The longer quote from Warren Buffett is very interesting
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). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything.
I don't get it. Warren Buffet seems to be wrong, which is somewhat unlikely.
First, there is only one "world's most profitable" Exxon Mobil. You can't buy 16 of them. Second, oil will run out. Sure offshore drilling will extend how long we can produce it for, even one Exxon Mobil producing at this rate doesn't look like it will last much longer than a century [1]. It is likely that the price of oil will go up (I think orders of magnitude) as the reserves dry up, but not enough to keep producing $40 billion/year. As one of my professors in college said "Your children will not believe you burnt this stuff" as it is so useful in other ways.
Second, oil is not end-all be-all. Cold fusion [2] is coming, and it will make energy cost a rounding error as compared to today's cost. It is not clear when there is a good chance it will happen within the next 100 years. This will mark a singularity past which even the investment genius of Warren Buffet is unlikely to see.
Because of point #2, crop fields may lose their value. Why bother growing things under the sun, when we could grow them using an artificial energy source much closer to us, that we control? If all of a sudden, every household has a self-regulated food growing companion cube, powered by dirt cheap energy, why bother with corn fields?
I suppose his larger point is that you are better off investing your money in companies that produce value in the world vs holding onto value. I would agree with that. However, for the love of god, don't buy 16 Exxon Mobils! If you have that kind of money, talk to me instead. I have a very profitable bridge to sell you!
I am stuck wondering if this is an ironic comment are not.
Obviously you wouldn't buy 16 Exxon Mobils. He used it as an extremely profitable company, and I guess you could say just buy the top 16 most profitable companies.
Cold fusion? Any recent research backing your claims? It's been pretty well characterized as junk science since the 90s [1,2].
However,
>I suppose his larger point is that you are better off investing your money in companies that produce value in the world vs holding onto value.
First, there is only one "world's most profitable" Exxon Mobil. You can't buy 16 of them. Second, oil will run out
You missed his point: you can buy 16 Exxons or one Exxon, one Google, one MSFT, one GM, one GS....and so on. The idea was that stocks perform better given that companies are always earning money (at least many of them)
Nobody wants "All the money in the world". (I saw very cute afterschool-special many years ago, about a kid who found a leprechaun and got 3 wishes, and wished for all the money in the world. The wrld economy froze until he wished he never wished that.)
Money (including gold) functions as a symbol of debt, and it works when it is distributed throughout the economy as a lubricant. Which would you prefer to have: all the motor oil in the world, all the machines in the world, but no oil? Both are worthless without a measure of the other.
Buffet jr, always the rebel. Let's hear what his father Howard Buffet had to say about gold. From Businessinsider: "I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support.
> You can fondle the cube, but it will not respond.
It may not, but I certainly will. Joking aside, there is value in having a store of value. Whether it be gold, diamonds, or green pieces of paper. Not everything has to produce something. Some things merely facilitate.
Exactly. The true value of the gold for the investor that chooses to buy it instead, is that in the future he will be exchange it for whatever he wants then at (hopefully) close to the same exchange rate he bought it for. He believes it's value won't decay with time, or at least that there is less risk with it than with his other options.
Buffet's argument would be just as valid if it was applied to a pile of US dollars for example.
The only difference is, that you have to actively engage in order to keep Exxon running and the farmlands productive. Plus think of all the lobbyists you have to hire to keep the government away from taking your farming subsidies and oil rights.
With the gold, you just dig a hole, put it in the ground and you know that when there is a time you need it, it will most likely be of the same value than when you put it there in the first place. It is about how much capital you have, your personal views on global economic stability, and how actively you are willing to work that capital.
Sure, investing in running farms takes more day to day work, and the probability of seeing your entire non-diversified portfolio wiped out might be somewhat higher.
But gold prices are far from stable: they're at least as volatile as the stock market albeit tending to move in the opposite direction. They can be hugely affected by changes in legislation which affect the perceived risk or return to actual investments, not to mention exchange and convertibility restrictions or the vague possibility of returning to some sort of gold standard, so anyone holding a vast fortune in gold can't really afford not to have lobbyists and PR campaigns
(an interesting corollary is that as the real purchasing power of a gold portfolios rises when the economy as a whole stutters, "gold bugs" generally don't have a vested interest in economic stability...)
>At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion
Where did you get this price from? It's 1598USD/ounce.
I agree with your point. Given its rarity, gold has always been treated by a lot of cultures to be a safe commodity. People will always give you money in return for it - where-ever you go. It doesn't produce or generate anything, but it has been and will always be used as a storage of wealth.
Then you are not buying the gold, but investing in Exxon Auric, newly the worlds most profitable company
I think buffet is cautioning against seeing gold as an investment (buy now wait for the price to go up). He compares it to real productive investments - and as such explains why he is rich and everyone who has said store of value is useful is not rich
On the other hand, we have invented a new energy source and no longer have much need for oil or farmland. Meanwhile, gold will most likely still enjoy its status as a luxury item which people will clamour for no matter what the price (our needs are limited, but our wants are unlimited...).
If you're presuming a new invention that makes farm land and oil irrelevant (a star trek replicator) then it's likely gold can be produced by this new method as for there to be unlimited supply, making your pile worthless
You have a point, although I suspect you'd end up with a division in mindshare between 'synth gold' and 'real gold', which might complicate the matter.
But I was thinking more along the lines that people will be constantly trying to invent replacements for oil and more cost effective food stuffs, whereas there's far less need for a replacement for gold (or gold mining). Besides, I imagine even if we did invent a replicator, it would still need the raw material input so it wouldn't really affect the demand for gold. It would just effect how much land we need to grow food and things like that.
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). 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.