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Buffett On Farmland And Exxon Mobil Vs Gold

|Includes: ABX, AUY, GG, SPDR Gold Trust ETF (GLD), IAG, NEM

Gold and silver prices are crashing this morning and I was reading some news on my Twitter feed I noticed someone link to a post at called Warren Buffett on Gold. Ivanhoff had a nice summary from Buffett's 2011 Berkshire Shareholder Letter that contains one of my favorite description of gold's value and how to think about the investment case for the yellow metal.

Here is Buffett on how you should think about gold:

"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 $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?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers - whether jewelry and industrial users, frightened individuals, or speculators - must continually absorb this additional supply to merely maintain an equilibrium at present prices.

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."

I like the line: "Can you imagine an investor with $9.6 trillion selecting pile A over pile B?" But yes, many people select their small portion of pile A over pile B when they buy shares of GLD over XOM, etc… in fact, in the area where I live, it only costs about 2 ounces of gold to buy an acre of farmland. As Buffett, says, what will produce more value over the next century or so?

Gold Stocks: Junk?

Although I wholeheartedly agree with Buffett's case against gold itself, I'll invert (like Munger tells us to do) his thinking for a moment. In the late 90′s, Buffett did invest a sizable amount into silver, which arguably a similar case could be made against it. And Walter Schloss invested in gold and other metals miners during his career, as long as they were selling at or discounted to book values.

I study the 52 week low list (along with 2-3 year lows as well) and I've noticed for weeks that the miners have shown up. I've also noticed that the miners are ranked 97th (out of 98) in Value Line's industry ranking in terms of price performance.

I have kept a small watchlist of miners to watch, and although these are not franchise type companies, they may become cheap enough to make an investment in at some point, if their stock prices become cheaper than their net assets. But these are Enterprising type scenarios, and not for the Defensive Investor. Here is the list I'm watching:

  • Goldcorp (NYSE:GG): Price to Tangible Book Value (P/TBV): 1.0 (very low debt to equity relative to other miners)
  • Newmont Mining (NYSE:NEM): P/TBV: 1.2
  • Yamaha Gold (NYSE:AUY): P/TBV: 1.1 (also very low debt)
  • Barrick Gold (NYSE:ABX): P/TBV: 1.4
  • Iam Gold (NYSE:IAG): P/TBV: 0.6 (net cash on balance sheet, but more geopolitical risk)

Most of these stocks have lost 50% or more of their values over the last 6 months. Please note that these are just stocks that I'm watching. Gold miners do not have economic moats, and so if I decided to invest into this industry, I would take a small and diversified position in stocks that are selling for less than their tangible net worth's. Be careful…

Disclosure: No position. Please do your own research. Nothing I say on this blog should be regarded as personal investment advice. Everyone's personal financial situation is different.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.