Buffett’s view on gold

I posted this last April, as I heard lot’s of people taking about a bubble in gold, and how gold “doesn’t provide a dividend” and how gold “doesn’t make a profit”.   After reading Warren Buffett’s annual letter to Berkshire Hathaway shareholders today, I felt compelled to update the numbers, as Buffett dissed gold pretty bad.

Buffett talked a bit about the dysfunctional dollar (which I fully agree with him on) saying:  Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power.

After that, Buffett went on to give his opinion as to why gold sucked, saying:  Gold, however,has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

That’s exactly the point.  It won’t go anywhere, it won’t rust away, and no one can inflate the value of it away. It’s a store of value – although it’s done pretty damn well as an investment as well.

Buffett likes to use 1965 as his starting point, because that’s when he started Berkshire Hathaway. No problem with that, but the price of gold was fixed until 1971, so to compare gold to “investment x” starting in 1965 is giving “investment x” a 6 year head start.

Gold was worth $35/oz in 1938, it was worth $35/oz in 1965, and it was worth $35/oz in 1971. Then Nixon fucked us all by uncoupling the dollar from the gold standard.  So that’s the ONLY proper starting point for ANY discussion about gold prices or the appreciation of gold as an asset. Before 1971, by law, it could not change value – at least in the US.

So, as they say, let’s look at the record….

Here’s what I posted in April, 2011:

Just forty years ago in 1971, one ounce of gold would buy 35 US dollars.   Twenty years ago in 1991, one ounce of gold could be exchanged for 350 US dollars.   Today, that same ounce of gold will buy you more than 1500 US dollars.  $1508 to be exact.

From $35 to $1500 in forty years.  That’s what inflation does.   It’s easy to demonstrate that this is a monetary phenomenon, not simply a spike in the price of gold, because other commodities have also gone way up in price since Nixon removed us from the gold standard (then tried wage and price controls to “fix” the problem that he caused) – although other commodities didn’t increase to the same extent. A few examples:

1971 2011 % Change
Gold (oz) $35 $1,508 4308.57%
Silver (oz) $1.55 $47.25 3048.39%
Wheat (Bu) $1.34 $9.32 695.52%
Soybeans (Bu) $3.03 $13.82 456.11%
Copper (lb) $0.51 $4.37 856.86%
Aluminum (lb) $0.26 $1.19 457.69%
Oil (barrel) $3.60 $112.00 3111.11%
DJIA 890 12,505 1405.06%
S&P 500 94 1,337 1418.57%
Official CPI (US Dollar) $1.00 $5.52 552.00%
Money Supply (Billions) $684 $8,980 1313.37%

Those prices are from April, 2011. Here’s the same chart updated with Feb, 2012 price information:

1971 2/25/2012 % Change
Gold (oz) $35 $1,772 5062.86%
Silver (oz) $1.55 $35.35 2280.65%
Wheat (Bu) $1.34 $6.40 477.61%
Soybeans (Bu) $3.03 $12.51 412.87%
Copper (lb) $0.51 $3.83 750.98%
Aluminum (lb) $0.26 $1.02 392.31%
Oil (barrel) $3.60 $109.62 3045.00%
DJIA 890 12,982 1458.65%
S&P 500 94 1,365 1452.13%
Official CPI (US Dollar) $1.00 $5.60 560.00%
Money Supply (Billions, official M2 Fed numbers) $684 $9,766 1427.78%

As anyone can see, while the exact percentages have changed, the general trend continues. And even though silver has dropped over the past year, it still beats the DJIA and S&P500 since 1971. And absolutely nothing beats gold as a long term store of value.  Nothing.

Sorry Mr Buffett, I do not doubt your investing acumen,  your long term record in business is excellent, and I do not for a second doubt that people will still be buying Coca-Cola in 2112.  But just look at how much better your returns would have been if you wouldn’t have enriched all those brokers with your billions of dollars worth of transactions since 1971. You, and your investors – would be much richer today had you simply put everything into physical gold.

No, I am NOT suggesting that for anyone. Hell, I don’t have hardly any physical gold – but I wish I did. I’ve bought some silver over over the years, and I wish I had more, but facts are facts. Buffett is wrong on gold.

Gold could lose 50% of its’ current value and still be 1000% ahead of the stock market (total return) since 1971.

Got gold?


%d bloggers like this: