Buffett Disses Gold

Includes: GLD, PHYS
by: Market Blog

By David Sterman

Warren Buffett is getting a lot of attention for an article – actually, an excerpt from an upcoming shareholder letter – he wrote in Fortune magazine, arguing in favour of owning stocks right now. Big deal: He’s expressed bullishness before, particularly during the depths of the financial crisis when, true enough, stocks were a steal.

But what’s far more interesting about Mr. Buffett’s article is his scathing views on gold. Conforming to his usual clear-headed and folksy outlook, he doesn’t linger too long on the monetary attractiveness of gold but rather zeroes in on its current valuation – which he calls “staggering.”

He puts it this way. If you assembled all the world’s 170,000 metric tons of gold, it would form a cube that is 68 feet per side and would fit within a baseball infield. Its value, at $1,745 (U.S.) an ounce: $9.6-trillion. He calls this cube pile A.

Pile B is also worth $9.6 trillion, but it is made of things entirely different than gold: With this amount of money, it could hold all U.S. cropland (with an annual output of $200-billion a year), 16 Exxon Mobils (NYSE:XOM) (where each one earns $40 billion a year) and still have $1-trillion left over.

“Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” Mr. Buffett asks.

He can, but only out of fear.

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” he said. “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth – for a while.”

He then drops the B-bomb:

“Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the ‘proof’ delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: 'What the wise man does in the beginning, the fool does in the end.'”

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