Warren Buffett gives a great illustration on the relative value of gold vs. real assets like equities and land.
Every year, Buffett publishes an annual report summarizing the performance of Berkshire Hathaway, while also giving some related insight on current investments. In 2011, he wrote an amazing piece on why gold is an overvalued asset, comparing the what you could buy in equities and real estate with the amount you pay for 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?"
Let's also give some background on the topic. Buffett, is not just a great stock value investor, but also has a great macroeconomic sense (evidenced by past successful trades on the USD F/X). In the past, he has discussed the impact of future inflation, so he's not abhorring gold because he has a deflationary view on the US economy. He simply notes that if the 2011 value of all the gold in the world could buy you all US farmland and 16 Exxon, then it should seem obvious that gold is crazily overvalued. As you can imagine, I agree with Buffett opinion that gold is just a greater fool asset; it is only worth what others are willing to pay for it (think Tulip mania in 1600 Netherlands where one noble sold his mansion for 3 tulip bulbs). Now some will point out that gold has been a storage of value in society throughout the history of man; that it fulfills the rules of a storage of value because it's easily divisible and does not rust or break down. Seashells and rocks throughout mankind have had the same effect. But in terms of a real asset, gold does not produce anything valuable - farmland produces food and Exxon Mobil generates profits, which become dividends.
Before you look into shorting gold, keep in mind Buffett published the letter in 2011, so he basically called the top in Gold; since his annual letter, GLD has sold off roughly 30% or so. Meanwhile, a few notable fund managers have taken it in the chin with the move down in gold (*cough* John Paulson).
" Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head"
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