Warren Buffett is out with a very good piece in Fortune that describes why he believes gold could be a bubble.  This is a controversial call, but I think his broader message warrants a great deal of attention.  Buffett breaks down investments into three categories.  The first category is things that are currency based investments like bonds, mortgages, deposits, CDs.  The second category is things that don’t produce anything, but require ever increasing hope that someone else will purchase the asset from you at a higher price.  And the third category is things that are productive.

I’ve discussed this in the past in some detail.  Commodities are nothing more than speculative bets.  Gold is not unique in this way.  When an investor seeks long-term capital appreciation they should always seek productive assets.  In essence, you want to bet on the ingenuity of man.  The French philosopher Volney wrote about this in his classic Empire of Ruins.  He called man’s innate desire to improve “natural law”.  He said:

“And what is the natural law?” replied the simple men. “If that law is sufficient, why has he given any other? If it is not sufficient, why did he make it imperfect?”

“His judgments are mysteries,” said the doctors, “and his justice is not like that of men.”

“If his justice,” replied the simple men, “is not like ours, by what rule are we to judge of it? And, moreover, why all these laws, and what is the object proposed by them?”

“To render you more happy,” replied a doctor, “by rendering you better and more virtuous. It is to teach man to enjoy his benefits, and not injure his fellows, that God has manifested himself by so many oracles and prodigies.”

Humans have this innate desire to improve, to innovate, to create, to build and to generally demand a better standard of living for ourselves.  This is a powerful desire.  So powerful that betting against it is practically a guaranteed losing bet.  When you bet on an unproductive asset you are essentially betting against human innovation.  In fact, you are essentially betting that living standards will generally stagnate or decline.

Buffett puts the current gold outlook into perspective with an excellent analogy:

“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 $1,750 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 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 (XOM) 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.”

Now, as a hedging device, the first two categories can function as excellent buffers.  Capital appreciation, innovation and increasing living standards are no guarantee in the short-term.  And the last 10 years have certainly proven this to be accurate.  But over the very long-term the trend in improving living standards due to ingenuity is a trend you cannot fight and should not fight.   After all, it is not the pile of rocks that produces great things, but the man/woman who uses the pile of rocks to build something, that does great things.

This all feeds into my work on Monetary Realism, understanding our monetary system and understanding the world we should seek to leave for our children.  After all, we do not leave our children this mythical burden of debt that so many pundits constantly discuss.  Rather, we leave them a certain living standard.  And as a society, we should not seek to invest in rocks or promote activity that is unproductive.  We should seek to give our ancestors the ultimate gift – the gift of time through innovation and maximizing human ingenuity.  This is the true path to prosperity.  And while investments in unproductive assets might benefit man in the short-term, over the long-term the desire to innovate, be better and be more virtuous will always prove a more fruitful investment.

* Mr. Roche maintains a small position in gold and invests the majority of his long-term portfolio holdings in bets on human ingenuity.


Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Following on from my first comment, I’d like to see Buffett make his argument over again, but this time citing the Washington Post instead of Exxon Mobil. Berkshire Hathaway once held a large chunk of Washington Post stock… now, not so much. Care to hold some of that for 100 years, Warren? – maybe in your family trust?

    As one of the other commenters pointed out, gold hasn’t ever gone to zero.

  2. And then to harp on Buffett’s idea of owning cropland as a productive investment for 100 years:

    Excluding all the government subsidies and protective tariffs lavished on the very powerful farm lobby during the last 100 years, has the typical farming enterprise been profitable?

    Especially in inflation-adjusted dollars?


  3. To clarify my comment about the Washington Post, Berkshire Hathaway still holds a similar number of shares of the Post as it did some years ago – but the market capitalization of the Post is down from $9.5 billion to $3 billion since 2004, according to Bloomberg.

  4. The most important thing about Buffett’s piece is the fact that he cares about gold to such a degree he wrote about it in Fortune. Why so much effort and emotions to invest in the subject? Why all this poetry of “cube”???? And from the guy who made a lot of money investing in the company selling brown bubbly drink causing diabetes and obecity, and in the company selling gold and stone trinkets to chumps, among the others????
    Why he is trying to put a price tag on something that, as he claims, has no value? Is it expensive at $1750? What is the right price? 1725? Or maybe 725? Or maybe 25? Where are the belowed future cash flow projections here?… No, all we have is pile of useless metal versus pile of Enrons, apparently there are 16 of them available somewhere for sale to willing investors…..
    Several explanations of this piece of art are possible. Cynical ones: either the most brilliant investor gone senile, or he is shorting the yellow garbage and is talking his book.
    And the more subtle one: the old gentleman who made his money investing in “human ingenuity”, of which the best examples are Coca Cola and Wells Fargo is facing an asset which he cannot comprehend. More than that, to a great degree, investing in gold is indeed a counter-thesis to all he has been doing. And, naturally, seeing something you despise going up and up counter to all your reasoning, would make you quite unhappy… Thus, such a piece in Fortune to relieve some frustration.
    I am not arguing here whether he is wrong or right about the buble call – I do not know how to value gold. But it would be really interesting to see, if he is brave enough to put his money where his mouth is. Check the tape for Buffett’s short GLD positon!

  5. Gold is for the ‘saver’, not the ‘investor’ who wants to guard against central bankers debasing the currency.

    Some people just want their savings to hold their value, without taking equity, or lending to businesses.

    Of course, I’ll expect a rational discussion of gold from Messrs Buffet and Roche the day aliens land on earth.

    • Maybe only semnatics but:

      You can’t ‘debase’ something that is not ‘based’. Current international monetary system is not based in anything else than confidence in governments and ‘the system’ so… unless they are ‘debasing’ from ‘the system’ there is no such thing as currency debasement.

      We are not in the gold-standard anymore (for the good or for the bad).


    • This happens if negative rates translate into credit expansion.

      This is not happening right now, so gold prices could muddle through during years before resuming an uptrend (if ever). Market is realizing that balance sheet expansion (QE) does not equal inflation necessarily that’s why even after all “money printing” and “balance sheet expansion” of last months gold has not take new highs IMO.

      Off course as long as EEM buy gold the intrinsic demand will make price rise, but the negative rates thesis is wrong and that’s not what is driving gold (buying by CB’s in EEM specially is driving it).

  7. I couldn’t believe my eyes when I read the title of this post. Why is Cullen pandering to the argument gold is bad and stocks are good. There are plenty who do that on other sites, notably Seeking Alpha. It is not an argument worth having. It is as pointless as pissing in the wind.

    • I’m not pandering to the idea that “gold is bad”. I am simply pointing out there’s a difference between assets that produce something and assets that don’t. I’m not saying that gold is bad. I own a decent amount of gold. But it’s just a hedge. I would never build a portfolio around an unproductive asset. That makes zero sense.

  8. this article neglects to take into account, in my opinion, that unproductive assets are used to in the production of productive assets. the human element is the vital catalyst, of course. However, the two go hand in hand. And what with all the political motivations behind the control of resources, the human element is unfortunately stifled in many repsects. Just think if the poor, despotic nations of the world had a paradigm shift towards the education and freedom of their people. it unleashes innovation.

    additionally, i agree with the gold bubble, and plan on shorting it strongly when the time is right

  9. What is Gold used for? Really. What. Would anyone really choose a pile of cash over pile of gold. Exxon converts oil to cash. Farmers convert land into food. Innovation makes nothing into something then creates cash for the inventor. Can we eat gold? Can we use it to move our commodities. Does gold sustain life? Do billionaires have a bank account full of gold? Do millionaires have gold in their accounts? (well maybe 10 %} Do I or we work for gold or money to pay bills. WTF is gold for? teeth, canvass for diamonds, electronics, used in space shuttles,some medical devices,( but silver can be used to, etc.) So what I should do is buy as much gold as I can and wait for the dollar to fail then those of us with gold will be much better off. Please forgive the rambling and the cursing. I love this site and think MMT an MMR is very informative.

    I am just asking Thanks, Jerry

  10. Ask any Argentine or Zimbabwean if they think gold is a good investment. Nuff said.

    • Short and sweet:-) would throwing in Indians and Chinese redundant?:-)

  11. Great comments here. I have no time now to read them all since I am on the road. U just have a question:


  12. What is Gold used for? Really. What.

    Gold is in just about all computerized gadgets, from chips and motherboards, to phones and servers. (In fact, there is so much gold in computer components, it is “mined” from discarded components to be used again.) And obviously the market for computerized gadgets continues to expand pretty significantly.

  13. I do not understand this need to rationalize everything to the nth degree. People are involved in what is valuable and what is not valuable. Value is time dependent. There are no laws that define what will happen and what will not happen or when it will happen in the investing world. It all depends on people around the world making decisions. If gold is valuable to people today, then gold is valuable today. If Apple is valuable to people today, then Apple shares are valuable today. Any pronouncement about what gold or shares will do in the future is speculation. Period.

  14. Since I know Warren Buffett has received some sweatheart deals from the US Government/FED I take all his comments with – at least – a number grains of salt. But currently I am bearish on gold. But I also that the purchasing power of gold will increase.

  15. You said it all right here: After all, it is not the pile of rocks that produces great things, but the man/woman who uses the pile of rocks to build something, that does great things. And as a society, we should not seek to invest in rocks.

    You have to use rocks…but you should not invest in them? You’re a funny guy.