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:
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.