Do you have an eccentric uncle who lives in a rural Arizona trailer park? Has he recently gone on a rant about hyper-inflation and the economic ideas of Glenn Beck? Did he just spend half an hour talking about how he put all of his life savings into some sort of exotic gold bullion recovered from an 18th century Spanish galleon?
If so, you should make him read this. It’s Warren Buffett’s annual letter to Berkshire Hathaway shareholders. This year’s letter included a shockingly simple explanation for why gold is a terrible investment.
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 about $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?
Buffett points out that he seeks investments based on their ability to produce future wealth. He only wants “productive assets.”
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.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
So why are we seeing such a bubble in gold prices? Buying gold is basically just a bet that other people are even more fearful about the future than you are. As Matt Yglesias put it today:
Rather than being the ultimate hedge against risk, gold is something like the ultimate pure speculation play. You’re betting that in the future more people will want to bet that future people will want to bet on gold.
