears alike. Gold is no hedge against deflation and it may be a stable form of currency but I would be willing to bet that we will not go beack to it any time soon. Just a note that the USD is going to strengthen this year.

  15. I thought the purpose of a stash of gold, as well as a stash of cash is to have savings which then can be applied to a future purchase (stocks, a car, whatever). If so, you then have to figure out which type of savings will be worth more at the time of purchase.

  16. In the last five years Berkshire Hathaway Inc. price is almost the same as today. Gold in the last five years has gone from around 630 to 1730 as today´s price, that is a return of 175% return. If we make the same comparison 10 years from now the difference is much more dramatical. So I wonder if Buffet is losing his luster or if he is getting dumber instead of smarter as years goes by.

  17. Mr.Buffet is in bed with the Obama administration. He has made millions of dollars on profit helping this administration.Of course he is against Gold.

  18. Why anyone listens to "The Blowhole of Omaha" espouse his bs mystifies me. He has fought the IRS over business taxes since 1992, yet thinks wealthy should pay more? You don't think BHO vetoed the Keystone Pipeline so his buddy Buffet could haul all the oil in his solely owned Burlington Northern RR, thereby raking in $$millions do you? Think again.

  19. I would not be surprised to discover that WB is secretly buying gold, just like the Chinese. Of course, these big buyers want to get in ahead of the crowd. Remember, Wall St is all about manipulating public opinion.

  20. And if tomorrow that cube of gold became the sole global currency, how much would it be worth then?

  21. As a part time reader of some of the stock investor comments (yahoo, investor village, etc) I am constantly confronted with paid short sellers commenting negatively on these sites, trying to drive down the particular stock prices to make money for their short seller accounts. Yet we listen to Buffet, Soros, Trump, et al. sitting there with baited breath as though they are interested in our financial well-being. What BS. I figure, when these crooks tell me they don't like gold, or a stock, or any financial instrument, they are engaging in disinformation. Maybe not all the time, but just enough to make herd buyers panic and sell their assets out on the cheap, and they scoop them out at lower prices, either for permanent accounts or buying back their short positions at a lower price. Just don't forget, Soros learned his "investing" from stealing Hungarian Jews' gold from them right before he held open the Nazi cattle train doors before they left for Auschwitz. The old devil in the Garden didn't tell Eve a falsehood. He messed around with the truth just enough to confuse her and screw over the human race. Word to the wise.

  22. During the past decades I have come across a number of people who have done very well for themselves on the share market. What was interesting about them is that they all admitted to being ignorant of economics. A characteristic they apparently share with Buffett. However, there was one particular feature that put them a cut — a very big cut, come to think of it — above Buffett: and that was their awareness that making a lot of money did not make them morally or intellectually superior to the rest of the citizenry. But Buffett is evidently the kind of billionaire who has come to believe that his vast wealth gives him the right to govern others. And if you are that kind of person, then the Democrat Party is just the place for you. - Gerard Jackson, Brookes News (2007)

  23. Buffet makes the argument, would you rather own gold or productive assets like farmland and companies? Wenzel counters by saying you can't make that comparison, your choice is between two forms of money - gold or paper currency. Of course, reality is that your choice is between any or all of the above: productive assets, gold, or paper currency; and it is not a singular choice, you do not have to put all your money in one asset class. There are risks associated with all three asset classes; the value of all three can, and do, both increase and decrease during different periods of time. However, Buffett's point is valid - your best road to building (and preserving) real wealth is through owning high quality productive assets because like gold, they will keep pace with the rate of inflation (since they are denominated in the dollar terms) and they will continue generating additional wealth in all times through their productive activities. Therefore if you are going to allocate the majority of your assets to only one asset class, pick high quality productive assets. Only a complete fool would put all of their money in gold or paper currencies - even though you might do very well with that strategy during certain times. However, you would be much less of a fool to allocate all of your wealth to productive assets. Those are the simple facts.

  24. It is of note, that a well thought out and written piece, by Warren Buffett, should be labelled as a rant; by someone who then chose to rant against him. It is a well travelled path by some, to accuse others, of defects to which the accuser is oneself guilty of.

    I speak not however against the merit of gold as money. And I strongly believe, that is someone were to take a stack of $100 US bills, and at today's prices, convert them into gold; that in doing this, 100 years from now the gold's purchasing power would vastly exceed that of the stack of US currency.

    But this only addressed the risk associated with fiat currencies. And I might add the less than honest political agenda for debasing currencies.

    Warren Buffett's piece avoids this whole thorny issue of the political agenda that leads to the debasing of currencies. And does this by eliminating the fiat currency equation from his analysis.

    And if the correct question is asked: That being what will the future value 400 million acres of farmland, 16 Exxon Mobils plus one trillion dollars be versus the value of the gold mentioned; my inclination would be in favour of the pile Warren Buffett has given preference.

    This of course is simply my opinion. And I am fully open to the possibility that Warren Buffett and I am wrong. All I wish to point out, is that simply labelling Warren Buffett's piece as a rant; does not ipso facto make it true.

    Carpe Diem


    1. Agreed, anyone interested in the future welfare and wellbeing of their children and grandchildren needs to secure a legacy with some gold & silver.They will love you for it.

  25. Everyone has missed it.
    There is nothing about gold that makes it an "investment" unless you consider it an investment in "insurance."

    Gold isn't about a return on your money, it's about the return OF your money.

    It's the thing that remains, no matter what else might happen.
    Therefore, given a 20 or 30 year span, if nothing goes wrong, of course Exxon with reinvested dividends increases your store of paper value more than gold would have - as it should.

    However, what if the dollar is replaced, america collapses (or whatever country you're living in)
    or Exxon goes bankrupt, etc.

    That's all gold is: A guarantee to have SOME value. That value will rise & fall depending on what
    paper system it's compared to, but measured in ounces, it never ever changes.