Buffett on Gold: Only if a Greater Fool Will Buy You Out

It might sound like sour grapes, given the chart below, for Warren Buffett, CEO of Berkshire Hathaway (BRK.A) (BRK.B), to all but call gold bugs idiots. But that’s essentially what he does – and somewhat persuasively – in his letter to shareholders this year.

Gold Price in US Dollars  Chart

Gold Price in US Dollars Chart by YCharts

Wednesday's decline in Gold and Silver, following testimony by Fed Chairman Ben Bernanke indicating a less dire view of the economy, given recent jobs gains, should give Buffett some encouragement.

Buffett, something of a showoff with his math skills -- read his delightful letter here -- informs us that the world’s gold stocks today amount to 170,000 metric tons, and at roughly $1,750 per ounce that’s $9.6 trillion (yes, trillion) dollars worth of the stuff.

On top of that, annual production of new gold from mines at today’s price is worth about $160 billion, and that seems more than enough to make all the desired jewelry and satisfy industrial uses. The rest – the stockpile – just sits there, producing nothing of value and worth $1,750 an ounce only because lots of people think of gold as a bulwark against inflation, deflation and just about any other economic ill you can name.

The $9.6 trillion, Buffett notes, is enough to buy all the farmland in the U.S. (400 million acres which produces income of $200 billion annually), plus 16 Exxon’s (XOM), each of which earns $40 billion or so a year, and still leave you holding $1 trillion in cash.

Hold an ounce of gold for some period of time and all you have at the end is an ounce of gold. Hold farmland or Exxon shares and you get an income stream – a dividend yield of about 2.2% in Exxon’s case -- and in this economy an asset with rising productivity.

Yet gold outperforms these more productive assets. Of course, one needs someone to sell his gold to, and while that hasn’t been a problem in recent years (neither was it hard to profitably unload a house, or an Internet stock, during the upside of those bubbles) at some point the metal’s price could plunge. Investors might realize it lacks real economic value. No good being the last one holding gold, then. Buffett quotes an old proverb: “What the wise man does in the beginning, the fool does in the end.”

From the editors of YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.

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