Gold Wars: Gollum Mocks the Oracle of Omaha
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Warren Buffet and partner Charlie Munger, the world’s greatest investors over the last 40 + years, have never been big fans of gold. In fact, the Oracle of Omaha devoted ten paragraphs of his latest letter to Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)shareholders to mocking Gold Bugs. Here is an excerpt.
“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?”
This sensible commentary of course drew derision from gold bugs around the world, who sit in their basements, stroking their yellow ore with more affection than they have for their children, startled by the slightest sound, fearing someone might burst in and steal their “Precious.”
For the record, this is why I am long Berkshire Hathaway, and why I recommend everyone read Warren Buffett’s simple, sensible, and yet profoundly successful thoughts and strategies.
Now let's examine the statements of notable hedge fund manager, David “Gollum” Einhorn, (gold being one of his top holdings) who had the audacity to mock the Oracle.
Einhorn stated: “The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us.”
Gold: So useful it is used to make "Air" Jordans. (Air in quotes because it's doubtful you'll have much vertical)
Listen up all you Gollums, your “Precious” has not been forged from the fires of Mount Doom, it has no magical properties other than looking pretty, and therein lies the greatest part of its value, because its industrial purposes are limited.
As I write this gold currently stands at $1,625 an ounce. Yes, I know that we’re likely headed for inflationary times, but the only reason that gold remains an “inflationary hedge” is because it has been one historically. People get taught as children that gold will "always have great value," and so the myth perpetuates itself.
Can you eat gold, can the metal be used to produce something new and novel as we are able to use a modern computer? Can you grow food with it? Can you drive gold around town? The answer to all these questions Gollum brains, is “NO,” though from experience to listening to you wax on, I’m sure you can come up with any number of reasons why it’s practical applications surpass those I’ve mentioned.
Shoot, at least titanium can be used to make really cool, lightweight industrial products, and rare earth metals have special magnetic and conductive properties.
And furthermore, Buffet wasn’t talking about cash, he was talking about productive businesses, whose products will also increase in nominal value as inflation heads north.
Money is meant to be a fluid way to exchange value- of time, labor, and production. Yes, raising the money supply will raise the value of commodities, and if gold happens to go up in nominal value by a greater percentage, it’s because of one reason and one reason only- the fear and irrationality of human beings.
In my investments, I don’t want to rely on fear to be my most productive asset, I want to be part of companies that make the world better, that produce items of value for others, whether they be crops, iPads, robots, cars, etc. The innovations that make us more efficient and create new capabilities for human beings. The innovations that increase productivity are what create real wealth, that drive true progress.
So go on Gollums, I will be happy to trade you the golden infield for all the U.S. cropland, the 16 Exxon Mobils, and the cash. And while you position orcs to protect your “vast wealth,” I’ll be sailing into the sunset with a trillion dollars in my back pocket to blow. Which of us is going to have more fun?
funspirit is long Berkshire Hathaway shares. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.