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Warren Buffett: Why stocks beat gold and bonds (cnn.com)
181 points by DVassallo on Feb 9, 2012 | hide | past | web | favorite | 203 comments

Warren Buffet is a value investor. He buys stocks that he sees as fundamentally undervalued during a bear market and sells them when they are overpriced later.

If you try to value gold objectively (its industrial and possibly jewelry use), its price should be significantly lower than what it is today. Speculation and paranoia have driven its price to amazing heights. A value investor can't touch gold with a 10 foot pole.

I know Hacker News has its share of gold bugs and libertarian survivalists preparing for the fall of the US government. My only recommendation for you all is to remember to leave a map to your buried gold in case you die unexpectedly.

For those who don't think the fall of civilization will come within their lifetime (which I hope is the majority of you), trying to match the market with a heavy diversification of stocks/ETFs and bonds (notably US government bonds), a long time horizon and a yearly re-balancing is probably a better bet.

If you try to value gold objectively (its industrial and possibly jewelry use), its price should be significantly lower than what it is today.

I think you might be misunderstanding what gives things value. The $20 bill in my pocket has little objective value by your definition. Sure, I could use it as a building material by papering a small piece of my wall with it or I could make an origami ring out of it, but the object's value is not determined by what can be made out of it.

Value is subjective to people's desires and beliefs about what is worth trading for. Gold has value because (almost) everyone anywhere on the planet will accept it in trade.

Gold is priced in dollars and when dollars are flying off of the printing press, but very little new gold is being produced, it follows that the price of gold would increase in terms of dollars. It is inflation that is mostly responsible for driving the price of gold up, not fear.

I'm not suggesting that everyone should be 100% into gold, I merely think that people looking for real value, would find gold very attractive as a reliable way to preserve it.

Yes you are correct. I use fundamental or intrinsic value in the financial sense. That relies on summing the future income and then discounting it to the present value. As a $20 bill has no future income, it has significantly less value than $20 invested in even a government bond.

What makes gold "real" value and other exchangeable items not "real" value?

You had better stick to talking about exchange value, because once you get into nebulous discussion of "real" value it becomes immediately relevant that gold is nonproductive at best and prone to fluctuations and bubbles in reality.

If you define the discussion of value as being limited to immediate short term exchange, then it's no surprise that you end up concluding that the only things of "real" value are whatever gives you liquidity. That is a part of the story, after all Berkshire keeps $20-$30 billion liquid as a matter of policy.

But that doesn't tell you anything about future returns or opportunity costs, and it is not the whole story. The idea that gold's value is "real" because others think it is real (or better, have long thought that it is real) is just as viciously circular as saying that currency's value is real because others believe it is real.

"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." -- Warren Buffet

He doesn't mince words, does he?

This is a quote from the Q&A at 2011's yearly Berkshire Hathaway annual investor's meeting. Definitely worth going if you can spare the time (and are a BRKA or BRKB investor...)

I wonder what 170,000 tons of paper can produce. Does paper respond to Buffet's fondling?

No one proposes to use sheets of paper as a currency, let alone as an investment.

Treasury bonds have exchange value, not because they are paper, but because people will accept them, for the right they reliably represent; because the government is good for that debt. Gold, too, has exchange value NOT because of its chemical composition - only because people will accept it, and they accept it because they believe they will be able to trade it in the same way. If it loses half its value due to a bubble popping or the global supply increasing over time, it's no better than a currency which lost half its value due to government policy. There is always something around of value, and if the post-apocalyptic situation is bad enough then gold will be worth only a little at best, if you can even find someone selling whatever you need.

Land is an example of something which can produce, as is stock in a company which sells things that are always in demand. This was the contrast being made against the block of gold, not paper

Heat, which would be a valuable resource in the kind of scenario where it stops being valued as currency.

Dog food would also be quite useful. And of course the wet kind would be better served warm, which would add to the desirability of paper.

You could probably find uses for gold. But you'd have to waste a lot of paper to melt it down, so the most common ones would be things like 'doorstop' and 'blunt weapon'.

You don't have to believe in the fall of civilisation to realise that the US Govt is currently borrowing $1 trillion per year to fund the non negotiable American lifesyle. Things that cannot go on forever won't, and this is one of them. Take $1 trillion out of the US economy (ie: consume only what you produce) and this will be a non linear event.

I'd recommend you read some FOFOA http://fofoa.blogspot.com.au/2010/07/debtors-and-savers.html (and all the rest.) If nothing else it will help you see the money system in a different light.

Gold is priced in dollars. If the dollar loses real value, gold goes up. It's the same reason oil is $100, its baseline price is getting set ever higher, because it's priced in dollars. Price oil in silver or gold and you'll see that oil hasn't gone up in price, the dollar has gone down.

It's not paranoia or speculation primarily driving the price increase, but the objective destruction of value represented in what a dollar can buy today versus, say, 12 years ago.

I know you're heavily invested in gold, but what you say is simply not true. The Gold-Oil ratio has fluctuated from upwards of 36:1 to 1:8 over the past 40 years.

Further, if it were true then in 2009 when oil plunged from $140 to $50 a barrel, the value of the dollar should have shot up significantly. When gold dropped 20% last year, there wasn't a corresponding increase in the purchasing power of my dollar.

You only have to look as far as the sleazy companies selling gold to old people on tv and charging 20-30% markups to know that speculation is driving this market.

I own zero gold. I'm being objective about what it does, and does not do. It's a store of value, that's it.

I'm heavily invested in my self. I own a business.

Which is also why in one of my posts, I said the best investment you can ever make is: you.

Tracking lines on oil and gold requires that you do so over an actual duration, not on select spot prices. Over time, oil and gold have tracked each other extraordinarily well.

Ultimately the point is really simple: check out a graph on oil and gold prices since 1970. To the moon. Why? They're priced in junk dollars.

If you open up a graph of the ratio between gold oz and barrels of oil over the last 40 years, you will not see anything resembling a straight line. They don't track each other. At all. Not even a little bit.

There are literally thousands of charts and graphs that you could find a reasonable correlation with gold, but oil is not one of them.

I don't know where you got the idea that they tracked each other, but it is simply wrong. Gold does not track oil, CPI-U does include food and energy and inflation is not anywhere near where you think it is.

>> Over time, oil and gold have tracked each other extraordinarily well.

you're just wrong. here's prices over the last 6 years: http://imgur.com/a2mMZ (CLH is crude oil)

>> They're priced in junk dollars.

you're confusing real and nominal prices. if your point is that inflation exists, i don't think you will find anyone that disagrees with you. if your point is that real prices of oil and gold are driven primarily by inflation, you're absolutely wrong.

If you bought 1 lb of gold in 1970 and sold it today after taxes you would not have kept up with inflation. Also, the S&P 500 does not include dividends. If you actually buy it's stocks or a fund that tracks the S&P 500 you do much better than the graphs suggest.

Right, because the price of gold in US$ has tripled in the last five years not because of speculation but because the dollar is one third as valuable as before.

That's why the average US wage and minimum wage has also tripled over the same time period, right? Or have we become less efficient and our hour of labour is "worth" a third less?

The price of labor eclipses the price of commodities in most of the economy, which is the true value of your dollar.

That's exactly right, it's because the dollar is collapsing in real value.

I dare you to spec out the price of a basket of 10 to 15 commodities from a decade ago compared to where they're at now.

I don't have prices at hand. But a look at my Quicken database revealed that my total food-related expenses (groceries, school lunches, dining out, etc) were:

2001 $12K (family of three)

2011 $17K (family of five)

I was surprised when I compared these two numbers first time. Gut feeling was that food prices went up a lot.

Housing costs:

2001 $10800 (aparment, rent)

2011 $14800 (house, PITI)

Edit: formatting

doesn't the size of the family almost completely account for the difference in price?

say you do a simple, stupid analysis - 12k / 3 = $4k/person/year, which is greater than 17k/5 =$3.4k/person/year

of course, that's not entirely fair, since children eat less than adults, right?

if you ballpark daily caloric intake, the family of 3 eats (2500+2000+1000)365 calories a year, for 4.4 cents/Cal.

The family of 5 maybe eats (2200 + 1800 + 1800+1600+1000) 365, for 5.5 cents a Cal (I'm assuming the aging adults moderate their diet for their decreased metabolism)

yes, that's a 20% increase, but given other factors (possibly more dining out, errors in the ballparking, etc.), it's really not a huge jump in food prices.

And I dare you to compare the cost of a big mac from 3 years ago vs today in comparison to gold.

McDonald's won't take my gold flakes, and anyway I don't think a 3-year-old big mac will be edible...

But what about labour prices? Why have they not shot up?

actually if you adjust oil prices for inflation, you'll see that oil prices (in real terms) has gone up.


> It's not paranoia or speculation primarily driving the price increase

the price of oil is driven by supply and demand. the useful of oil has gone up, but the amount of oil we extract has not kept up. that's why the price has moved.

I fear this might be too much a tangent...

The price for oil is affected by supply and demand but also by speculation. People invest in oil, and people speculate in oil. More so, the price for oil includes a substantial degree of risk assessment. If buyers and sellers both agree that the future of oil production (due to geopolitical instability, for example) is at risk and could lead to oil shortages tomorrow then they will settle on higher oil prices today.

The same sort of effects don't enter into the price of, say, Aluminum which is much less entertwined in complex geopolitical situations.

His basic point is almost a tautology. Yes, it's great to own productive assets. The real trick is predicting which ones will really stay productive over the long term. Just buying a broad index is often not a winning strategy when you factor in the taxes, inflation, and survivor bias. Certainly Buffet hasn't just bought a broad index -- he makes highly targeted investments.

And he glosses over a basic point that I've seen many commenters miss. An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble.

But expanding the supply of gold available for trade by more than a couple percent a year simply isn't feasible. This is precisely why markets have repeatedly chosen it as a form of money.

Of course this means the market for gold is driven purely by demand sentiment, and of course demand could crash. But this is true of every currency -- it's only valuable because it's valuable.

An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble.

The number of new home sales at the top of the bubble was about 1.4 million/year vs. existing housing stock of over 70 million. That's less than a 2% increase per year, not counting the thousands of home that are demolished each year. Vast new production isn't required for a bubble.

The real trick is predicting which ones will really stay productive over the long term. Just buying a broad index is often not a winning strategy when you factor in the taxes, inflation, and survivor bias. Certainly Buffet hasn't just bought a broad index -- he makes highly targeted investments.

This depends on how high you set the bar. If you're trying to be Warren Buffet then buying a broad index obviously won't get you there. With the bar set somewhere in the neighborhood of "I'd like to protect and increase the buying power of my money" then buying something like SPY starts looking a lot better, even with taxes and inflation taken into account.

He omits the only valid reason any non-speculator would own gold - it holds it's value through times of political turmoil - holds it's value over millenia rather than decades or centuries.

A coup d'etat may result in seizure of private companies, rendering your stock worthless, but not touching the value of gold.

It would be speculating to put all your assets into gold, but a small amount is like an insurance policy.

relevant: http://www.csmonitor.com/World/Americas/2011/1105/Hugo-Chave...

    Government expropriation of private industry has been a
    key policy of Chávez's regime.

    More than 450 companies have been expropriated this year 
    alone. ExxonMobil, which had its assets seized in 2007, is 
    still fighting the Venezuelan government for $7 billion in 
    compensation it believes it is owed.

An unstable government could just as easily seize your gold.

What investor cares about millennia? Centuries is already too much, unless you're vastly more concerned about your great great great grandchildren than most people. 100 years is probably the absolute largest possible upper limit for a real investor to care about, and typically it's much less still.

I think he was talking about a small amount of gold. Twenty-thousand dollars worth could fit in your hand and easily be smuggled in clothes, luggage, etc. That's pretty handy if you had the flee the country from nazis(or whatever) that have stolen all of your other assets.

Admittedly that's a pretty unlikely scenario.

If we've come to the point where you're fleeing the country from Nazis with only what you can carry in your hand, the only thing that's going to be sustainable is investment in _yourself_ through massive education. That way you're up and working and earning from the moment you're safely away.

Since we are talking Sci-Fi scenarios...

It makes a lot of sense to try and carry as much value with you as possible. Conditions during the course of your escape are likely to be difficult and the ability to pay for thing (=bribe your way out of trouble) is likely to be much more useful than knowledge of advanced mathematics or Python minutea.

(Of course, the most useful way to carry value in an escape scenario is gemstones, not gold, since it is much easier to hide during transport).

Gemstones are not a good value store at all, since there is no liquid market for them and the first-sale price is artificially inflated through marketing.

Buy a diamond today and sell it tomorrow, and you'll make a loss of 30% or more.

In the "government collapse and you need to run from nazis" scenario, if you somehow manage to only lose 30% of your value you are doing well.

I'd note that Wikipedia says:

A high quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency funding. People and populations displaced by war or extreme upheaval have utilised this portable asset successfully.[1]

[1] http://en.wikipedia.org/wiki/Diamonds_as_an_investment (yes, it says citation needed, but nevertheless it did work in WW2.)

It's even more unlikely because you then have to find a buyer that's willing to pay market price for the gold wherever you end up at. You'll be reduced to selling it for whatever people are willing to pay.

In the past it's been mainly useful if you can flee from a region in turmoil to one with more stable conditions. For example, my grandfather fled Turkey for Greece in the late 1910s (http://en.wikipedia.org/wiki/Greek_genocide), taking some gold with him that he was then able to sell in Greece, using the money to help resettle.

Gold is pretty easy to sell and even if you got a terrible price for it, you are still better off than without it.

Many wealthy people in vietnam were reduced to nothing when the currency became useless. The few smart people who had gold were able to move their wealth out. The entire world is going to go to shambles at once, that is a very low probability event compared to a region. Even during WW2 there were regions that were relatively untouched by the world war.

The government doesn't even need to be unstable: https://en.wikipedia.org/wiki/Executive_Order_6102

(Granted, many people simply shipped their gold to another country, but still...)

The changes that accrue over millenia all happen in some 100 year stretch.

My point is that looking at the last 100 years, by definition, will overlook times of revolution and change that certainly have happened and will likely continue to happen.

In any serious failure of government, the value of bullets far outweighs the value of gold.

When the revolution comes, I'm going to hide somewhere and wait for everyone to run out of bullets.

value(canned food) > value(bullets) > value(gold)

Gold is an universal store of wealth. Canned food and bullets not so much.

It's a different kind of value.

Gold is a universal make-believe store of wealth: it is precious because "we" (i.e. most people) agree to consider it as precious. The fact that it's rare, cannot be manufactured and doesn't corrode over time are nice to have properties but are neither necessary nor sufficient conditions of value.

The context of this subthread is SHTF situations, where all that matters is inherent value determined by the laws of nature. What good is your gold if nobody wants to take it for even a tuna sandwich or if you have a loaded gun pointed at you?

How do you define wealth?

I'm taking an assault rifle to my hidey-hole just in case someone finds me before running out of bullets.

What about golden bullets, gold is heavier than lead after all.

If this is an argument for gold, then it's important to note that most gold "owners" don't actually own gold. They own paper. Or, at best, they own shares in funds that must buy and sell their gold on fixed timetables (debatably erasing a lot of the real gains that would be made by holding actual metal). But they're pretty far removed from the physical good -- and, if the shit truly hit the fan, they'd be just as SOL as would stock-holders.

Hedging against the apocalypse is a silly reason to own "gold." Hedging against market volatility is a slightly better reason. It is important that we don't conflate the two strategies, as popular perception seems to.

> Hedging against the apocalypse is a silly reason to own "gold."

In the last 100 years alone there were at least 2 such "apocalyptic" events: the Russian revolution and the communists' grab of power in China. Granted, there were a couple of lucky stock-owners that didn't see their holdings going to zero (http://en.wikipedia.org/wiki/American_International_Group#Hi...), but generally speaking it would have been much better for a "White" Russian to be carrying gold or jewelry on his way to Paris in the 1920s than to carry worthless Tsarist stocks.

But my point is that most people don't actually own physical gold (hence my use of the air quotes around the word).

I'm in complete agreement that holding something like GLD is only valuable as a hedge against market volatility.

As for owning gold rather than "gold", I find appeal in being able to put $30k in my pocket in the event that credit cards or ATMs are temporarily out of service, which could happen well short of an "apocalypse."

Paranoia is not an investment strategy.

There are a whole lot of things that have to go seriously wrong before we revert back to a gold-based currency. Even if we did, all the gold in the world won't help with the food shortages resulting from the collapse of companies like Monsanto.

Most of the grain we use has to be chemically activated to grow. If the country falls apart to the point where those chemicals are not available, there is no amount of gold that will buy a loaf of bread.

The problem with gold in times of turmoil basically boils down to you saying "here's (insert weight) of gold that I'll use to pay for this", and the person you're dealing with saying "yeah, and I'm the Queen of England".

Without some sort of neutral respected authority to assay and say "yup, it's gold", you just have shiny pebbles and/or dust. And when everything around you has collapsed, reliable access to a trusted assayer may not be so... reliable.

It is easy for anyone to prove gold is real with an acid test. And you don't go to the grocery store with $20K of gold be it coins or chips. At most you would be carrying around gold rings which are small, something everyone has handled and knows and have a "smallish" value.

No, gold isn't for times or turmoil, it's for when things quiet down again--seed stock for rebuilding your life once stability returns.

And then the guy who stocked up on ammunition instead of gold points a gun at you and says "thanks for the gold", then leaves.

... unless some breakthrough in nuclear physics leads to cheap synthesis of precious metals: http://en.wikipedia.org/wiki/Synthesis_of_precious_metals

Gold would make a lovely material to construct a toilet.

You had better hope your gold is hidden in a safe place under these circumstances. What percentage of the current gold investors are hoarding trading-size chunks in the cellar and the woods?

The benefits of diversification -- higher return and lower risk -- is a better reason to invest in gold, even if it was true that gold holds its value for millenia, which probably isn't true.

The article is about "why stocks beat gold and bonds" not "why you should own only stocks and never own any gold or bonds".

Unfortunately it is worth noting that FDR instigated the greatest private wealth seizure in the history of the planet when he stole all of America's privately held gold with force.

If you've got a government that is willing to plunder like that, there's no great way to keep your wealth safe except to get yourself and your wealth out of the country.

> stole all of America's privately held gold

Except for the bit where he, y'know, paid for it at the then-prevailing rate. (Which was defined by law, since at that point the US dollar was still on the gold standard.)

.... only to devalue the dollar by 50% or so as soon as it was believed there was not a lot of gold left in private hands.

While "stealing the gold" is not technically correct, eliminating 50% of the value of everyone's saving IS, and the confiscation of gold was done to eliminate the best (and popular) store of value.

Of course, it was all legal -- but when the government makes the laws, that statement is completely moot.

To be more precise, FDR increased the price at which the government would buy gold from foreign buyers. The devaluation occurs in terms of foreign currency exchange. I don't think it's quite correct to put a 1:1 correspondence to that and "eliminating 50% of the value of everyone's savings". Maybe eliminated 50% the value of everyone's savings in Francs. Domestic purchasing power would be negatively affected for foreign goods, in theory it would create income in terms of increased exports.

"he confiscation of gold was done to eliminate the best (and popular) store of value."

'Best' no, 'popular' yes and that was crippling the economy.

It was 'crippling the economy' in the same sense that Bill Gates and Warren Buffets money not being spent is "crippling the economy". And it what FDR has done to savers is just as fair as "liberating" said money from BillG and WarrenB's bank accounts would be.

"It was 'crippling the economy' in the same sense that Bill Gates and Warren Buffets money not being spent is "crippling the economy". "

Umm no. What happened was people took their money out of the bank to hoard gold which crippled the money supply and credit markets. Which is exactly what would happen if Gates et al. decided to hold their money under the mattress instead of in the bank.

That's an inaccurate analogy (or rather it make the point opposite to what I think you are trying to say).

Gate's and Buffet's "money" is stored in stock in companies, which add value to the economy - ie, their money is active and productive. That's the opposite to storing value in gold.

Aren't Bill Gates and Warren Buffett currently trying to spend as much of their money as possible on charity work, as well as lobbying to get the amount of taxes they have to pay increased?

Except they paid market rate knowing full well what would happen to the buying power of dollars relative to gold. I like how people are willing to redefine theft to support their notions of benevolent government. You guys are a riot.

If someone raped you and then paid you the then-prevailing rate for a whore, does that make it not rape?

What makes an exchange stealing is the involuntary aspect.

"If someone raped you ... does that make it not rape"

Stunning circular logic there.

"Someone" =/= "democratically elected government with clearly enumerated power".

We agreed on the Constitution and it says the government can take stuff as long as it pays you. Those are rules we agreed to.

If we all agreed on a Constitution that said the President could have relations with whoever he wanted and then people chose to stay in this country and then the President chose to have relations with them we might question whether that still qualifies as rape.

Yes, and then immediately after taking the gold he changed the standard, so if you wanted to buy your original gold back you would have to pay more money. What happened was robbery.

The only things buying gold from the US government were foreign national banks. The government never offered to sell gold to individuals after the gold clause abrogation.

He paid for it at the then-prevailing rate so that you'd be stuck holding dollars, which he would then immediately depreciate through inflationary measures.

Not that I'm a gold-bug, but, it was pretty rude.

And given that such a thing can happen even in the US, which all things considered is very free and democratic compared to most of the world, what does that say about a strategy based on the allegedly intrinsic value of gold?

Same conclusion from a slightly different angle: You trade risk for expected payout. Imagine each of these scenarios is like flipping coins with different values attached. At the end of the year, you flip one coin:

- Bonds: Heads, you gain 1%. Tails, you gain 1%. If it lands on it's side, you lose everything (government default)

- Stocks: Heads, you gain 15%. Tails, you lose 10%. A lot more risk here, but the expected value of flipping the coin is higher.

Some people would rather flip the bonds coin, some would rather flip the stocks coin, and it depends on the individuals' risk tolerance.

Gold doesn't fit the model, because buying gold is speculation rather than an investment.

I think this is miss-representing Buffett's position here. First off, he explicitly states that the riskiness of an asset should not be measured by its volatility:

> Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

He goes on to describe what sorts of investments he thinks are worthwhile. Namely investments in assets that will continue to be productive in the long term.

> Investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.

Again, this isn't framed in terms of risk. Probably because with a diversified portfolio the risk is not at all analogous to flipping a coin (there is obviously still risk, but it's not that simple). Instead, it's framed as current versus future consumption.

As for gold, I don't think he frames it in terms of speculation versus investment at all. Buffett recognizes that gold will probably continue to hold value. Instead, he decides to frame the question in terms of whether gold is a productive asset. It isn't. It will just sit there.

> You can fondle the cube, but it will not respond.

Stock indexes are more like: heads you gain 10% (average year), tails you lose 50% (every 5-10 years).

Warren Buffet once wrote about gold...

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Gold has utility: it easily forms a plating on other metals, and conducts electricity even when continuously exposed to air. This is not true of many other metals, hence the popularity of gold-plated electronic interconnects.

But is that utility that you mention the reason why people bury it again and pay people to stand around guarding it?

Gold may have some utility and practical applications but that does not seem to account for all of it's perceived value.

This is exactly why I hate it so much when people use gold as an investment instrument. Gold would be useful, except its price is high and its supply is low, because people purchase it with the sole intent of not doing anything with it.

Well, then why not rate all the elements in the periodic table? Silver is considered precious and can kill werewolves; Plutonium can send you back to the future. If you start talking about Gold as a resource, then what's the point?

I'd need to find the statistic again, but it's something like 15% of the value of gold is due to its utility, and the rest is due to it being shiny/historically valued

50% jewelry (half to india), 40% investment, 10% industrial

Imagine if gold were a company.

Friend: "Hey man, you gotta get in on this— this stock has gone up 30% in the last year! Nowhere to go but up!"

You: "Wow, that's amazing! What does it do?"

Friend: "Um... it doesn't corrode?"

Imagine if the USD were a company.

Friend: "Hey man, you gotta get in on this— this stock has gone down 30% in the last year! Nowhere to go but down!"

… Which is why Buffet also says he doesn't like currency denominated assets.

Hint: the value of USD isn't as an investment. In fact, if the value of USD goes up, that makes it less useful, because the point of having money is to spend it. For example, one of the many reasons of the utter trainwreck of Bitcoin is the fact that more people were holding it as speculation than actually using it to purchase anything.

And it's only 3% in the last year if you aren't trying to compare it to something mid-bubble. The USD is totally going down with respect to tech stocks, guys!

Currency markets exist. USD is an asset that can be traded. Holding USD is an investment -- although, not necessarily voluntary. I don't know why you're comparing gold to a baby p2p app with microscopic trade volume. That just seems odd. Because they both experience deflation? In that case, all inflation goes the way of Zimbabwe and even more worthless than gold.

Currency markets exist, but most currency trading is a lot more short-term.

Holding USD is rarely an investment. You put money in your checking account(as opposed to a savings account/CD, which is an investment in the bank) because you expect to spend it(you know, what money is for?) soon. Only banks hold large amounts of USD and they almost immediately loan it out.

And you're right, it's unfair to compare gold to Bitcoin. There are people actually using Bitcoin as a currency, whereas gold is almost exclusively exchanged for actual currencies, which are then exchanged for goods and services.

And the failure of the Zim dollar is the reason they recently returned to the gold standard. Oh wait, no, they switched to USD.

Currency is a terrible way to invest. Nobody is arguing that.

Not if that currency is gold. Unless, you don't like turning profits of course.

When is the last time that you purchased a product or service using gold?

We got it you like gold. Warren Buffet doesn't. I'll take his advice over yours.

Mr. Buffett, like a lot of people, mischaracterizes gold as an investment. It is not. Gold is a store of wealth, not a tool realizing future gains (although that may happen). It is disingenuous to compare gold to stocks, or even to farmland as Buffett does. When you buy land, it doesn't miraculously produce crops (wealth) for you, you must input labor and resources (money) first.

I know this is nothing new, but investing in yourself through education is far and away the best investment out there. Governments, thieves, natural disasters and who knows what else can seize or destroy your stocks, bonds, gold, and land, but they can never touch your knowledge and experience. Even if you loose all of your possessions, you can use what you know to reacquire them. If the goal is "preserve AND grow" wealth, educating yourself is the best investment.

The labor part is his whole point. Gold has little to no utility ("...some industrial and decorative utility"), but land can be used to build more wealth ("A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops").

He absolutely prefers actual production over mere investment in trends. "More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date." This whole philosophy is at the heart of nearly all of his letters to investors and other writings.

If you buy 16 ounces of gold then you have a pile of metal. 5, 10, 20 or 50 years from now it'll still be a one pound pile of metal. Bonds essentially offer the same deal, only you trade a pile of money now for a slightly larger pile of money in the future.

Investing in stocks however buys a piece of a growing entity. You buy stock now and the company buys a tractor, a truck, a robotic assembly line, researches some new polymer, hires staff, invests in its own growth and actually produces goods. As time goes on the company is always trading in current dollars.

Of course there is risk, but If I buy gold now I'm only ever going to own that much gold in the future and the price is entirely based on some other gold-buyer willing to buy a hunk of metal to sit on himself.

Buffet says it better right in the article though which I think people here failed to address. "Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk."

Technically you'll have 1.33 pounds of metal :-)

(Precious metals are typically measured in Troy ounces; there are 12 Troy ounces to the Troy pound.)

Technically, I could still buy 16oz of gold and have a pound... So I officially declare all my metaphorical gold is measured in international avoirdupois ounces.

Which I learned about thanks to Wiki University.


Disagreeing with Buffett is an express ticket to Looking Stupid. But.

As Buffett notes, gold demand is an index of fear. And yes, generally returns on gold reflect the extent of fear. Were this the only return case, the whole thing would be subject to tautological collapse.

But it's not the only return case. Sometimes fears come true. Governments debase or revalue currencies, regimes collapse entirely, equity assets are appropriated. (Anyone care to guess what happens if foreign investor interests in the Chinese stock market collide seriously with vital state interests?) In these edge cases, gold is one of the few assets that carries value across the transition.

To which comes the reply, if the U.S. government falls you'll have worse problems than asset preservation. Certainly true. But when those problems get resolved, asset preservation will work its way back up the priorities.

It strikes me as lousy investment vehicle -- but I think it's a mistake to dismiss its political and economic importance entirely because it doesn't make sense in our particular context. The whole point of its importance is its commentary on that context.

Man, you'll never be able to convince gold bugs it's a bad idea.

Shit's just too shiny.

He says: 'Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle ... Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot.'

But how many companies have ever survived for centuries?

Yes, centuries from now there still will be companies producing goods and services, but they are highly unlikely to be the same companies you put your money in.


'The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University.'

'Professor Foster estimates that by 2020, more than three-quarters of the S&P 500 will be companies that we have not heard of yet.'


I don't think that Buffett is saying that stocks, at any given point in time, will deliver you better returns over a given time period than gold or bonds. He quite clearly notes that there are times when bonds are beaten up and they'll offer a great return. Buffett, being a virtuoso, variously reaps returns from derivative contracts, insuring sweepstakes prizes, and solar farms. He once bought a boatload of silver and tried to corner the market. He won't argue with you that with all of these there's a right time.

That's because all of these asset classes are subject to 'animal spirits.' Stocks went through the tech bubble. At various times bond yields have been too low when judged against the real risk that you do not get your principal back in full. Bond yields are pretty darn low right now. Gold may seem invincible now and it may seem that the world is only going to continue falling apart and Helicopter Ben is only going to keep running the presses, but don't you remember a time when stocks did nothing but go up? Or when people thought that house prices would never go backward?

All of these asset classes are also subject to the 'invisible tax' of inflation. As the money supply increases, all currency is devalued and everything that's denominated purely in currency loses value as well.

To preserve and grow wealth, you must first beat inflation. Stack the assets up against each other on these merits and I think that's where his logic lies. Let's remove 'animal spirits' for now. Look at these asset classes dispassionately for what they represent. Ignore prices, what they've done in the past, where they are now.

Bonds are contracts for loaning currency. You as the lender demand repayment of your principal and interest payments concordant with the risks you take that the money does not come back to you. Most bonds as structured do not protect you from inflation unless your nominal payout is explicitly pegged in the contract (as with TIPS). You pay today's currency for a fixed amount of tomorrow's currency and if that currency is worth less (as it probably will be) you're out of luck.

Gold is a real good. It's a particularly nice real good in that it's malleable and somewhat plentiful but both difficult to destroy and difficult to make more of. Oh and it's shiny. Everybody agrees that gold is an excellent real good in that way. Those factors, particularly that it's difficult to make more of, protect you from inflation. The real value should stay the same so the price of gold increases as inflation brings currency down around it. Gold beats inflation for sure (except maybe for the bit of mining and new discoveries that get done).

Stocks represent ownership in companies. A company is a group of people operating capital assembled to provide a good or service to others in exchange for value commensurate to the good or service tendered. A good company can protect you when inflation attacks by raising the prices of its goods or services so that it receives the same value as it did before. The well-known example is a candy bar that costs a dollar today cost a nickel in the 1950s. A great company can grow over time, providing more goods and services to the world for more value. Ownership in a good company is an opportunity to both protect against and even beat inflation. That is the key and that is why over time it is a better idea to own stocks than gold. Here's something of a common-sense test: name a family fortune and you'll usually find a company behind it. Now name me a gold-hoarder in the Forbes 400.

Warren glosses over the bad here, that you could buy a stock representing ownership in a poorly managed or even fraudulent company. You could buy a chunk of fool's gold, but you wouldn't be a fool for long. People held onto Enron stock for ten years after Fastow started his shenanigans.

Certainly the bad or fraudulent companies detract from stock performance in the aggregate. But a major index does a pretty good job of protecting you against this precisely because of survivorship bias. A company does not become one of the top 500 largest in the US by being poorly run or providing no value to its customers. A few frauds make it but there's so much scrutiny at the top, they don't (or shouldn't) last long. The S&P 500 is a pretty good proxy for the creme de la creme of businesses and that's why it's such a successful measure. Owning it also offers you the opportunity to grow your wealth with the expanding real value of the economy, beyond the level of inflation.

Now if we turn back on the animal spirits, timing matters. Buffet knows this. He's one of the best market-timers out there. Buffett would not have written this article in 1999 even if the precepts were all the same because he knew that it was a bad time to buy stocks and he would get blamed for the people that misunderstood his advice. He wouldn't write this article in 2008 either because he knew then that bonds were actually a great deal (as he points out). He's publishing this article now (even though it's somewhat of a timeless truth) because he thinks stocks are pretty cheap and the alternatives are terrible.

As the money supply increases, all currency is devalued and everything that's denominated purely in currency loses value as well.

This is a gross oversimplification. The monetary supply can increase without inflationary effects as long as there is a corresponding increase in the production of value in an economy.

Thanks, appreciate the point. After all, part of the reason we moved away from gold as currency in the first place was its inability to keep up with economic expansion.

Like computers becoming cheaper and cheaper while the prices of other goods increase? That's just another form of inflation because the computers would be that much cheaper if it weren't for an increase in the monetary supply.

Erm, lets make this simpler. Lets say that in year 10 the economy produces exactly 100 apples and nothing else. And lets say that in the year 20 the economy produces 200 apples and nothing else. If apples were selling at $1 in year 10, then we would expect apples to sell for $.50 in year 20 with a constant supply of money[1]. We call this decrease in price deflation. The money supply does double, we would expect the apples to still sell for $1 and we would call this price stability. If the money supply were quadrupled then each apple will now cost $2, and we'll have had inflation.

[1]Well, in the real world in the short term people tend to be upset by the idea of the amount of money they receive for a good or product decreasing, so prices and wages tend not to decrease as fast as you might expect in a theoretical perfectly efficient market. This is called nominal downwards price rigidity by economists and nominal loss aversion by psychologists. This is the simplest of the mechanisms by which inflation and deflation can effect the state of the real economy.

His comment is that as long as the supply and demand for dollars remain in balance the value of the USD does not change. The reason the dollar maintains value is because people and companies need to pay trillions of dollars a year in taxes and loans in USD. Which is why despite the fed dumping a lot of money into the economy we have see so little inflation over the last few years.

Since Indians are notorious Gold bugs historically, this piece by an Indian Investment Blogger is relevant and illustrates several popular misconceptions with data. Oh, and Graphs. http://www.jagoinvestor.com/2012/01/gold-price-movements-ana...

SO I was recently trying to figure out why Bitcoins could be considered a rational investment (sorry to bring up that dead horse again =P). Much to my surprise, I realized that reasons for investing in them are much the same as the reasons for investing in gold.

  * Relatively stable, predictable supply over time
  * Not controlled or regulated by any institution or central authority (government or otherwise)
  * Value determined entirely by market
  * Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged
  * Value not tied to the utility of an underlying asset[1]
For both gold and bitcoins, that last bullet point is both the cause of all their advantages, and the source of all their criticisms. By all rational analysis, bitcoins should be valueless and gold should be much cheaper. They don't do anything but sit there, unchanged. However, this resilience against outside factors is what makes them eligible as an "apocalypse-proof" investment. In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened.

The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time.

For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments.

[1] Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.

In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened.

I'm not so sure that works.

With gold, it was not the case that everyone just "agreed to agree" that it was valuable.

Rather, gold was valued independently of its "investment value" due to its use as a status symbol/decoration/jewelry.

Likewise, because of that, there's no risk of everyone suddenly "disagreeing" that it's valuable, causing a huge collapse.

With bitcoin, it's unclear to me that there is a way to either bootstrap this "agreement" in the first place, or to sustain it.

Glass also has decorative value. There's no easily imaginable risk of everyone suddenly deciding that it has NO decorative value.

So what? That's not the relevant risk. The relevant risk is that whatever you are using as a currency will DECREASE in value. Say, from the level of something highly valued as a medium of exchange accepted everywhere, to the level of a mere decoration. Or from a peak value where you bought in big during a speculative bubble, to a lower value where (yes) it's still worth something, but worth less than if you had kept it in treasury bonds or an index fund or a farm.

This is a great article. I wish he had explained three things in more detail:

1) that you can only count on this over longer timeframes (15+ years) 2) his argument assumes an inflationary environments (versus a deflationary environment like Japan and Europe) 3) if you don't have the skills to read a Exxon Mobile or Coca Cola income/balance sheets once a quarter and find it fun you should invest in index ETFs.

These three things are why average investors should have a mix of stock and bond index funds in their portfolio that is based on their timeline.

Shameless plug: I'm bootstrapping a startup to help average investors manage their portfolios. If you are interested in getting started with or managing an existing index oriented asset allocation investment plan, I'd love to help you at https://azul.io (free of charge to folks signing up before I get Stripe integrated)

Buffett is great at picking stocks. The problem with his statement is that he is a professional stock investor but we mere mortals are not. We have our busy lives other than watching the market. For us, the correct strategy is to do balanced portfolio with 50/50 :: stock/bond, or some other ratio.

Paying someone like him a fee to choose stocks for you seems like a much better strategy to me.

The challenge is identifying "someone like him" before the fact. But if you could do that, then you would know why he's been so successful and you'd be able to do it all by yourself. Most funds do not beat the market in the long term (> 10 years) after costs, and for the same asset allocation, someone who just invests in the market (e.g. through low-cost index funds) will do much better than the average professional manager.

Investing money produces measurable results. It is possibly to verify that someone is a successful investor without knowing why he is successful.

It is completely useless to verify that someone's investment choices were successful in the past without knowing why. For example, there are enough hedge funds out there that there will always be a few that outperform the market just through sheer luck, and there's no way tell the difference between a fund which has succeeded in the past through sheer luck and one that's actually well-managed. In fact, I seem to recall there's decent statistical evidence that nearly all managed investment funds with a track record of success were successful in the past solely through chance.

Edited: In fact, Warren Buffett has an interesting bet outstanding related to this, see http://longbets.org/362/

It's not completely useful, nor is it completely useless. As long as it is possible to be a "good" investor, in the sense of making lots of money, it can still be somewhat useful. If you continue to bet on people who made successful investments in the past, you might get burned by the people who merely got lucky, and you will make money when the person really was a smart investor. Past performance thing is not a convincing argument against this. A valid argument would be that the ratio of those groups is not favorable enough to overcome the management fee. I'd be interested to see if the Buffet bet you mention is related to this, but my work filter blocks that site.

The only thing you can measure is past performance. In investing, past success is not a guarantee of future long term success. Long Term Capital Management had two Nobel laureates among its partners. The fund was extremely successful in its first few years (~40% yearly return with little volatility), but then lost over four billion in just a few months, and eventually closed.

Of course you don't get a guarantee. People who are looking for one are stupid. You get a betting advantage - as long as you accept that it is possible to be a "good" investor, in the sense of making lots of money. If you continue to bet on people who made successful investments in the past, you might get burned by the people who merely got lucky, and you will make money when the person really was a smart investor. Past performance thing is not a convincing argument against this. A valid argument would be that the ratio of those groups is not favorable enough to overcome the management fee.

"You get a betting advantage."

Actually you don't. The investment industry understands very well that people will naively invest based on superior historical performance, so they use that history to sell investment products. One example of a popular rating system is the Morningstar Rating which rates a fund, stock, or manager based on performance over e.g. 3, 5, 10 years. But that history is public information that most investors use already, so it cannot convey a betting advantage.

"you will make money when the person really was a smart investor"

Statistically speaking, you will run out of money long before you find this hypothetical smart investor. Also, note that the smart investor has not necessarily been "successful" in the past. He could very well have been accumulating shares or fund units while prices were falling, anticipating that they will rise in the future.

Point is, unless you know why that investor is smart, you are essentially leaving it all to chance.

Your "correct strategy" is actually not incompatible with his statement, so long as you have most of your assets invested in stocks if you have a long term horizon.

I ran some numbers, and gold seemed to add value to most portfolios over the last 83 years, with modest real return and low correlation with other assets. (Of course, it was legally problematic to own in large quantity in the US for a large part of that period, although you could own jewelry etc.)

The last 30 years of disinflation, stable growth were not a good time to own gold.



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

No, but most people aren't investors, they're just people with a small amount of money buying pieces of paper from each other to gamble over which company is most attractive.

Summary: Gold is Insurance, not Investment(especially after inflation kicks in).

It's probably a good idea to have some % asset allocation for this class of holdings, for the various Doomsday scenarios.

That... and a cellar stocked with lots of tinned food.

Nitpick: there's one clearly false statement Buffet makes:

The second major category of investments involves assets that will never produce anything, [...] Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

Tulips actually produce something - more tulips. It's actually quite possible that the bulb of a rare and especially pretty tulip variety could be a sound investment for someone intending to grow tulips. And that's how the Dutch tulip mania started out (though it then did proceed to truly bizarre excesses).

The fact that Warren is on the hook for several billion dollars of S&P puts is mentioned nowhere in the article.

When O When are reporters going to understand conflict-of-interest?

Do you honestly believe that Warren is trying to deceive you into investing in productive assets rather than a shiny metal because he wants to manipulate the market?

I believe that his speculation argument against gold holds for the stock market as well. Investors create feedback loops when they buy stocks that then creates even more demand. Buffet believes in the S&P and so he will naturally encourage others to do so.

The value of anything can be propped up by speculation, what varies is the value which can be maintained without speculation (e.g., in cases where the bubble bursts).

I think this is the use of discriminating among (A) resources reasonably expected to decline in value, (B) resources expected to 'hold value' modulo speculation, (C) resources expected to have ongoing returns with or without speculation.

Do you honestly believe he is not talking his book?

It's Warren Buffett, man. Perhaps he invests (long-term) in stocks because he believes what he writes, rather than writes what he does because he just happens to be invested in stocks. You really think there should be a disclaimer here?

"I’m shocked, shocked to find that gambling is going on in here."

Lets listen to the jailer tell the inmates that shackles are better than manacles.. grabs popcorn

In the 90s everyone rushed the IT shares and then the dotcom bubble burst.

In the first decade of our new millennium, real estate and all sorts of weird financial products somehow building on real estate were THE best way to invest money because nothing can happen, you have a house standing right there, right?? Then that bubble burst.

Now, you'd think people would have learned by now but no... sure as hell now everyone rushes to buy gold and silver because "hey what could possibly happen"??? Even one of my colleagues who has been burned both times on dotcom shares and some shady real estate thingy in east-germany, no less, now religiously swears by gold and silver because what could possibly happen?

People seem to really not be able to grasp that it is just another market.

Except gold and silver have a couple of millenia of history, that shows that unlike fiat money, they retain their value.

(Unfortunately, your friend is likely to lose his pants again -- not because gold is going to lose its value, but because there is no way to invest in gold without fiat and counterparty risk which is equivalent or even worse than the equity investment risks. If you don't believe that, ask any MF Global customer who had money and gold futures worth lots of money where his money is)

Gold retains its value over time only on average. Guess what? So does real estate. Gold over the past 30 years has retained its value relative to gold a century ago. But right this very minute we're in the middle of a gold bubble. If you buy gold today and then sell it a decade from now there is a great likelihood that you will lose, not retain, perhaps 75% of your investment.

There were booms and busts in the value of gold in the 70s and 80s as well.

> everyone rushes

Who is rushing to buy gold? I'd be surprised if more than 1% of households have meaningful gold exposure.

Look at this graph: http://blog.thomsonreuters.com/wp-content/uploads/2011/04/GL...

Is that the sign of an investment that keeps growing in value steadily across the ages or merely the sign of a speculative bubble about to burst? Hint: look at the late 70s as well.

Have you considered that the chart merely shows the value of gold in US dollars, and that it could be, this time, that the US dollar is the speculative bubble that has been bursting for some time now.

It has two lines, one is for prices adjusted for inflation (the blue line), the other (the yellow line) is with absolute prices.

Inflation rate doesn't properly reflect the change in the value of the US dollar. A better line would be one adjusted for the growth in money supply.

Inflation is the proper measure. The chart might not say what you want it to but that's not it's fault.

Ew. Is there a version of that graph that's on a logarithmic scale?

I'd be surprised if more than 1% of household had actually held tech stocks in 2000, also.

He's wrong. Stocks do not beat gold once inflation outpaces the rate of average market returns, which is exactly where we're at now.

Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock, Apple at the absolute bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and then hold all the way through, and then sell at the absolute top. On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes (you have to constantly shift your investment strategies for all sorts of reasons: age, family, economic conditions, and so on). Few people are skilled enough to do that well.

With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing' (to pay for entitlements, to devalue national debt, to fund deficits, and so on). There are very few things you could leave for your grandchildren that will retain their value, real estate and gold are two prime options.

If you had bought and held the stocks that make up the Dow over 60 or 70 years, you'd have gotten demolished because the Dow constantly shuffles its index. That is to say, you can't look at the Dow from 70 years ago and compare it to today, because the index is completely different, and the average investor could only easily purchase index ETFs in the last 30 or so years.

In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers).

The dollar has lost 97% of its value since the Fed came into existence. There's no way you can outrun that unless you hit homeruns in the stock market, which is what Buffett did, and which is exactly what your average investor cannot do regularly. The majority of people that invest in the stock market lose money. That's tracking since the late 1960s when the US went off the gold standard and inflation skyrocketed (sending oil, gold, and nearly everything radically higher).

Buffett hasn't made most of his wealth in the stock market anyway (nor that of Berkshire). He has made it by using insurance company float cash to purchase other high float companies, and then rolling that ball forward. Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario.

And if you'd bought gold at its peak in 1980 you'd still be down money, even 3 decades later.

Adjusted for inflation gold has gone up by a factor of about 4, but almost all of that has been within the last 10 years.

Anyone who thinks that gold is a dandy long-term investment is just as deluded as all of the fools who thought "this time it's different" about the last speculative real-estate bubble.

Edit: to put a finer point on it, if you would have bought gold in 1850 and sold it at any time recently except for during the speculative bubble of the late 70s or the last decade you would have lost money, around a quarter of your initial investment, or around negative 0.2 percent interest rate. If you would have bought gold at its low point in 1919 and held on to it for 80 years then sold it during some time in the 90s you would have just slightly more than doubled your money, for a whopping return of 1.2% per year.

You reveal a huge bias by the fact that you selectively pick only an extreme event that spans about 0.001% of 30 years as a prime example.

The wild peak of gold in 1980 lasted for days, on a temporary burst higher. The average price of gold in 1980 was $615 or so. Your scenario requires that buyers of gold do not cost average over time, but rather that they only buy at very specific points in time and only sell at very specific points in time.

You could have just as easily purchased gold at $55 in 1972. Or $125 in 1977. Or in 1985 at $300. Or at $266 in 2001.

You make my point about gold: it's a wealth protector, not a vehicle for seeking big real returns. If you had bought gold in 1850 and passed it down the generations, that wealth would have been completely protected from the fiat disaster of the green back the past 90 years. You would not have grown the wealth in some spectacular fashion, because that is not what gold does.

Gold is subject to speculative bubbles just as housing and stocks are. Gold is not a wealth protector unless you are lucky, but that's true of anything. If you buy gold during a speculative bubble then gold is more likely to be a wealth destroyer. If you buy gold today, near the peak of a classic and obvious speculative bubble then you are not doing yourself any favors.

Worse yet, gold tends to return to a constant value after speculative crashes. Compare that to property and stocks which tend to end up higher in the long term, regardless of speculation. If someone had invested their money into houses, land, or stocks in 1850 or 1919 they would have seen a vastly superior rate of return than from gold.

People who advocate buying gold right now are giving irresponsible advice that if followed will almost certainly lead to people losing money.

You don't have to be lucky with gold.

You could have bought in roughly 88 of the last 90 years and been perfectly well protected over time from the loss of value in the dollar.

Indeed, it's always good to sell near the peak of a speculative bubble. What is your argument that "this time it's different" for gold? That the current exceptional run-up of gold prices over the last decade is sustainable and the current inflated gold price will be the price floor for the remainder of the 21st century?

If you're lucky enough to buy gold in the doldrums and sell it at the peak of a bubble, you make a killing. If you're unlucky enough to buy gold during a bubble and sell it during the doldrums you lose a lot of money. If you're neither lucky nor unlucky and buy and sell during the doldrums then you end up making a very paltry return on investment that is inferior to the average of other equally popular forms of investment (such as property or stocks).

Buying gold today is just as smart an investment as buying a house in 2006 or buying stock in pets.com in 1999.

No, I'm not making any argument that "this time is different".

I'm making the argument that the dollar is not going to increase in value over the next 10, 20, 30 years. Rather, the dollar is going to continue to lose large amounts of real purchasing power. Gold priced in dollars will rise accordingly.

Just calculating entitlement costs alone, the Fed will be required to massively devalue the dollar over the coming decades to keep a mass social panic from occurring due to defaults by the Feds on paying SS or Medicare et al.

> Gold is up 87 fold over 90 years or so

Inflation adjusted, its closer to being up 3 fold:


Meanwhile, inflation adjusted, the S&P500 up more maybe 5 or 8 fold:


>> On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes

if you look at the gold price chart above, it's pretty clear that holding gold is not exactly smooth sailing either.

> With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing'.

this is actually also true of stocks. stocks are a real asset in that they are claims on things that aren't directly tied to the money supply. if the fed prints more dollars, dollars are less valuable, but IBM's ability to make money also goes up by the same amount.

also, fundamentally, you're missing buffet's argument:

"this type of investment [(gold)] requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce [(unlike stocks)] -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future."

Stocks are meant to be an investment vehicle, gold is not. The difference is, in an inflationary environment, stocks get murdered in real terms. That was the first line of my initial post in this thread.

The problem with stocks on the smooth sailing point, is that you can have a company that goes bankrupt, and plenty do over 30 years or more. You should look up the rather shocking numbers on how many publicly traded stocks have been vaporized in the last 30 years.

Gold does not go bankrupt, and it will not go to zero (if the last 2,000 years are any indication). Even more specifically, it won't go anywhere near zero.

With stocks you must constantly manage your holdings. With gold you do not have to manage it at all, assuming you didn't go chasing it on a bubble run (which represents less than 1% of the time duration that you could have bought gold over the last 60 years; 1980 for a few weeks for example).

There is a huge time management cost to stocks, most people simply do not have the time to focus on that. Skilled investors certainly do either have the time or the ability.

> in an inflationary environment, stocks get murdered in real terms.

is there any evidence to back this up? is a logical reason why this would be true? i certainly can't think of any

> Gold does not go bankrupt, and it will not go to zero

yes, in this respect, stocks are riskier than gold. if minimizing investment risk is what you want, maybe you should buy gold, or maybe TIPS. however, most people also care about returns.

> There is a huge time management cost to stocks, most people simply do not have the time

this is an argument for ETFs, not an argument for gold

Sure there is evidence, the 1970s provided lots of it, and the last 15 years have provided even more.

A quick glance at the Dow chart from 1960x to 1983x tells that story very well.

Gold did extremely well during the inflationary late 1960s and the 1970s. Stocks did horrifically terrible in the 1970s (which is where Buffett made a lot of his killing in the market, buying dirt cheap). Right up until the point where Volcker broke the back of inflation in the early 1980s, at which point stocks had a stellar run while inflation was relatively tame.

The reason this happens is: inflation hammers almost every core ingredient of an economy. It kills real savings, because the rate of return on cash can never outrun inflation. It pushes up of the price of commodities that producers need, while eroding wages capabilities for the bottom 90% (the rich can shield their wealth from inflation, poor can't shield their wages). That makes producing things more expensive, while simultaneously limiting the ability to raise prices on consumers that have less real cash to spend. So it squeezes companies, and it erodes real growth.

If you have a 5% to 10% net profit margin, and you're growing at 5% to 10% per year, which are perfectly common rates for most businesses - if you run real inflation at 5%, you're making it radically harder to survive random risk events in the course of business, you're removing critical points of profit and the ability to stick back cash for a rainy day. In effect, that hammers the stock market because it's an inter-connected economy in which IBM or Microsoft or Dell or Cisco all depend on small businesses. And so on and so forth.

There are now a lot of ETFs, you still have to pick among roughly 1,000 of them.

>Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock

$1 in gold 90 years ago: $87 today (by your number anyway)

$1 in a basket of stocks that were traded to match the DOW starting 90 years ago: $174 today (from the article's numbers)

Keep in mind this includes the recent 5 year period where gold has shot up and stocks have performed miserably. If we picked different dates, gold would be even further behind.

I must be missing something. The situation described is not a fold. When talking about folding, you're really talking about doubling. For $1 in gold to increase 87-fold, it would have a value of approximately 7.7 times 10 to the 25th power. I'm pretty sure that was not the intent.

What's really being said is that $1 in gold has gone up 8700%. Compared to the same dollar going up 17,400% in stocks.

The problem is you could have actually owned gold for 90 years. Average Joe could have bought gold and held it.

You could not have owned the Dow index for 90 years and then left that to your children or grandchildren.

Would you like to still be holding Polaroid or Kodak? Or perhaps just bought and held the classic Dow index perpetual GM? You would have gotten wiped out in the Dow shuffling. The Dow gets to drop something like GM at its convenience, but if you had bought its stocks in a basket format (not an ETF), you'd literally be holding worthless old GM shares, and a lot of other worthless shares that they don't currently count in today's Dow numbers.

The Dow calculation is a theoretical, not an actual. 90 years ago only a very savvy investor could have owned a basket of stocks to mirror and index exactly and constantly traded in and out of the market. In 1920, an exceedingly small % of people owned or had access to equity markets.

Buffet using even 1965 as the reference point is disingenuous because of those reasons. His scenario is not a normal one: he used his father's brokerage firm to commit his first market transactions back in his early days. How many Dow tracking ETFs existed in 1965? How many people owned stocks in 1965? Today you can open an account at Scottrade or wherever, and pay a mere $7 transaction fee to buy stocks.

The Dow doesn't get to drop GM after it goes bankrupt and then not count its losses. The decline of GM hurt the Dow index just as much as it would have hurt anyone else that bought and sold GM stock when the Dow index added/dropped it.

It also represents an average of the market, so the fact that it was hard to mirror it exactly is not particularly relevant. Mirroring it approximately, or buying any other large basket of stocks, would have led to roughly the same result.

While it's true that an investment in Gold was better than an investment in USD, it wasn't better than common stock equities. You said the only way to capture a return better than Gold was to buy a particular stock at IPO, but that's just factually incorrect.

The Dow gets to replace GM with another growth vehicle of the modern era. While you take a real beating on the shares, the Dow simply swaps in a new stock (typically one with brighter prospects that can recharge the lost value in the Dow).

You can't swap your dead GM shares for the shares in, say, John Deere when it's added to the index. Your money is gone.

You, simply put, utterly fail to understand how indexes work.

There are index funds that swap out exactly the same way the Dow does.

"The problem is you could have actually owned gold for 90 years. Average Joe could have bought gold and held it."

I don't understand why this is a problem.

You seem to be arguing that if you were a person of average wealth, thinking about investment 90 years ago, gold might have been a reasonable choice.

But if I want to invest today, investing in an ETF will almost certainly give me far greater return than gold.

"In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers)."


"Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario."

You are on to something here, and you don't recognize it.

Many economists believe that the CPI actually overstates inflation, in the long run, for a variety of reasons - quips about how "you can't eat an iPad" notwithstanding.

Gold per ounce

1968 $39.31 2012 $1,750.00 (current price give or take)


Berkshire Hathaway one share

1968 $36.00 2012 $118,000.00 (current price give or take)


Which would you rather invest in?

Comparing the price-change in gold to the price-change in just one stock is cherry-picking the data, no matter how correct your main argument is.

There are very few things you could leave for your grandchildren that will retain their value

How about well-educated and well-raised parents for said grandchildren?

In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers).

Am I correct in interpreting this to mean that you believe that inflation has been 100% over the past 12 years (that what you could have gotten for $13 in 1999 would only get you half the same basket of goods today)?

By the 1980 CPI, inflation is running at closer to 9% right now. So yes, I'm saying inflation has been chugging at a brutal pace the past 12 years. When the CPI was that high back then, Volcker had to take extreme measures to tame inflation. When inflation was 3% to 4% in 1970/1971, Nixon installed price and wage controls. Now when it's much higher on our new CPI, we don't even bat an eyelash at the extreme inflation.

You might think, for example, that real estate has gotten cheap? It's up 100% over the last 12 years in real estate disaster zones like Phoenix. How many people have seen their wages climb 100% in the last 12 years? That's pure inflation, as the historical rate of return on real estate is closer to 1% to 2% per year.

You can also blatantly track the huge inflation of the last 12 years in most commodities.

The current Fed CPI, which was altered during the early Clinton years to hide real inflation, says that inflation is around 3%x. It leaves out all sorts of fun inflationary items (because the Fed says they're volatile, har har).

What kind of fun inflationary items? And please don't say gold or oil as it would be an extreme case of cherry picking commodities.

The Fed CPI excludes food and energy.

So when milk goes from $1.50 to $3.60 per gallon over 20 years, they pretend that never happened.

Or when gasoline goes from $0.75 to $3.59 over 30 years, they pretend that never happened.

They pretend you don't need to eat food or drive anywhere.

Uh, the Fed CPI does include food and energy prices. The government does have a separate "core" inflation number which excludes food and energy prices, but the regular CPI number includes food and energy and has forever.

Specifically, the CPI-U includes food & energy, but economic analysts and policymakers like to use the CPI-U for All Items Less Food and Energy because of the volatility of commodities.

The CPI-U however is still available and was last sitting at 3% for 2011. Again, that's with food & energy. http://www.bls.gov/news.release/cpi.nr0.htm

Not only that, but the numbers that exclude food and energy make inflation look higher than when they are included.

You talk like the price of gold has never gone down or been stagnant for decades at a time. How much of that 87 fold is due to the last decade?

That's the entire point.

Inflation has been substantial the past decade. Gold would have shielded you from it.

You buy gold for the protection it offers from the devaluation in the dollar (in this case), not because you think you're going to get rich from it.

Are you taking dividend yields into account?


The S&P for example has had a roughly 2% average dividend yield on its basket of stocks over the past several decades. That helps, as without that dividend value the real return for stocks would be even worse the past decade.

For dividends to work in an inflationary environment, you need serious yield. AT&T and Verizon as common stocks would get you close with their 6%x yields. Most people these days of course can't get access to good yield on anything with interest rates on the floor (corporate debt and select few dividends being nearly the sole safe exceptions).

"If you had bought and held the stocks that make up the Dow over 60 or 70 years, you'd have gotten demolished because the Dow constantly shuffles its index."

No, but if you put your money into an index fund, you'd be shuffling your money exactly when Dow did.

Why are you being downvoted? Your comment is spot-on. Look at the market performance of 2011 and you will see why:

Stocks: +0.93% US Treasury Bonds (Long Term): +33% Gold: +10%

He's exactly right about Buffet. Buffet makes all his money because Berkshire Hathaway collects all of these insurance premiums and he can use the cash flow float to make a few extra points of interest (above inflation). Do this with enough $billions for long enough and you will own all of the money in the world.

Single-year performance is a terrible measure of the value of an investment.

So what is your investment recommendation then? Avoid the market and invest in Gold?

Not exactly. If you're asking as a skilled money manager or investor, I'll give you X advice. If you're asking what I think the average Joe should do (someone with limited time and skill when it comes to money management), I'll give you Z advice. A lot of it depends on how hard you're willing to work to protect and grow your wealth.

If the market is near 13k like it is today, with corporate profit margins at all time highs (cyclically impossible that they'll stay up there), I'd say you should be out of the market. Corporations are accumulating debt at the fastest pace in history (which is one of the reasons they're also hoarding cash, as an offset). When rates spike higher as they eventually must, those companies will get demolished. Far better to wait for the next plunge and be opportunistic, than to hope for a few more points on top of this already huge several year run. Buffett's mantra works very well in that case: be greedy when others are fearful, and fearful when others are greedy.

Buy gold on big drops, like when it fell from $1900x to $1530x recently; but never chase it when it runs. Keep it a modest part of your portfolio (10% to 25% depending on your particularly preferences). It's not a growth vehicle, it's a wealth protection device.

Corporate debt is a great place to get good yield right now, but again you have to know what you're buying.

It's perfectly fine to take an annual hit on inflation against liquid dollars (granted that's under, say, 10%); better to have opportunity cash available. Typically people miss big opportunities because of a lack of cash. Really big opportunities are not that rare, they come around every 3 to 5 years, and the returns you can make off of them are extraordinary. You buy the Dow at 7,000 when everybody else is writhing in pain from the ride down from 14k.

Own commodities when they're occasionally cheap. For example, when potash crashed during the global implosion a few years ago, you could have purchased stocks like POT for 80% off. When oil was $10 or $12 circa the late 1990s, the common 'wisdom' was that oil was dead, a terrible investment, and so on. In reality, cheap energy is almost never a terrible long term invest. The human desire / need for cheap energy will continue to be infinite, which ensures that prices will swing up at some point (even if it takes several years).

Right now, I'd tell most people to look around themselves and invest there. Get a strategically better education perhaps; or find a good business to purchase or invest into. Something you can directly apply your sweat equity to with multiplication potential. Shield your wealth until you find the right opportunities; people seem to often undervalue patience. You don't need lots of homeruns, you need very few.

In this environment, it's all about having liquidity to be opportunistic. The volatility in the global economy is almost guaranteed to produce wild swings over time. When people panic, be there with your cash.

So let me get this straight.

Half of your thesis is that gold is great because you don't have to do anything but sit on it and hold it, unlike stocks (we'll pretend that index funds don't exist in your fairy-tale world). The amateur investor can just buy and hold, no rebalancing necessary.

And then you turn around and, as investment advice, essentially say "The trick is to, without the benefit of hindsight, figure out what each next bull market is going to be, buy it at the bottom and sell it when it's at the top."

Fantastic fucking advice. Mind if I borrow your time machine sometime?

Unbelievable response. I am a lowly CS grad student at the moment so investment is not my greatest concern, but hopefully in the near future I will have some money to invest. When that day comes I will take a second look at your advice from a practical perspective. At this point it is fun to fantasize though...

Any discussion involving gold unfortunately brings out the loons.

Buffet: "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."

Buffet implicitly rejects global warming here, specifically the latest projections on drought: http://earlywarn.blogspot.com/2012/01/another-terrifying-dro... and others.

You seem to implicitly reject the human ability to adapt. We'll find a way to adapt to the changing environment. Hell, we might even adapt our habits (ha!) and allow the environment to correct itself.

Regardless of the plausibility of global warming, 400 million acres of farmland will still produce more value in crops than you could shake your investment stick at.

No, I read very smart people who try to analyze what it would take to adapt, and they range from deeply concerned to terrified. Start here:

or here:


I don't think he's rejecting anything, just making a general point about investing in something with cashflow (a business, farmland) vs speculating in something that is only worth what others will pay for it (gold, commodities)

Did you follow the link? Buffet's recommendation comes with a long time horizon, and the asserion that he can predict stability:

"Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle."

I think he's right about people, but in the statement he is also implicitly asserting that peanuts will be a cheap commodity in 100 years. That rejects our best projections regarding climate change. The much more important implicit assertion I quoted in the downvoted post (thanks guys) is that you can buy productive farmland now that will be productive in a century. That will only be generally true if climate change does not happen.

I've been following Buffett for a long time. I've read all of the BErkshire letters and most of the partnership letters. I've read 2 biographies of him and watched and read dozens of interviews.

He was making a general abstract point, not a specific prediction. That's just the way he talks, and maybe it could be confusing if you are not used to it, but that still what it is.

And btw, MidAmerican Energy, a Berkshire owned utility, is the biggest investor in wind power in the US and just bought huge solar power projects.

I'd be willing to bet that when he wrote that sentence, global warming was one of the furthest things from his mind.

Even so, I'm pretty sure Warren Buffett is a businessman, not a climate scientist. It's called the Appeal to False Authority, look it up.

Honestly (and regardless of the actual value of global warming) the projections have changed so much and are so impossible to nail down exactly that they might as well be read in tea leafs.

And if we get draught, what do you think the farmers will do? irregate their fields.

For "changed" please substitute "have gotten more specific, more grim, and better corroborated."

WRT irrigation, we lack enough water now on a global scale.

>For "changed" please substitute "have gotten more specific, more grim, and better corroborated."

That's not true at all. If anything the last decade has shown the data and models are woefully inadequate for prediction.

So you believe global warming is going to end life as we know it. How does that change your investment strategy?

Global warming is a red herring here. No matter how hard food production gets, it will remain a value-creating activity as long as there are people (if you don't believe me, then stop eating).

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