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Mocking Warren Buffett’s Stance on Gold

Commodities / Gold and Silver 2012 Jun 05, 2012 - 03:41 AM GMT

By: Eric_McWhinnie

Commodities

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.”-Warren Buffett


When it comes to bashing gold, few do it as publicly and extreme as the crew at Berkshire Hathaway. The company’s CEO and largest shareholder, Warren Buffett, has provided many analogies over the years involving the precious metal. In a Fortune article earlier this year, the “Oracle of Omaha” cited gold’s limited industrial demand and placed it in a category of assets that “will remain lifeless forever.” Berkshire’s attack on gold grew louder as Charlie Munger, vice chairman, said in a recent interview that, “Gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939, but civilized people don’t buy gold, they invest in productive businesses.” The recent statements by Buffett and Munger have not gone unnoticed by hedge fund manager, David Einhorn.

Buffett dedicated a decent part of his latest shareholder letter to criticizing gold. He painted an analogy of the world’s gold stock as a useless cube that would fit within a baseball infield. Buffett wrote, “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 about $9.6 trillion. Call this cube pile A.”

He then compared pile A to another pile. “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?”

Einhorn, founder of Greenlight Capital and board member of Hillel: The Foundation for Jewish Campus Life, is long gold and provided an analogy of his own. “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,” explained Einhorn in Greenlight Capital’s quarterly performance letter.

Interestingly, Einhorn does not make any mention about gold in his letter, but instead leads readers to critically think about dollars as a store of value, all while providing an entertaining response to gold critics like Buffett and Munger. Rather than place gold against all U.S. cropland or several oil companies, its role in the financial system should be seen as a store of value that can not be printed at will. The precious metal also offers diversification and is one of the few things that has represented currency for thousands of years.

For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.

By Eric_McWhinnie

http://wallstcheatsheet.com

Wall St. Cheat Sheet : Only days after the S&P 500 crashed to the depths of hell at 666, the Hoffman brothers launched Wall St. Cheat Sheet: one of the fastest growing financial media sites on the web. Like a samurai, our mission is to cut through the bull and bear shit with extraordinary insights, a fresh voice, and razor-sharp wit. We provide the highest quality education and information for active investors, financial professionals, and entrepreneurs.

© 2012 Copyright Eric McWhinnie - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors


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Comments

DB
05 Jun 12, 07:58
That's a Keynsian proposition isn't it?

Wasn't it Keynes who suggested that burying barrels of money so that people would dig them up again would be a valid way to stimulate the economy in a time of crisis? Only problem is that gold mining these days doesn't employ enough people.

Luckily spruiking it does.


nick barrett
05 Jun 12, 12:42
Charlie Munger

I do not know whether Charlie Munger really said that or why he said it. Perhaps for him civilized people are members of large organizations with lots of savings, and not members of families who are trying to get by and for one reason or another cannot invest in productive business. Those who are not in his little group are probably all barbarians living beyond the Pale.


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