Why Warren Buffett Doesn't Invest in Gold

If you will reach in your pocket, I don't like to do this, but, uh, and pull out your wallet, this is you're watching a historic event.

If you look at this, and I might point out this is a one Charlie carries. On the back of it, it says, "In God we trust," and that's really false advertising.

Okay, Andrew, this question comes from Neil Steinhoff, who writes, "The commodity market, in particular gold, have appreciated astronomically over the last few years. My Berkshire Hathaway stock is only slightly better or doing better than it was in 2006. It's barely kept up with inflation."

He says, "Please explain why you have not invested more heavily in commodities as long as Ben Bernanke continues to print money and there's no indication that he's going to stop anytime soon. Isn't it right that commodities, and particularly gold, will continue to appreciate?"

Well, I would point out that when we started with Berkshire, it was about three-quarters of an ounce of gold, and gold was twenty dollars an ounce then, and it was fifteen. So gold, even at fifteen hundred, has a ways to go.

I think he's right about inflation, but if you think about it, there are three major categories of investment, and you ought to think very hard about which category you want to be in before you start thinking about the choices available within that category.

Now, the first category is anything denominated in a currency. It can be bonds, it can be deposits in a bank, it can be a money market fund, or it can be cash in your pocket.

If you will reach in your pocket, I don't like to do this, but, uh, and pull out your wallet, this is you're watching a historic event. If you look at this, and I might point out that this is a one Charlie carries.

On the back of it, it says, "In God we trust," and that's really false advertising. If Elizabeth Warren were here, she would say quite properly it should say, "In government we trust," because God isn't going to do anything about that dollar bill.

You know, if government does the wrong things in terms of keeping it as valuable as it was when you parted with it to buy a bond or put it in a bank, any currency-related investment is a bet on how government, now and in the future, will behave.

And if you happened to be unfortunate, fortunate to live in Zimbabwe, and you decided to make currency-related investments, you know, your family would have left you by now, and it was not a good decision.

Almost all currencies have declined in value over time. I mean, it may be built into almost any economic system that it will be easier to work with a value a currency declines in value than a currency that appreciates in value.

And the Japanese might reaffirm that here with their experience. So as a class, currency-related investments, whether they're in the UK or the United States or any place else, unless we're getting paid extremely well for having them, we do not think make much sense.

The second category of investments regards items that you buy that don't produce anything but that you hope someone will pay you more for later on. The classic case of that is gold.

And I've used this illustration before, but if you take all of the gold in the world—don't get too excited now—and put it into a cube, it will be a cube that's about 67 feet on a side. That'd be about 165 thousand or 170 thousand metric tons.

So, you could have a cube. If you owned all the gold in the world, you could have a cube that would be 67 or 68 feet on a side. And you could get a ladder and you could climb up on top of it, and you could say, "You know, I'm sitting on top of the world," and, you know, and I think you're king of the world.

You could fondle it, you could polish it, you could do all these things with it, stare at it, but it isn't going to do anything. Now, all you are doing when you buy that is that you're hoping that somebody else a year from now or five years from now will pay you more to own something that, again, can't do anything.

But you're hoping that the person then thinks that somebody else will buy something five years later from him. You're betting on not just how scared people are now of paper money; you're betting on how much they think a year from now people will be scared two years from then.

Keynes described all of this, I think it was in Chapter 12 of "The General Theory," when he talked about this famous beauty contest where the game was not to pick out the most beautiful woman among the group, but the one that other people would think was the most beautiful woman.

And then he carried it on to second and third degrees of reasoning. Anytime you buy an asset that can't do anything, produce anything, you're simply betting on whether somebody else will pay more for, again, an asset that can't do anything.

And actually, we did that with silver, but silver had an industrial use. About 13 years ago, I bought a whole lot of silver, and if you'll notice, silver's moved recently. So, you know, my timing was only about 13 years off, but you know, it was perfect.

The third category of asset is something that you value based on what it will produce, what it will deliver. You buy a farm because you expect a certain amount of corn or soybeans or cotton or whatever it may be to come your way every year, and you decide how much you pay based on how much you think the asset itself will deliver over time.

And those are the assets that appeal to me and Charlie. Now, there's some logical follow-on to that. If you buy that farm, and you really think about how many bushels of corn, how many bushels of soybeans will produce, how much do I have to pay the tenant farmer, how much do I have to pay in taxes, and so on, you can make a rational calculation.

The success of that investment will be determined in your own mind by whether it meets your expectations as to what it delivers. Logically, you should not care whether you get a quote on that farm a day later, a week later, a month later, or a year later.

We feel the same way about businesses. When we buy this car or we buy Lubrizol or whatever, we don't run around getting a quote on it every week and say, "You know, is it up or down or anything like that?"

We look to the business. We feel the same way about securities. When we buy marketable security, we don't care if the stock exchange closes for a few years.

So when we look at Berkshire, we are looking at what we think can be delivered from the productive assets that we own and how we can utilize that capital in acquiring more productive assets.

And there will be times, you know, cotton doubled in price, much to our chagrin, at Fruit of the Loom. But, you know, if you own cotton for the right six or eight months in the past year, you came close to doubling your money.

But if you won't go back a century and try to make money only cotton over time, it's not been a very good investment. So to pick a product—crude oil, cotton, gold, silver—anything that. And, of course, cotton has utility; gold really doesn't have utility.

I would bet on good producing businesses to outperform something that doesn't do anything over any period of time. But there's no question that rising prices create their own excitement.

So when people see gold go up a lot, I mean, if your neighbor owns some gold and you think you're smarter than he is and you didn't own any, and your wife says to you, "You know, how come that jerk next door is making money, you know, and you're just sitting here?"

It can start affecting behavior, and people like to get in on things that have been rising in price and all of that. But over time, that has not been the way to get rich.

Charlie: Well, I certainly agree with that. Besides, something peculiar to buy an asset which only will really go up if the world really goes to hell doesn't strike me as a terribly rational thing to do.

I think if you ever figure on leaving the country because the country is going to kill you, and you assume all the other countries you might go to will also be thoroughly screwed up, I think all those people should buy a little gold.

But I think the rest of us would be better off with Berkshire Hathaway stock. And, of course, there's another class of people that think that they can protect themselves by painting buying paintings of soup cans.

I don't recommend that either. One thing about gold also is that in addition to this 67-foot cube, more gold is being produced every year.

So you have to have buyers not only to offset sellers in the natural course of events, but you have to absorb something like a hundred billion dollars' worth of added items of no utility.

I mean, it's really interesting. I mean, they dig it up out of the ground in South Africa, and they ship it to the Federal Reserve in New York; they put it back in the ground.

I mean, if you were watching this from Mars, you know, you might think it was a little peculiar, but think of how many people it makes happy.

You know, I might mention that the value of that cube—all the gold in the world is now about valued at fifteen hundred plus—is about eight trillion dollars.

And there are a billion acres, roughly, of farmland in the United States—that's a little over a million and a half square miles—and that's valued at something over two trillion.

And if you take ten Exxon Mobiles, you get up maybe another four trillion and maybe not that much even.

So you could own all of the farmland in the United States, every bit of it, and you could own 10 Exxon Mobiles, and you get a sick trillion or so in your pocket for walking around money.

And you could have your choice of that or this 67-foot piece of gold that you could fondle, and that may seem like a close choice to some people, but not to me.

Well, you would also need an army to defend the gold, and it's really not a very good spot.