Warren Buffett on Gold:
Useful vs. Useless Investments
Warren Buffett: Investing
Warren Buffett is a man that needs no introduction when it comes to investment success and brilliance for financial portfolio building. There is a very intriguing quote from Warren Buffet stated in March 2011 during an interview with CNBC.
During this interview, Warren Buffett made his usual brilliant and unique remarks on finances and the economy. There is one particular quote on investing in gold that warrants further investigation and discussion.
Here is the exert on what Warren Buffett said on gold investing:
Warren Buffett: ….Well, I just don’t know. I don’t know whether cotton’s going to go up. I mean, we use a lot of cotton. I’ve watched it go from 80 cents to $1.90. You know, we use a lot of copper and I’ve watched it go from $2 to $4-plus, so I mean there’s all kinds of things in this world that are going to go up and down in price. You know, maybe hamburgers will tomorrow. And— but I— I’m— I don’t know how to judge that.
I do know how to judge to some extent the earning power of some businesses. And the real test of whether you would like it as an investment is whether you would be happy if it never got quoted again, and just in terms of what the asset did for you. But that doesn’t—
I will say this about gold, if you took all of the gold in the world it would roughly make a cube 67 feet on a side. So if you took all the gold in the world, we could have a cube that went down there 67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today’s market prices about $7 trillion. That’s probably about a third of the value of all the stocks in the United States.
So you could have a choice of owning a third of all the stocks in the United States or you could have a choice of owning that little block of gold, which can’t do anything but kind of shine there and make you feel like Midas or Croesus or something of the sort.
Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They’re valued at about $2 1/2 trillion. It’s about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money.
And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,’ and it says, `I don’t do anything. I just stand here and look pretty.’ And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money.
I, you know, maybe call me crazy but I’ll take the farmland and the ExxonMobiles…..
Investment Purchase Value
As investors, future value is something looked at almost exclusively. Yet, how often does one simply look at the physical item purchased as the sole reason to invest?
the real test of whether you would like it as an investment is whether you would be happy if it never got quoted again, and just in terms of what the asset did for you
The idea of investing in something to never have it gain value is a rather astute perspective. This creates a whole new investment mentality as no longer would pure speculation on future prices be a deciding purchase factor, but actual physical value and usefulness.
If people only invested in usefulness and tangible real value, then prices on such things would rise as a result.
Useful vs. Useless Investments
`Do something for me,’ and it says, `I don’t do anything. I just stand here and look pretty.’
It sounds almost humorous to imagine Warren Buffett sitting alone, talking to a huge block of gold and asking it to perform for him. Yet Buffett makes an excellent point on usefulness and uselessness in investing.
Gold is practically a useless, overpriced investment. Other than cultural practices of utilizing gold in jewelry, there is no practical use for it. And jewelry and aesthetics, for the most part, is not considered a need in life, but rather a want.
Gold Value vs. Gold Usefulness Value
Whether gold is or is not overvalued is not the point. The investment point in gold is that it is a highly desired precious metal investment commodity that is sought after by investors globally of all shapes and sizes. However, is gold a useful commodity?
If gold was never revalued or quoted again, would you, an investor, be happy with simply having purchased the gold? This is the real intriguing factor about investments in gold.
In fact, Warren Buffett shows us how intriguing the value of gold prices really are:
if you took all the gold in the world, we could have a cube that went down there 67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today’s market prices about $7 trillion. That’s probably about a third of the value of all the stocks in the United States.
This pricing may be outdated to march 2011, but the key to analyze this statement is not about the price, but the comparison of value. Owning 1/3rd of stocks in the entire United States of companies producing physical goods or providing real, tangible services holds a value based on usefulness in society. Gold, however, holds very little practical use at its current price.
for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They’re valued at about $2 1/2 trillion. It’s about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money.
So based on a comparison of value of a purchase never being quoted again, Warren Buffett provides an intriguing example of useful investments versus useless investments, tangible or otherwise.
Farmland is a great example to show useful value. Not only is this purchase land, but also investing in people who’s livelihood are in selling something useful and needed to exist: food.
I don’t know whether cotton’s going to go up. I mean, we use a lot of cotton. I’ve watched it go from 80 cents to $1.90. You know, we use a lot of copper and I’ve watched it go from $2 to $4-plus
This Warren Buffett quote is an interesting read-between-the-lines investment statement. The gold analogy that follows this statement is about discussing tangible useless investments versus tangible useful investments.
As stated, cotton is useful and in demand. Copper is useful and in demand. So what makes more sense, gold or copper as a commodity investment?
One could argue that speculators would debate both as potentially solid investments. However, in the world of useless versus useful, copper seems a much more useful, day-to-day needed metal. Copper is commercially used around the globe across a huge number of industries.
Investing in copper is a practical investment.
Investing in gold is a speculation.
Is this what Warren Buffett was trying to say? To stick to practical and useful investments?
Asking would be an ideal way to find out. For now, investors will have to do their own speculation on his advice and their own investing needs.
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