Tuesday, October 19, 2010

Buffett on Gold

This is taken from the following article:

http://money.cnn.com/2010/10/18/pf/investing/buffett_ben_stein.fortune/index.htm

My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"


"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"


Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?


"Equities," Buffett answers without a moment's hesitation.

It is remarkable how Buffett has a simple way of putting things.  I have recently been recommending anyone who owns gold to sell.

I know some value investors have have large gold holdings, but my question is how do you know if gold is over or undervalued?  Demand is high because of the poor state of the economy, but that can change quickly. 

If I were to take a guess, I think gold may have some more room to run.  My theory is that demand will grow because everywhere I turn I hear about gold.  It's on TV, radio, papers, home parties, and recently booths in the mall buying gold jewelry.

Gold is becoming a little too speculative for this value investor.  If I can't value it, it gets tossed.

3 comments:

  1. Gold is the past. Gold is the future. It has been more stable than fiat currency. So perhaps it would be better to start with the idea that companies and other commodities should be valued according to their price in gold, rather than what is the "value" of gold in dollars. This is the approach of Peter Schiff and over the long term it seems to work. With QE2, one should be wondering what the dollar is worth not what gold is worth.

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  2. Congratulations to Peter Dunn and Peter Schiff for providing such a profoundly better way to think about the value of gold. In your face Warren Buffett! (end sarcasm)

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  3. Well, Mr. Anonymous, you can live in the make-believe world of fiat currencies being the measure of all things instead of the view that gold is the standard. But you have to remember that as the years pass, how much inflation there is, and how little gold changes vis-a-vis the cost of other commodities. Take for example the price of oil in gold, which has barely changed over the last 60 years. It is clear that gold is a better measure of value than fiat currencies.

    But please note that my disagreement wasn't with Buffet. I agree with Buffet as quoted above. I own no physical gold, though I invest in gold mining equities to give me exposure to gold. My comment was directed at Mr. Graham's contention that gold can't be valued. It remains stable. It is the dollar that is constantly changing.

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