In his excellent investing primer in Fortune (an excerpt of his forthcoming Annual Letter), Warren Buffett devotes a few paragraphs to gold and the fools who worship it.
He also explains why gold is generally a crappy investment, even if its price in dollars goes up from time to time (as it has over the past decade).
If you moulded all the gold in the world into a cube, Buffett says, it would be about 68-feet per side. This is four feet shorter (and considerably wider) than a tennis court. As Buffett observes, it would fit comfortably in the middle of a baseball infield.
The value of all that gold at today’s prices, Buffett observes, would be about $10 trillion.
As for its merit as an investment, Buffett observes the following:
- The cube of gold will produce nothing in the next hundred years (or, for that matter, thousands of years).
- The cube of gold will not pay you interest or dividends, and it won’t grow earnings.
- You can fondle the cube, but it won’t respond.
If you had $10 trillion sitting around, Buffett further observes, instead of buying the cube of gold, you could buy all the cropland in America ($400 billion-worth) and 16 Exxon-Mobils. And you would still have $1 trillion of “walking-around money.”
Over the next hundred years, your cropland and Exxon-Mobils would produce trillions of dollars of dividends (the size of which would be adjusted for inflation), and you would still have them at the end of the century, at which point you could probably sell them for vastly more than the $9 trillion you bought them for.
So, which investment would you choose?
For the cube of gold to be the smarter investment, Buffett observes, you would have to be convinced that you could persuade someone else that the cube of gold would be an amazing investment at your asking price. Because that’s the only way you can ever make money in gold—if there’s someone out there who is willing to buy it from you for more than you paid for it (and pay enough to offset the costs you have incurred from storage and insurance in the meantime).
Meanwhile, your cropland and Exxon-Mobils would likely keep throwing off tons of cash even if the market for them completely dried up.
Thus, Buffett has no doubt about which investment will return more over the next century—or which one he would choose.
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