Buffett, Berkshire and gold
AT THE BERKSHIRE Hathaway shareholders' meeting on April 30, 2011, Warren Buffett said: "When we took over Berkshire, its share price was equivalent to three-fourths of the price of an ounce of gold. So gold - even at US$1,500 [Bt47,000] - still
Buffett began purchasing Berkshire shares in 1965 for $14.86 each. Now, a Berkshire A share stands at more than $120,000. Do the maths
“Gold gets dug out of the ground in Africa, or someplace. 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,” he continued.
1) Fixed-income bonds, cash, money market funds
While on stage, Buffett pulls out his wallet, holds up a dollar bill and reads “In God We Trust”, and then says, “it should be stamped ‘In Government We Trust’.
“Any currency-related investment is a bet on how the government will behave in future.”
As an asset class, almost all currencies have lost value over time and political incentives are directed to prevent deflation.
2) Gold
“If you take all the gold ever mined in the world and melt it into a single cube, it would be about 67 feet on each side and weigh around 165,000 to 167,000 metric tonnes. You could get a ladder and climb on it, fondle it, polish it, stare at it. But it isn’t going to do anything. All you are doing is hoping that someone else will pay you more for it down the road.
“I’ve found the problem with investing in gold is that the only way you can make money is by having someone to pay a higher price than you. It pays no dividend or interest, so if sentiment moves – and it often does, and quickly – you’re left holding the bag,” Buffett said.
Obviously, as an investor, you need to out-guess others.
3) Productive assets, farms or businesses
In this type of investment, you don’t worry about getting a price quote every day. Instead you look at how the underlying business is performing. For instance, at afar, does the production price meet your expectations independent of its “sale price”?
Buffett said that of all the gold ever mined, based on the end-April 2011 prices, the market value of this 67-foot gold block would be about $8 trillion. Consider what else that money could buy?
“All of the farmland in the lower 48 states that would cost you about US$2 trillion, ten ExxonMobil’s valued at $4 trillion” and you could “stick a trillion or two in your pocket for walking around money”.
“So, rather than speculating, a smarter and safer strategy to beat inflation would be to concentrate your efforts on investing in businesses that have little debt, the ability to increase prices and a history of paying strong dividends.”
Buffett closed with “I’d bet on a good producing business to outperform something that doesn’t do anything.”
Lucas Remmerswaal, financial adviser, author, teacher and co-founder of a non-profit Success for Students Charitable Trust, can be reached at [email protected].
