Buffett on Gold: He Makes Some Interesting Points!

The price of gold has reached some pretty high levels this year, as we know. It’s busted through historical highs, albeit on a non-inflation adjusted basis. Still, gold has gone from almost an afterthought in some people’s minds to a high flying investment once again.

With this in mind, I did some reading on gold recently, looking at some articles online.  In doing so, I came across some stories that discussed some Warren Buffett quotes and conversations from earlier this year. Buffet had given his thoughts on gold as an investment, and how it compares to other alternative uses of capital.

Here’s a summary of his main points:

If you took all the gold in the world, it would be valued around $7 trillion. This would equal about 1/3 of the value of all U.S. stocks. By comparison, the value of all farmland in the U.S. is about $2.5 trillion. You could take that farmland, add 7 Exxon Mobils to it, and have an extra $1 trillion to boot. What’s a better use of funds? You could probably do more with these alternatives to gold, versus just staring at a giant block of gold that looks nice but doesn’t actually do anything.

When you look at it in those terms, it makes sense.  Gold, as such, has limited real world use. It’s considered a storage of wealth, but as an actual element, what does it really do? It doesn’t directly generate income, it doesn’t produce anything that directly generate cash flows. It’s a speculative investment that can go up and down in market value.

I’ve seen people pumping up gold lately, even hearing one guy talk about how there’s a lot more room for gold to increase in value. Basically, he’s totally bullish on gold, it would seem. Additionally, I’ve seen many more businesses out there which buy and sell gold. I even saw one a few months back in a local indoor mall. There was a kiosk that had a sign that indicated that the people running it would buy gold. In fact, it seemed like the kiosk was truly dedicated to gold and little else based on first impressions. Those types of businesses just didn’t seem as prevalent in the not so distant past, before the huge price appreciation occured. It reminds me of how all kinds of people got involved in the real estate industry while it was in full bubble mode.

Speaking of this price appreciation, I see that gold has surpassed $1660 per ounce as I write this! There’s a lot of uncertainty of where things are headed in terms of the global economy.  This debt crisis in the U.S. isn’t one of our better moments, and there have been all kinds of problems in Europe of late.

When I see how this has become such a hot market, I think of the Buffett comments. They make me pause to consider exactly why gold has maintained it’s place as a store of value over time, taken in context with what we’re seeing with the price of gold lately.

My Questions for You:

What do you think of Buffett’s comments earlier this year?

Do you ever think about the opportunity cost of owning gold, in this way?

What are your thoughts on where gold is at today, in terms of it’s value and it’s potential for continued growth?

Comments

  1. says

    I’ll respectfully disagree on this one, Squirrelers. I think Buffett’s comment make him look like a bit of an opinionated boob. Saying that gold doesn’t do anything is engaging in a bit of misdirection, as neither does cash. It just sits there and doesn’t pay a dividend. Neither do many equities. Neither does your house, and yet leveraged real estate is often touted as an “investment”, not as a decaying asset which must be maintained and paid taxes on.
    Gold in and of itself is not an investment, merely a store of value as agreed by other people, and in “other people”, I don’t necessarily mean solely the population of mature economies. As long as folks in India and China think that buying gold and silver is just swell as a form of saving, I’ll continue to do the same.
    Also, it’s not and either/or false choice between ALL gold or farmland or stocks. I’ve got all three (in various forms and determinate amounts that fit my allocation strategy), plus other asset classes.
    Will gold go higher? I’m not certain, but I personally think it’s a much safer option than some municipal or foreign sovereign bonds.

    • Squirrelers says

      101C -

      I knew this post would be contoversial, as Buffet’s comments generated a few criticisms:)

      Clearly, there were people that shared your view, essentially finding Buffett’s comments as being a bit arrogant. Personally, I’m not sure about that. I think that there are bigger picture issues at play here, in terms of the overheating of the gold market, as well as the actual practical value of what gold really does. It’s simply a store of value that over time people happened to agree upon. Of course the same could be said of the paper on which we have our cash, to be fair:) But the practical uses of gold also don’t match up with other assets, and it’s eye opening to think that one can have all the farmland in the US for the value of all the gold.

      Anyway, I think Buffett has some interesting points, though I do feel like some gold is a good idea to keep in a portfolio. It seems hard to imagine these prices continuing their upward momentum indefinitely.

      • says

        Hindsight is always 20/20 and the facts could change, placing gold in a bubble. I would not recommend anyone to go all in, but doesnt mean yhat some exposure isnt a good idea. On the other hand what could you buy with all of the us debt, eh? ;) One mustn’t forget that this fiat experiment is only a few decades in the making, and previous experiments have not had happy endings.

        Gold seems fringe to mainstream, but we are young… what seems normal to us may in fact be very broken and off…

        • Squirrelers says

          Investitwisely – you bring up very good points for perspective. The US was tied to gold at one time, as an example. As for exposure to gold, I think that some exposure makes sense, just not all in or too heavy in gold. It’s all about one’s overall portfolio in light of age, financial goals, resources, etc.

      • says

        P.s. there is a similar question in economics. What is more valuable: a diamond or a bottle of water?

        Now what is more valuable? ALL of the diamonds or ALL of the water?

        You change the question completely when you add that qualifier. We would take one diamond over one bottle of water because another bottle of water is very easy to obtain, but if it was a choice between all or nothing, we have to choose water because without water we die.

        Usually we are not in a position to make such choices so the question is rhetorical at best. 101 Centavos said it right when he said you can have all 3.

        • Squirrelers says

          Investitwisely –

          Yeah, I’ve brought up that type of question before in support of water (different topic, but similar example). It all depends on context. We could all live without diamonds, and our lives wouldn’t be impacted much at all if we never owned a diamond in our lives. Go 8 hours without water, and we couldn’t survive. Logically, water is more important, right? For some reason, diamonds have value despite having no real importance.

          Same goes for gold vs land, right? Without land, we couldn’t make it. Without gold, our lives could theoretically go on without any problems. But gold has been historically designated as a store of value.

          What if the medium changed, in terms of what’s the predominant store of value globally? We’d still need land regardless.

          Anyway, these are interesting things to think about. The reality is that gold keep going up and up in value to investors globally, reaching highs today as I type this.

  2. says

    Gold is a different asset class and cannot be compared with regular stocks. For me, Gold is a hedge against fear. If all the currencies in the world were to break down, Gold will be the last man standing.

    I agree with Buffett, but I don’t blindly agree with everything he says.

    • Squirrelers says

      Moneycone – I too see gold as a hedge against fear. If we really do need some default store of value, it seems like gold would fill that role based on history. I do agree with you, though let’s also keep in mind that is an arbitrary store of value.

  3. says

    His argument is a strawman because first nobody is in a position to make such a purchase and second the exact same is true of fiat paper, except gold will have value far in the future and the paper won’t.

    He is right insofar as one compares gold to an income producing investment and I understand his argument if this is where he is coming from but this is like comparing apples and oranges. One doesn’t do that anymore than one would make his argument but substitute paper currency for gold.

    • Squirrelers says

      Kevin – one could substitute paper currency for gold in the argument, and it might be the same concept in the sense that both are simply stores of value. Neither throw off cash flow, or actuall do anything. They’re stores of value. Thing is, gold has absolutely skyrocketed in price and is being viewed as a hot investment. Has the look and feel of a bubble, perhaps? I do think that gold has a place in one’s investment portfolio, and would like to have some in mine, though buying in at these prices seems high.

  4. says

    I’ll take productive land over gold any day. People will always value productive land whereas the relative value of gold fluctuates.

    • Squirrelers says

      Linda – I think that it takes a paradigm shift for many people to view it that way. Realistically, the argument of all the farmland in the US vs all the gold seems clear to me: you can do much more with the land than the gold in direct, practical terms.

  5. says

    Warren Buffett bought 130 million ounces of silver a little over a decade ago and stated that he sold too early and didn’t make much money. Imagine if he had held. I wonder if he is a little bitter regarding that trade not to mention that he missed the gold rally.

    What he says is true, but I find it somewhat ironic from someone who owned all that silver to trash gold.

    • Squirrelers says

      Cashflowmantra – I agree with you that what he says is true, and it’s also interesting in light of his past sliver investments.

  6. says

    I don’t have any gold investment. The price is just too high right now. Once it cools down a bit, I’ll probably purchase some bullion. Probably have to wait 5-7 years though.

    • Squirrelers says

      retirebyforty – may have to wait a bit for prices to cool down, based on the continued upward trend! Who knows, things are so volatile in general in this current climate.

  7. says

    I agree with Linda, and loosely agree with Buffett. I’ve always seen gold as a sort of trophy of wealth – as in, a trinket for someone who has enough money to invest in something that has little real world use and an extreme fluctuating market value. I can’t really see myself ever investing in gold or silver.

    • Squirrelers says

      Financial Advisor MVP – that’s what’s interesting about it, it’s a historical store of wealth despite having no real long-term benefit inherent in itself.

  8. says

    I agree that gold seems to be the market everyone is getting into like they all did with real estate until it went bust. I actually saw a store/big area (bigger than kiosk) in the mall the other day and see people with signs in the street marketing all the places buying gold…..

    • Squirrelers says

      World of Finance – I know what you mean. Many people jumping on the bandwagon with gold. Riding the wave can be great, and people can make a lot of money doing it….but once the wave breaks it can be painful for those still on it. Ok, maybe not the best analogy but you get the idea:)

  9. says

    I agree that gold is acting like it’s in a bubble. Still there is so much fear now over the US and international economy. I’d like to have a hedge against inflation, but I’m not sure what’s the best vehicle. I don’t buy gold because of the high premium over spot price that you have to pay. And gold jewelry has an inflated price also. I have invested in commodities as a hedge, but it looks like they are going in the toilet now. It’s frustrating.

    • Squirrelers says

      Maggie – It’s acting like it’s in a bubble…and the bubble, if there is one like we think there might be, keeps expanding! Up again today amidst the market fallout.

  10. says

    Warren Buffett has proven to be right a lot more than he is wrong. Me, on the other hand, I was way wrong about gold and never thought it would get this high. I still do believe it’s ripe for a correction. But, I’m no expert on precious metals.

    Jennifer Barry over at Global Asset Strategist pointed out something interesting to me. She showed me a chart that gold has tracked the real rate of inflation (calculated by the pre 1990 standard, not the bogus new CPI published by the BLS). So, it truly does seem to be a store of wealth.

  11. Omar Fredricksen says

    You really made some interesting points here Squirrelers, I never thought like this before. I particularly own a gold when it is truly mine and I will make and do the best for it.

  12. Elvira Anthony says

    Up again today amidst the market fallout. Personally, I’m not sure about that. Moneycone – I too see gold as a hedge against fear.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>