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?