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Warren Buffett explains the investment value of gold

Warren Buffett

Warren Buffett

Warren Buffett explains the investment value of gold in his 2011 letter to shareholders. He makes the point that buying productive assets is an essential for investing success. Gold produces nothing.

Good investments grow; they produce. We need to plant good investment seeds in our portfolio. Those are our well researched positions. Then we carefully attend to our portfolio to see it grow.

“Why do you call gold a lousy investment?” a new investor asked during a discussion. This investor suggested Gold was the only hedge against world and economic events. The following quote from a Buffett letter is the best response I know. In it Warren Buffett explains the investment value of gold. Enjoy the read.

From Warren Buffett’s 2011 letter to Berkshire shareholders:

Warren Buffett says fold produces nothing

Warren Buffett says fold produces nothing

“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.” [Gold @ $1400 Sept. 3, 2013 but overall point remains valid.]

“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?

“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.”

Agriculture land produces crops

Agriculture land produces crops

“Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

“I believe that over any extended period of time this category of investing will prove to be the runaway winner… More important, it will be by far the safest.”

Reading a newsletter article by Chad Tracy that quoted Warren Buffett letter, reminded me of this wisdom packed letter . Here is a link to it in the Aug 15, 2013 The Street Authority newsletter.

Gold - an expensive doorstop

Gold – an expensive doorstop

Key investing principal

As the article points out, productive assets generate enormous wealth. Gold is pretty and valuable but generates nothing. It just hurts your foot if you drop it or stumble over it.

That is key. To grow wealth, money needs to produce. Put it to productive use; do not let it sit as an expensive doorstop. That is an absolutely core investing principal. Don’t let the gold bug bite you.

What do you think of buying gold? Do you own any? Do you agree with how Warren Buffett explains the investment value of gold? My only gold holding is a 4 decade old band on my finger which is far more valuable to my heart than wallet. Let me know about your attitude towards gold.

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These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact © 2013 Bryan Kelly

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