Warren Buffett has often criticized the value of gold. He recently said that all the gold in the world would be nothing more than a swimming pool filled with a pretty metal. Buffett said he would rather own "productive farm land or seven Exxon Mobiles."
Unfortunately, Buffett does not understand the two main functions of gold.
Store of Value
In 2001, I could have purchased a gold bar (400oz) for $100,000. I also could have purchased a small family house in most parts of the United States. Today, that same gold bar is worth over $560,000 and I can purchase a large, luxurious house if I simply traded my gold bar. In other words, gold has stored value over time. This is something that Buffett does not understand.
An Olympic sized pool filled with cotton or iron ore also has no value in and of itself. Rather, one must refine the raw material into usable goods in order to extract value.
The purpose of iron ore might be to build steel beams for construction purposes. The purpose of cotton might be to create blue jeans. The purpose of gold is to retain value irrespective of social or political conditions.
Medium of Exchange
There is a second step that unlocks value and creates wealth– trade. Gold is not only a store of value but also a medium of exchange. It is a recognized unit of exchange from New York to some remote village in India. In other words, it can be used to facilitate trade globally.
It would do someone no good to create steel beams without finding someone who wanted to build something. Similarly there is little value in creating a hundred pairs of blue jeans without any market demand. The value is created through trade. By virtue of unique properties making it portable, divisible and impossible to counterfeit gold facilitates trade and wealth creation.
Conclusion
All investors prefer cash flow producing assets over assets that are simply stores of value. However, as Mr. Buffett has previously recognized you have to “wait for the right pitch.” In other words, often times you have to be patient waiting for cash flow producing assets to become available at attractive prices. Gold enables an investor to maintain purchasing power so that when attractive investment opportunities arise one can capitalize. This is the value of a stable store of value.
Secondly, gold is a recognized medium of exchange across all borders. It does not depend upon banks nor governments to facilitate trade.
These are the two factors that Buffett either does not understand or pretends to not understand.
Gold is the friend of value investors, not a foe.
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Unfortunately, Buffett does not understand the two main functions of gold.
Store of Value
In 2001, I could have purchased a gold bar (400oz) for $100,000. I also could have purchased a small family house in most parts of the United States. Today, that same gold bar is worth over $560,000 and I can purchase a large, luxurious house if I simply traded my gold bar. In other words, gold has stored value over time. This is something that Buffett does not understand.
An Olympic sized pool filled with cotton or iron ore also has no value in and of itself. Rather, one must refine the raw material into usable goods in order to extract value.
The purpose of iron ore might be to build steel beams for construction purposes. The purpose of cotton might be to create blue jeans. The purpose of gold is to retain value irrespective of social or political conditions.
Medium of Exchange
There is a second step that unlocks value and creates wealth– trade. Gold is not only a store of value but also a medium of exchange. It is a recognized unit of exchange from New York to some remote village in India. In other words, it can be used to facilitate trade globally.
It would do someone no good to create steel beams without finding someone who wanted to build something. Similarly there is little value in creating a hundred pairs of blue jeans without any market demand. The value is created through trade. By virtue of unique properties making it portable, divisible and impossible to counterfeit gold facilitates trade and wealth creation.
Conclusion
All investors prefer cash flow producing assets over assets that are simply stores of value. However, as Mr. Buffett has previously recognized you have to “wait for the right pitch.” In other words, often times you have to be patient waiting for cash flow producing assets to become available at attractive prices. Gold enables an investor to maintain purchasing power so that when attractive investment opportunities arise one can capitalize. This is the value of a stable store of value.
Secondly, gold is a recognized medium of exchange across all borders. It does not depend upon banks nor governments to facilitate trade.
These are the two factors that Buffett either does not understand or pretends to not understand.
Gold is the friend of value investors, not a foe.
For more hedge fund news visit our website at http://fundmanagernews.com/
