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Gold vs. Farmland vs. Exxon Mobil - Buffett Makes $ense of It All
Posted by: 20punches (IP Logged)
Date: December 21, 2013 04:35PM

Most of us are familiar with the following famous observation of gold price from Warren Buffett:

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about 7Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

During another interview at a different time, Mr. Buffett said the following:

The value of all that gold at today's prices would be about $10 trillion.The cube of gold will produce nothing in the next hundred years (or, for that matter, thousands of years).

The cube of gold will not pay you interest or dividends, and it won't grow earnings.

You can fondle the cube, but it won't respond. If you had $10 trillion sitting around, instead of buying the cube of gold, you could buy all the cropland in America ($400 billion-worth) and 16 Exxon Mobils. And you would still have $1 trillion of "walking-around money."

Over the next hundred years, your cropland and Exxon Mobils would produce trillions of dollars of dividends (the size of which would be adjusted for inflation), and you would still have them at the end of the century, at which point you could probably sell them for vastly more than the $9 trillion you bought them for.

So, which investment would you choose?

You would have to be convinced that you could persuade someone else that the cube of gold would be an amazing investment at your asking price. Because that's the only way you can ever make money in gold—if there's someone out there who is willing to buy it from you for more than you paid for it (and pay enough to offset the costs you have incurred from storage and insurance in the meantime). Meanwhile, your cropland and Exxon Mobils would likely keep throwing off tons of cash even if the market for them completely dried up.

Note that the value of all the gold and the number of Exxon Mobils you can buy with the value of gold are different in the first interview as they are in the second interview. The first interview took place during 2011 and the second interview took place during 2012. The fascinating part of the interview is the fact that Buffett knows these seemingly random numbers and that he is able to make sense of these numbers in the most logical way.Did he calculate the numbers by himself? I doubt it. At least not the length of the side of the cube that holds all the gold in the world.  You can get that information from websites such as:

[www.numbersleuth.org]

Ditto to the value of all the cropland in America. My guess is that Mr. Buffett probably recalls it from his readings. But he definitely knows the market cap of Exxon Mobil almost on a daily basis.

You may think that the ability to quote random numbers is that impressive. After all, we all can intentionally memorize some trivia numbers just for the sake of it. The secret is, in my opinion, to make sense of the numbers from a comparative value perspective.  Buffett automatically compares the total value of gold to the value of cropland in America and the number of Exxon Mobil you can purchase. The underlying thought process centers around opportunity cost. It all boils down to what else you could have invested when allocating capital.

"Intelligent people make decisions based on opportunity costs," says Charlie Munger. Buffett’s interpretation of gold price is a classic manifestation of this one of the most neglected investment advice.




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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: AlbertaSunwapta (IP Logged)
Date: December 22, 2013 09:31AM

But Buffett is buying commodity stocks, something he's rarely seen value in owning.



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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: AshishGupta (IP Logged)
Date: December 22, 2013 11:24AM

"But Buffett is buying commodity stocks, something he's rarely seen value in owning."Are you refering to the oil stocks like XOM? He has owned oil before I believe.



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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: AlbertaSunwapta (IP Logged)
Date: December 22, 2013 02:39PM

Yes.  XOM, Suncor.  And he has held other oil stocks before, plus silver.  



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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: 20punches (IP Logged)
Date: December 22, 2013 07:42PM

AlbertaSunwapta: Buffett probably has been following Exxon and the oil e&p industry for a few decades so when the price is right, he buys commodity stocks such as Exxon and ConocoPhillips. ConocoPhillips was not an investment he is most pride of and we'll see what happens with Exxon.And in my opinion gold is different than silver, and other commodities because the price of gold has a big human psychological factor in it. 



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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: AlbertaSunwapta (IP Logged)
Date: December 22, 2013 10:05PM

I believe that silver is generally a byproduct of mining other products.

Nonetheless, I don't think Buffett sees gold, farmland or oil as particularly high up on the spectrum of great long term investments.  I may be wrong on these when it comes to the lowest cost producers of depleting or increasingly consumed resources.




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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: ansgarjohn@twitter (IP Logged)
Date: December 23, 2013 06:59AM

It comes down to: Do you want to own money or money making machines?  The Mischievous Mr. Market and The Money Making Machine [sinaas.blogspot.nl]Or as Buffett puts it, the choice between owning golden eggs or a goose that lays them:[www.gurufocus.com]



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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: AlbertaSunwapta (IP Logged)
Date: December 23, 2013 03:14PM

^ So that might be gold bullion vs gold mines. ( I own both but at maybe 1/2 % of my savings and treating it as an insurance policy. Though as I saId here years ago, when/if the gold bugs eventually get proven right they won't be able to sell their positions because their mindset is that of extreme pessimism. Things to them will always, only get worse.)

On Buffett's purchase of oil company shares how would you weight Buffett's thinking on the prospects for superior forward nominal returns vs the inflation adjusted returns (the hedge potential)? That is, aren't there better companies out there that he could buy?  Is he diversifying, seeking inflation protection or seeing some sort of fundamental change in oil use or production?  Maybe he's seeing a drop in oil prices where upon the shale drilling world takes a major hit...




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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: AlbertaSunwapta (IP Logged)
Date: December 27, 2013 09:01AM

Seth Klarman is an huge admirer of Buffett yet has seen fit to own gold.  I wonder why?  Though it seems he is now unloading gold shares.

Below is an interesting comment on what Klarman is doing, though I suspect that this may not be a credible article or web site (just for selling subscriptions), I am assuming that the Seth Klarman comments are somewhat correct and not taken too far out of context. Though quite suspiciously, the author doesn't provide a link to substantiate his remarks. Still, interesting.

Gold as “Insurance” for Possible Financial Crisis

[www.dailywealth.com]  

 

Does anyone have good info on what Seth Klarman is currently doing in terms of gold?




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Re Gold vs Farmland vs Exxon Mobil - Buffett Makes ense of It All
Posted by: 20punches (IP Logged)
Date: December 28, 2013 11:07PM

AlbertaSunwapta: I don't know enough about Mr Klarman to extrapolate his reasoning for investing in gold miner stocks but I won't be surprised to find a few superinvestors bargain hunting in the gold miner industry - after all, it has been one of the worst performing industry during the past 2 years. Gold and gold miner are obviously different. If you can produce an ounce of good below the market price of gold, you will make money and as long as your marginal cost is below the market price of gold you will continue to make money. There is a wide range of marginal cost among various gold miners, some can produce an ounce for less than $700 and some more than $1200 and I'm assuming the one that Seth Klarman invested in was a low cost producer. Of course this is all guess work but again, directly investing in a commodity and investing in commodity businesses have vastly different implications.  



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