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GOLD ANALYSIS
Why Warren Buffett still doesn't like investing in gold
The Oracle of Omaha is certain that 100 years from now, when people are fearful, they will still rush into gold but, he still prefers stocks and productive assets.
Author: Dorothy KosichPosted: Monday , 13 Feb 2012
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RENO -
In an article published in Fortune Magazine, based on his upcoming annual Berkshire Hathaway shareholder letter, Warren Buffett again reminded everyone how little faith he has in gold.
Buffett once observed, "Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Buffett places gold in a major category of investments which involve "assets that will never produce anything, but that are purchased in the buyer's hope that someone else-who also knows that the assets will be forever unproductive-will pay more for them in the future."
"This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further," he asserted. "Owners are not inspired by what the asset itself can produce-it will remain lifeless forever-but rather by the belief that others will desire it even more avidly in the future."
"The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful)" Buffett said. "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."
"What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct," Buffett observed. "Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon' investors join any party, they create their own truth - for a while."
In his article, Buffett suggested if all gold were melded together, forming a cube of about 68 feet per side, fitting comfortably within a baseball infield. At a $1,750 per ounce gold price, the cube's value would be about $9.6 trillion.
"Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers - whether jewelry and industrial users, frightened individuals, or speculators -must continually absorb this additional supply to merely maintain equilibrium at present prices," Buffett noted.
Would-be gold investors, instead, should make an investment in productive assets, such as businesses, farms, or real estate, Buffett advised.
"In the future, the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce," he suggested. "Our country's business will continue to efficiently deliver goods and services wanted by our citizens. "
"Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety - but we will also be owners by way of holding sizable amounts of marketable stocks," Buffett declared.
iPad Version: Picture- Warren Buffet speaks at Microsoft CEO summit press conference: Reuters Photographer / Reuters
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