BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?
BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.
Then there’s this comment from Buffett on the relative performance of Berkshire Hathway book value and an ounce of gold over fifteen years in the 1979 letter to shareholders:
[b]One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.
Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold.
Greenbackd
[greenbackd.com]
Greenbackd is a former corporate advisory and securities lawyer working in value-oriented activist funds management.
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User Comments:
1. Billspetrino says on Nov 10, 2009 at 10:46 AM:
well as a WEB disciple the fact is reinvested dividends into multinational companies is a better hedge
In 1990 you could have bought gold at 400 an ounce or Coke at 5 dollars per share witha div yield of 3.5%
Today the gold has appreciated 175% and the Cokepaid you dividends starting at 3.5% and this year the amount is over 32% of the purchase price
and although Coke has dropped 30% of its 1998 high your oroginal investment went up 1100% andthe last 4 years dividends was MORE than the investment cost
Imagine if you reinvested dividends when the PE was under 25
See Web does teh math
Web bought silver when gold and silver were both low about 10 years ago.
Hope this helps.peace
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2. Ustaad says on Nov 10, 2009 at 11:16 AM:
Greenbackd -- I'm not sure of the point you're trying to make. Buffet is famous for operating well within his circle of compence. As an owner (both full and part) of several business that earn operating cash, can he be faulted for his preference for assets that generate cash flow and whose value you can calculate by doing a DCF analysis.
Assets can be in many forms -- precious metals including gold, art, paintings, operating businesses, intersts in businesses via equity or debt. I can arbitrarily pick any two points in time where one of these has done well relative to others. So what?
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3. Fazsha says on Nov 10, 2009 at 1:16 PM:
Ustaad - Buffett was unfairly glib in his assessment of gold. Just because an asset just sits there doesn't make it a bad investment, and just because a company is "doin' things" and "makin' money" doesn't make it a good investment. It all has to do with the price you buy an asset for. Otherwise, you could just look at any stock that made any money at all and just buy it, regardless of price. Fine, if Buffett wants to analyze by DCF no problem. But there is also no problem analyzing an asset by its value in relationship to world monetary supplies or other analysis. Gold will not always be a good asset to invest in, but I'll tell you right now it is a terrific asset for the next several years.
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4. Sivaram says on Nov 10, 2009 at 4:11 PM:
Fazsha: "Gold will not always be a good asset to invest in, but I'll tell you right now it is a terrific asset for the next several years."
Why? How can you be sure?
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5. Eddie says on Nov 10, 2009 at 6:55 PM:
correct me if i'm wrong..but if we look at the price gold and the book value of berkshire at today's prices..... one is inclined to side with Warren.
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6. Ustaad says on Nov 10, 2009 at 9:40 PM:
Fazsha -- If you notice, I started my comment with noting that buffet is famous (really notorious) for not straying out of his circle of competence. Glib or not, he's basically admitting that investing in gold is outside his circle of competence and that's why he doesn't have a view on where gold will be in a few months. Moreover, he gives you a reason why he doesn't feel comfortable investing in gold (he likes to count cash flow which gold does not provide).
Agree with you that analysis can use many tools and DCF is just one. I congratulate both you and the author for being confident in your analysis/thesis on gold. I have no conflicting views or issue with where you think Gold might be headed. Let me state my issues with this article:
1. The article starts with "[url=http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett]Warren Buffett[/url]’s position on gold is well known, if a little difficult to fathom." Issue: If Buffet admits that valuing Gold is outside his circle of competence, why is that difficult to fathom.
2. It ends with "Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold"
Issue: You can cherry pick timeframes where certain investments did better than others. If I made the argument that technology companies provide superior returns than others since from 1999-2000, they outperformed all other types of companies, would you call that robust analysis? Perhaps the author would care to compare Buffet's long term record with Gold's or it's record from 1982-2000 with Buffet's for that matter.
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7. Futureshock says on Nov 11, 2009 at 6:56 AM:
The book value that bought half an ounce of gold in 1979 will today buy 80 ounces, a relative gain of 16,000%.
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8. Grantelpers says on Nov 11, 2009 at 8:34 AM:
Flawed argument. How pointless is it to compare Berkshire Hathaway's book value to gold from 1964 to 1979. If my calendar is correct it is 2009. Why don't you compare book value with gold from 1964 to 2009? I can assure you that it will take you two minutes to figure out that gold is inferior in the long-run. 1964 to 1979 was also a boom period for gold and commodities and an extended bear market period for stocks, yet Berkshire Hathaway kept up with gold during one of it's strongest periods in history. I think that awards high marks to Buffett.
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9. Justintime says on Nov 12, 2009 at 8:20 AM:
i did a comparison in fact. for $1 invest in berkshire in 1964, it will pretty much worth you $3000 now while for gold, $1 will grew to $23... so u sure buffett has his reason not to put his money in gold...
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10. Valore says on Nov 12, 2009 at 9:28 AM:
Yeah the argument is really stupid. Buffet is right of course. Gold doesn't produce anything. It doesn't create value.
Over the long haul a value producing asset has to win.
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