There is this guy where I work—really nice guy. Some people at work are listening to his advice on how to allocate their 401(k)s, including some bosses. I went to him to see how he approached investing. He was aggressive, confident, and upon first perception very knowledgeable. I thought I found a kindred soul. But then he started talking about his overall investment thesis, and I knew we were miles apart. He told me that he was taking himself and those who would listen to him out of equities and into gold (six months ago). The commodity, gold, at the time traded near an all time high of 1700 an ounce. Today, it is roughly trading at 1300 an ounce. This is a negative return of 25% in an environment where the S&P 500 returned 20%. To add insult to injury, gold has to earn 33% for him and his followers just to get back to even. When an investment becomes too popular, it almost always has a major speculative element. With the risk of sounding like a Monday morning quarterback, I will defer to the man, Warren Buffet, and what he has to say about gold as an investment. His words written in Fortune, February 27, 2012 has proved to be prophetic: “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1750 per ounce—gold’s price as I write this—its value would be about $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A (gold) over pile B? Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers—whether jewelry and industrial users, frightened individuals, or speculators—must continually absorb this additional supply to merely maintain an equilibrium at present prices. A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops—and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond…I am confident that pile A will compound over the century at a rate far inferior to that achieved by pile B.”
Posted on: Sat, 10 Aug 2013 01:24:17 +0000
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