Warren Buffet doubts gold

Warren Buffet points out that land produces wealth, and gold does not. His argument leads to the conclusion that had a Roman in the time of Caesar invested a talent in land, or deposited some money with the money lenders to earn interest, his descendents would now be worth 1067 talents, or about one trillion trillion trillion trillion trillion trillion dollars, whereas had that Roman buried a talent of gold in the ground, that Roman’s descendents would now be worth about one talent, which is a few hundred dollars.  Clearly there is a fallacy somewhere.

Warren Buffet tells us:

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). 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. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow.

Not so. What motivates most gold purchasers is insurance against their fears becoming true.

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.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, 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 bubbles
blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man 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, 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 $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 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).

Warren thinks that if you invest in cropland, rather than gold, then at the end of the day, you will have the cropland and the crops.

But alternatively you get a one way trip to the gulag as the great and the good, the wise and the virtuous, look for scapegoats to punish for the failure of utopia to arise at their command. They command utopia, notice that there is no food. Obviously those who own cropland must be at fault, and need to be punished.

What motivates most gold purchasers (and thus most bitcoin purchasers) is their belief that their fears might well prove correct, that without gold, they might find themselves penniless refugees, or, worse, without even the ability to become penniless refugees, because they lack the funding to leave a collapsing society.

Gold is an end of the world investment, insurance against total institutional collapse. We tend to underestimate fat tail risks such as total collapse, since the English speaking world has never had a total institutional collapse since the battle of Hastings in 1066.

This however, is survivorship bias. In the rest of the world, total institutional collapse has been rather common. What would have been the best investment for a Russian, an Austrian, a Hungarian, or a German in 1900?  Survivorship bias causes us to overlook fat tail risks.

Warren Buffet correctly argues that gold will, on average, lose value. However there is a significant risk that everything except gold will lose value.

9 Responses to “Warren Buffet doubts gold”

  1. dave says:

    meh, even in 1066, it was just a change of leadership. Ordinary peasantry went on about the same, and at some point noticed the elites were speaking a different language and putting crenelations on their castles.

    • jim says:

      If someone invested in land before 1066, his investment was gone after 1066.

      As for the ordinary non landowning peasant:

      I notice that the anglo saxon words for beef, pork, mutton, eggs, and milk (the noun) did not survive, though milk the verb did survive. From which we may conclude that those anglo saxons who survived the Norman Conquest found themselves on an almost strictly vegetarian diet. Humans cannot survive on a strictly vegetarian diet. You get B12 deficiency, iron deficiency, and numerous vague deficiencies that no one has a supplement for, but are fixed by eating meat. So every anglo saxon that survived had a mighty tough time and a lot of them did not survive.

      • dave says:

        I’m not sure if I would extrapolate all that from language changes. Maybe, hell I don’t know. I doubt most folks had either gold or land, and life for them probably didn’t change much, at least until the Edwards made them into longbow men.

        Your point is right on though that when push comes to shove investing in land is not the wonderful thing Buffett thinks it is.

        Ask the Rhodesian farmers how that worked out.

        • jim says:

          I’m not sure if I would extrapolate all that from language changes.

          It could well be that the language changed due more the influence of restaurant menus than the influence of artificial famine – but artificial famine has long been a popular instrument of conquest.

      • Mike in Boston says:

        I guess you are using the word “vegetarian” to mean not a diet lacking meat, but a diet free of animal by-products, i.e., what many term “vegan”? Milk does contain B12, as does eggs.

        There are East Asian communities which eat no animal by-products. It is speculated that they get B12 from seaweed. Interestingly, seaweed was once also an (unheralded) part of the diet of the coastal Irish population.

        For a more recent example of how gold is handy during times of political transition I can highly recommend Miron Dolot’s “Execution by Hunger: The Hidden Holocaust”. The author’s family, unlike everyone else they knew, survived Stalin’s manufactured famine because they had a five-rouble gold coin stashed away. By contrast, farmland– which had a dramatic run-up in price before the 1917 revolution– didn’t do you much good if you didn’t get to keep what you grew.

        • jim says:

          There are East Asian communities which eat no animal by-products. It is speculated that they get B12 from seaweed.

          I was under the impression that they ate fish and fermented products. Fish contain some iron, and probably whatever else it is the lack thereof that kills vegans.

  2. Leonard says:

    Gold is an end of the world investment, insurance against total institutional collapse.

    It is that. And that is probably what most investors in gold think they are getting.

    However, gold is also a speculation in money. Money is the bubble that does not pop. Right now gold is a little bit moneyish; a little bit bubbly; but not that much. Most demand for money is still being supplied by the Federal Reserve. This may change.

  3. PRCalDude says:

    Buffet makes some good points; you makes some good points Jim.

    If you own a 401(k), you are already diversified out of dollars since your shares can be sold into any currency. I’ve looked into moving money out of the country, and I haven’t come up with a way of doing it yet. This would be a worthy blog post.

    Gold seems like it’s good insurance if you need to leave a country for good. I think it probably IS in a bubble right now since you see ads everywhere for people buying gold, which is exactly what we saw in real estate before the real estate collapse.

    Buffet has a pretty good ability for avoiding bubbles, even though h

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