Warren Buffet’s Thought Experiment
What will you buy if you have $9.6 trillion? 1,70,000 metric tonnes of Gold for $1,750 per ounce, which has limited industrial use, and mostly decorative utility, or 400 million acres of U.S. cropland with output of $200 billion annually + 16 Exxon Mobil’s each earning $40 billion annually + $1 trillion in cash.
[He concluded that] 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’s will probably have delivered trillions of dollars in dividends to its owners, and will also hold assets worth many more trillions.
The 1,70,000 tons of gold will be unchanged in size, and still incapable of producing anything. You can fondle the cube, but it will not respond.
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.
How did Warren Buffett Get Rich?
By investing in real businesses selling shoes, chocolates, credit cards, razors, undergarments, jewelry, bricks, insurance, ice creams, etc…
I think when you are buying jewelry for the woman you love, financial considerations probably shouldn’t enter into it.
Gold is a club of collective terror, where the people who hold it spread doom and gloom, and then invite you to buy the store of value, that they own at a higher price than they have paid.
It is an elaborate and enduring spoof, but one that has infinitely attractive characteristics.
The thing that has always bothered me about gold is it has no value-creating unit.
Underlying common stocks are earnings and dividends. Underlying bond returns are interest coupons.
Underlying gold returns are nothing. There’s nothing. So it’s a complete speculation on price.
Everyone asks about gold. This is the irony: just as Jim Grant tells us (correctly) that we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal.
It pays no dividend, cannot be eaten, and is mostly used for nothing more useful than jewelry.
I own some personally, but really more for amusement and speculation than for serious investing.
It may work well and it may not. In the longer run, I believe that resources in the ground, forestry, agriculture, common stocks, and even real estate are more certain to resist any inflation or paper currency crisis than in gold.
Moral of the Story
Gold is very powerful gifting option rather than an investment option.