By MoneyMorning.com.au
Warren Buffett is a hater.
He hates gold. And he’s keen to tell as many people as he can just how useless it is.
In an article for Fortune magazine, the multi-billionaire investor “proves” that stocks, farmland and cash are a better investment than gold.
In a moment we’ll show you why Buffett is right… but also why he’s dangerously wrong. First, let’s summarise Buffett’s position…
He compares two investments. One is to buy the entire stock of gold ever produced. He says it would “form a cube of about 68 feet per side”. And the estimated value would be USD$9.6 trillion.
The alternative is to invest USD$6.4 trillion in Exxon Mobil shares (this isn’t possible because the market cap of Exxon Mobil is only USD$409 billion. But for the purpose of his example he says you could buy 16 Exxon’s). And USD$2.2 trillion-worth of farmland.
The remaining USD$1 trillion is for “walking-around money”. In other words, pocket change.
In fact, Warren Buffett says gold is so useless when compared to other investments…
“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 Mobile (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions… The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube [of gold], but it will not respond.”
Look, he’s using an extreme example. But we get the point he’s trying to make. He’s saying is that gold is useless because it doesn’t produce anything and doesn’t even earn its owners an income (unless you lend it to someone for a fee, which arguably defeats the purpose of owning gold in the first place).
In a way, Buffett makes the same argument for investing in Exxon Mobil and farmland that we make for investing in gold – they are hard assets. Exxon Mobil produces the world’s most important energy commodity.
Farmland is necessary for feeding the human population.
And gold is an asset the government can’t devalue by decree – even though governments may try. And unlike shares and farmland it’s very hard for the government to expropriate it (again, even though they may try).
For years the U.S. government rigidly tried to keep a lid on the gold price. Right up until the U.S. dollar gold-exchange standard ended in 1971, the U.S. government insisted the official price of gold was only USD$35 per ounce.
But that didn’t stop the market setting its own price. In the early 1960s the gold price “bubbled” to over USD$40 as traders bet the U.S. government would raise the official price. It didn’t and so the “bubble” popped.
But by the late 1960s there was no stopping the market from taking over the gold price. Before U.S. President Richard M. Nixon announced the end of convertibility of U.S. dollars into gold in 1971, the market had already pushed the free market price of gold back above USD$40. By 1972 it was USD$58 per ounce.
Or put another way, the value of a dollar in gold terms had fallen nearly 40%.
That’s why you should own gold.
(By the way, the U.S. government still sets the official price of gold at USD$42.22! There’s no accounting for the stubbornness of bureaucrats.)
We agree with Buffett. Stocks are a great investment. But not all the time… as anyone who bought shares at the top of the dot-com boom in 2000 or the mining boom in 2007 will tell you.
As we see it, gold isn’t just an alternative to stocks or other income-producing assets. Gold is also an insurance policy. And as many real money supporters will tell you, gold is also money… and has been for thousands of years.
But this isn’t an argument over whether one asset is better than another. That’s just dumb. Who cares if gold is better than stocks… or cash is better than property?
What’s important is to figure out when to buy a particular asset. Take a look at the following table. It shows the respective returns for five assets since 1978:
Sources: Money Morning Australia, Google Finance,
Measuringwealth.org, State of Iowa
We’ve chosen five year intervals for no other reason than space limitations.
If investors followed Buffett’s advice in 1978, 1983 or 1987 they would have done well. Exxon Mobil [NYSE: XOM] shares have produced quadruple- and triple-digit gains for those investors who bought and still hold.
But in 1992 the best investment would have been in Warren Buffett’s Berkshire Hathaway A-Class [NYSE: BRK-A] shares. An investor would have made a 929.05% gain holding them from then until now.
Yet investors who followed Buffett’s advice since 1997 haven’t done as well. Either from buying shares in his company or in Exxon Mobil.
Because by far and away the best investment has been… gold. Iowa farmland and Exxon Mobil come a distant second and third. Berkshire Hathaway and the S&P 500 come in fourth and fifth.
What this simple exercise tells you is that you won’t achieve investing success by backing one investment and running with it forever. The trick is to identify a trend early on and stick with…
But only until you find the next trend.
Cheers.
Kris.
P.S. We’re betting on natural gas as the next big trend for 2012. But it isn’t the only potential trend. At the Port Phillip Publishing investment conference in Sydney next month, your editor, our colleagues and a select few guest speakers will highlight some of the best investment ideas for the year ahead.
It’s a must-see event for any serious investor. You can check out the subjects we’ll cover by clicking here…
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