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.



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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. There are fundamental flaws with Buffett’s argument, though. Firstly, not all production is created equal. Secondly, much of the commodity boom is down to increased pressure on resources in the face of a population that’s growing at 2 million people a day and is already over 7 billion! That’s a pretty strong case for investing to preserve your quality of life today. Investing in someone who prints sheets of paper might not be as wise as investing in your ability to buy a loaf of bread in the future.
    Secondly, he ignores entirely the effects of monetary policy. If the key component of money is to be a store of value and you have a period where you live with negative real rates and there is increasing pressure on real resources, the desire to hold those resources instead of pieces of paper is rational.
    You can have a world with falling margins and rising prices. So, what he’s really arguing is that capitalism will improve yields at a rate greater than increase in demand through population growth and rising standards of living. You can argue that, but there’s rationality on both sides of the argument. There are a lot of people that argue that you’d need 3 planet earth’s for the current population to live by the American standard of living. I frankly don’t have a clue as to what the answer may be – so I trade a lot of things and invest in very few.

  2. Just to add to that – I was obviously being facetious with the 2 million people a day comment. I think the actual rate is 200,000 per day or something.

  3. True, all production is not equal. The key to good investing is finding the good production! Easier said than done. But you’ll miss all the shots you don’t take (and an investment in physical gold is essentially a non shot).

    I would argue that there are better ways to invest in the commodity boom than investing in the physical. For instance, Buffett bought Burlington Northern. Why? Not because he wants them to transport coal into his living room. But because BNI benefits from the innovation of transporting commodities.

  4. There is simply not enough of the yellow stuff to back anyones currency let alone ours(US). All of the worlds gold ever mined would fit into a small office building. Now for all the gold bugs out there if our dollar had been backed by real gold all along much of what you see out your window would not exist as there simply would not have been enough money to accomplish it.

  5. “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.”

    Well…if I was the Fed or Congress I may take that line personally.

    Good article..love when you offer these pieces up. And you may want to shut your site off for now..your about to get lectured by the gold bugs.

    I own 10% in GLD. for what it’s worth today. I’d like to thank Central Bankers and Congress for my paper profits.

  6. This is a great message Cullen. I love how you intertwine your understanding of the monetary system into the investing ideas. It’s a very unique talent and I think you’re doing great things with MMR. Thanks and have a great weekend.

  7. Didn’t Buffet buy into Silver a while back?

    “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.” – In the long run we’re all dead.

  8. Cullen,

    Buffet’s argument is reasonable, but TOTALLY time frame-dependent. This is the standard fund industry canard about how steadily the “stock market” has risen over the last 100 years……an amazingly consistent 7% avg (approx.) for 100 years. And so the gullible public piles in. What the fund industry, and Buffet, fail to include in their thesis is that whether or not we can individually profit from their investment theory will depend on which shorter term period we happened to live or have our income generating/wealth producing years. Had we entered the workforce in the mid 60’s we would have stagnant compounding wealth for almost 20 years.

    No matter what the fund industry or Buffet claims, the success of buying and holding “productive assets” is heavily dependent on how lucky or unlucky you are in the historical time frame you lived. Buffet may have core positions he holds, but he has been a “trader” around those core positions his entire career….all his public BS not withstanding. And all assets, productive or not, can have periods of time where they make sensible trading positions. He is spot on in his thesis if our holding period will be 100 years…..but who among us has 100 year wealth building time frames. 10 year hold periods are relatively long…..buying and holding gold the last 10 years blew the doors off buying and holding the “productive asset” stock indexes. Like everything else, the devil is in the context and the details. krb

  9. True. My general message is this. Invest in yourself first. The very best investment you’ll ever make is in yourself. That can be any multitude of things, but an investment in yourself is ALWAYS superior to an investment in something else. So, if you’re really looking for better living standards you should first look to maximize your investment in improving yourself. Investments in other innovative or productive people are all secondary. And investments in safe haven or protective assets are tertiary. Allocate this approach correctly and I find it hard to believe that you’ll be disappointed over a multi decade period.

  10. Some things are not taken in consideration. For example to be productive you need energy. We are in fossil age and fossil fuels production is in declining stage. Same story with most of the minerals. You think the innovations based on IPhone apps will give value to so many paper assets around there? There is less and less space for people to live out of the thin air of investing on the shoulders of productive economy. You can study MMF, austrian, keynesian , but in the end all is just a theory. System is to complex to be linearly analyzed.

  11. I agree with you on that. But that’s much different than the “investment” point I believe Buffet is trying to make……misleadingly, or at least without critical caveats, in my view…….in the headline article. Thanks for your reply, and service to this field by the way! krb

  12. A few flaws with this thinking exercise. First off is that there are not 16 Exxon Mobils to buy. True, you could buy other oil companies with the money, but his point is you could buy 16 Exxons, which you can’t. They just don’t exist.

    Second, gold does have extremely practical uses, such as its malleability, resistance to reaction with other materials, electrical conductivity, etc. I mean, we aren’t talking about seashells or beads here. We are talking about a metal with many practical uses. The space program coats its visors with a microscopic layer of gold to prevent the sun’s radiation from harming the astronauts, or something like that, I am not a physicist. However, I am a chemist and I have used gold as a catalyst in my chemical reactions where all else has failed. There are a ton of other uses as well, google it if you’d like. So there are good scientific reasons gold has been valued for so long. Now, perhaps you couldn’t practically use all of the gold mined in a year for industrial purposes, so some (most?) of the production does need to be bought for jewelry and investment demand. But I am going to go with history here and say that for thousands of years gold has been valued for its beauty, durability, etc. I won’t fight that trend, as it won’t disappear overnight (I happen to be a white guy married to an Indian, so I see the cultural bond with gold firsthand).

    Also, who ever said they will only buy a huge cube of gold? I own bonds, stocks, etc. But I happen to dabble in physical silver and paper gold (GDX, GLD, CEF, etc) because I don’t trust the government all that much. Is Buffet implying I have to invest solely in precious metals and then hold my silver/gold forever? Can I not make a short-term (3-5 years) play on it to make some paper profits? I am not a goldbug, and I will not invest in it forever. I will invest when I think the price is favorable and someone will eventually buy it for a higher price. Yes yes, this is the greater’s fool theory, but it’s been working for me since I bought silver at $18 an ounce and gold around $1000. AND I don’t need to use my power and influence with the Bush and Obama administrations to lobby for policies favorable to my investments as Buffet has done previously (TARP saved his Wells Fargo investment, etc). Now, this is no knock on Buffet, he has a GREAT long-term track record. But I will put my money where I please and he can do with his as he pleases. I am sick of him using his prestige to talk up (or down) investment options. I wish he would stop writing editorials in the WaPost, etc. Stick to being a CEO. In the end, I sleep better at night knowing I have a safety net/insurance policy. I have car, life, and home insurance, why not a little portfolio insurance? That’s all it is really. I can lower my portfolio volatility without affecting my returns. Win win in my mind.

  13. It all comes down to long and short. In the long run you don’t want to bet against human progress because you seem to inevitably lose. Take the US stock market. In 1900 it was around a quaint little 50 and today it is pushing 13,000. However, along the way there were a lot potholes. The purpose of a short bet like gold is to get investors throughout the downturns. A seasoned long investor like Warren Buffet has built up a lot of reserves to get him through the downturns, but small time investors like myself and even the financial industry need to have a way to generate (at least paper) capital in the short run to survive so as to be available to invest in the more productive good times.

  14. You’re right though I don’t think Buffett would disagree with my point. I think Buffett’s greatest choice was discovering a way to strike out on his own. He says he reads and learns all day long. This essentially allows him to invest in himself all the time. This is the genius of Buffett. Not buying Coke and Geico. So, it’s a bit of a tangent from this article, but all related in my opinion. Not that we need more guys running hedge funds (which is essentially what Berkshire is), but hopefully readers get the point….

  15. Point of order: It’s “Buffett” with two t’s people. He isn’t a lineup of food overcooking in chafing dishes. Get it together. That is all.

  16. Cullen,

    I disagree and agree with you. Gold is not an investment, but it is actually a currency hedge. Essentially it is the world’s 4th reserve currency (other 3 being the dollar, the yen, and the euro). Gold should be 15% of a person’s portfolio as a hedge against the world government’s desire to weaken their currencies to strengthen their export sector. It also hedges against a potential collapse (sudden stop reversal of capital flows out of this country) and that risk rises every day.

  17. Disclaimer: I am not a goldbug, nor an anti-debt crusader, nor would I ever advocate a return to the gold standard. Okay? I’m not a kook.

    At the same time, even Bernanke accepts that “gold is a hedge against fat-tail risk”. More specifically, it’s disaster insurance without a counterparty.

    The problem with hard property is that recognition of ownership is by fiat: you can get your farmland or factory taken away from you. Bond value is also fiat: countries regularly default (read Reinhart & Rogoff please). Stocks maintain value only in the absence of black swans, and only so long as the companies are well-run.

    If you were a factory owner in St. Petersburg in 1918, or a Jew in 1930s Germany, or a white farmer in Zimbabwe last decade, you’d have found that out quickly. Paper stuff can be taken away from you. Also, bonds, stocks, currency and property can get zeroed out in times of financial instability – see Argentina – or war – see Iran right about now.

    Gold, meanwhile, is a very portable store of approximate value. Or at least it always has been. Rich people seem to want some of it, stored somewhere, “just in case”. Gold hasn’t ever reached zero price in 5,000 years of civilized history.

    In that sense, it’s actually a “good” – like an insurance policy, but without the counterparty risk. And if gold is insurance, it should be trivially easy to figure out how much value gold actually “produces”. It’s certainly not zero. Please don’t oversimplify.

    So if I ever have to flee my country because of war/persecution/collapse, I don’t want to have to do it with a supposed investment account, or with my country’s supposed paper money, or with a few supposed deeds to farmland.

    Buffett’s argument is fallacious (and facetious), anyway – nobody puts their entire store of wealth in gold (if they’re not idiots, anyway). But neither would I put 100% of my money in XOM or any other stock. Someone with the time perspective of Buffett should know that. Stocks disappear off the face of the earth, over time.

    I’d actually think that a price driver for gold, in this era, would be the increase in the numbers of wealthy people in the world. The more wealthy people there are, the more will be wanting to put 5% of their cash in physical gold.

    Anyway. I’m no goldbug. But I do understand that gold is a store of some value, it avoids counterparty risk, and rich people have always seemed to want it. There’s empirical fact. Now try disproving it.

  18. “an amazingly consistent 7% avg (approx.) for 100 years”

    7% is a compounded annual growth rate. a CAGR NEVER implies that it is a “consistent” rate.

  19. Krb,

    Your argument only holds for “dumb” investing. That is place a bet, and ride it out.

    True, in the last 10 years gold has outgained SOME stocks. But many have outperformed gold. I just checked, and some Apple shares I bought in 2004 are up almost 43X in 8 years. Glad I didn’t put that money into gold!

    My entire personal portfolio (which includes some gold) has outgained gold in the last 10 years. And in the past 20+ years, I have averaged about a 16% annual return. For comparison, over that same time period, my 401k’s have averaged about 5%. What’s the difference? My hands are tied in the 401k’s. I have no choice but to stick to managed funds or indexes. As a result, in the past few years, I’ve cut back my 401k contributions and instead invest that money myself.

    My point is not to brag here, but to point out that comparing gold to some arbitrary stock index or average is not a valid argument here.

  20. Oh do come on. Senile from Omaha is talking his book as always. He’s an elite who is tapped into the first use of money which gives him an edge over most if not all investors. If he’s telling you to buy, I’m sure he won’t mind showing us his holdings in real time so that we can be sure. Otherwise, I trust you Uncle Warren, but cut the damn cards.

  21. Great job on your portfolio management! But this is perfectly consistent with my point…..you are “trading”.

    Buffet suggests holding productive assets (“A century from now….”) over commodities is a more sound strategy. And I’m saying that is totally disingenuous and misleading…..and isn’t reflective at all of what he actually does. krb

  22. “Gold purchases over the past 10 years have been derived increasingly from emerging markets, especially emerging Asian countries (with India, China, and Vietnam accounting for the bulk of the increase in demand).
    In 1999, emerging Asia accounted for only 39 percent of global gold demand, Bhartia and Seto note. By 2010, that figure hit 57 percent and has continued to rise. The increase in demand has been concomitant with the rising price of the precious metal.
    At the same time, demand for gold among emerging market consumers has far outpaced investment demand through ETFs or direct purchases in the developed world.
    The data show that the bets against the Federal Reserve, at least in the form of ETF purchases over the past decade, were a relatively small part of the total demand,” the analysts write. “Instead, the really big bets were of a different flavor and originated almost entirely in emerging markets.”
    That’s largely due to “financial repression” against Chinese and Indian savers and investors, the analysts write. Residents of those countries have fewer options when it comes to finding ways to generate positive returns on their assets. Bank deposits offer paltry yields and equity markets have been volatile.
    As a result, gold jewelry and gold bars, along with real estate, have become the most prominent options among few alternatives, the analysts note.”


  23. Oh really? “Never”? I guess except for all those companies that include in their sales/educational material the 100 year graph of Dow returns with the smoothed actual and the straight line avg going from bottom left to upper right……..

    I’ve been a client and/or employee of the industry for over 30+ years…..I know how they train their account managers and I know what they claim to clients. Please…..you sound like a defensive acct manager. krb

  24. p.s. The Saudi Arabian government effectively taxes its country by basically owning the country’s oil and directly collecting revenue from its sale. The Saudi Riyal (the national currency) is also backed by foreign currency reserves, especially dollars).

  25. “I’d actually think that a price driver for gold, in this era, would be the increase in the numbers of wealthy people in the world. The more wealthy people there are, the more will be wanting to put 5% of their cash in physical gold.”

    Aka the emergence of China and India. They love their gold too.

    After re-reading the article I really don’t get what Warren is arguing. It seems like it is written for the buy and hold investor. But what buy and hold investor puts all of his or her money into gold? What buy and hold investor puts all their money into one stock? And if you are a trader, wouldn’t you want to take advantage of golds secular bull market? Sure it will form a bubble as all secular bulls do, but that is when you can make a lot of money. I just don’t see how his argument applies to any real world scenario.

  26. I suspect that when Buffet claims the farmland produces $200 billion per year, he is not considering the labor, fertilizer, fuel, and capital required to produce those crops.

    My uncle owned several hundred acres of productive farmland and was poor all his life. Some years he made a lot of money and other years he lost a lot. If his wife hadn’t been working as a teacher, they wouldn’t have been able to make ends meet. When he retired, he wanted to give the land to his son on the condition that he farm it, but my cousin refused. He was making more money in the city.

    Other advantages of gold are that it is portable (try carrying an acre of farmland on an airplane) and it seems to hold its value fairly well over time. It won’t make you rich, but it will always be valuable.

    That said, current gold prices seem to me to be somewhat higher than historical averages. I would be cautious about buying gold now. But on the other hand, the third world is industrializing and I know that my Indian friends have a great fondness for gold. As Asians become more affluent, billions of people who couldn’t afford much gold before may start buying it in much larger quantities.

    I don’t know what gold is going to do in the future, but I feel that it is good to have some as insurance against the uncertain future.

  27. It seems pretty obvious what Buffett is saying: right now, gold appears overvalued compared to productive assets. That’s it. He’s merely giving us an example of all the productive things you could buy with all the gold in the world at gold’s current spot price. It’s akin to his Market Cap/GNP scale.

  28. Cullen, not to rehash the taxes/demand debate, but I was thinking about something. Fiat means “let it be done” in latin. This is the essence of paper money. As Wikipedia says, “Fiat money is money that derives its value from government regulation or law”. So in a strict sense, taxes don’t drive money. If anything drives money, it is the laws that drive money. The laws ultimately are established by the people. And since the people decide, it is not enforcement of taxes that matters, but acceptance that matters! Unless you live in an authoritarian state, which we obviously don’t. MMTers misconstrue this point to claim that taxes drive money. Because if you say “laws drive money” then it’s harder to argue that acceptance matters more than enforcement. Leading to their conclusions that involve price fixing and job guarantees.

    I thought that might help your argument a bit.

  29. So if gold was 500 dollars an ounce I could buy a lot of stuff too with all the gold in the world. What is the ratio where gold is undervalued? 8 Exxons? Maybe 4?

    I know this article is a spin on the old “gold provides no productive value” argument, but gold doesn’t need productive value. It’s been a store of wealth for thousands of years and will continue to be whether people like it or not. Like other assets it will rise and fall in price during economic cycles. Why not take advantage during a time when gold is rising in value?

  30. Buffet is probably right, but as a geologist, I know for certain that the gold bubble will pop on a slightly longer timescale. This is because there are truly gargantuan amounts of gold in asteroids. A modestly sized M class (metallic) asteroid will contain far more gold than that $9.6 trillion cube. Taken together, M class asteroids will expand the gold supply by several orders of magnitude in relatively short order. With such a powerful expansion of supply, the price is bound to plummet. Asteroid mining is currently beyond our technological abilities, but it will not remain impossible for long. Indeed, it is probably about as feasible as a Mars landing–and it is much more realistic than Newt Gingrich’s Moon colony idea.

    New private sector space ventures like Space X promise to bring launch costs down significantly, and the amount of money to be made in gold is enormous. Combined with other valuable metals vastly more common in asteroids (platinum, iridium, osmium, etc.), gold will almost certainly be the first place the new space corporations will look for profit. A bet on the long-term price stability of gold, therefore, is not just a bet against a burst of the gold bubble but a bet against the space industry. If the US government were to adopt the gold standard, we’d be looking mighty silly when the gold begins rolling home from outer space.

  31. He misses the point, gold is viewed as a liquid substitute. Farmland is not, although XOM, utility stocks etc. are relatively liquid. But even from a liquidity point of view gold is not going parabolic. A while back I made a comment about valuing gold at the doomsday value of global GDP working capital (say 3 months or ~10 trillion), which is not that far off from where it is now. It’s not going parabolic from here. There is much more down- than upside. The better strategy is to keep a liquid buffer, wait for a blowup in a country and buy assets as their currency collapses. That’s a better doomsday strategy.

  32. That’s a horrible comparison. Farmland doesn’t produce, stocks don’t produce, it’s human who is producing. You always need to net the expense of human. Who’s here to guarantee that you get a profit after you net the expense?

    Not to mention, the so called ownership of land and stocks is only a word of promise by corporations and government. Although they appears to be trustworthy today, it doesn’t mean it can’t be broken tomorrow.

    In reality, no one will choose Pile A over Pile B for the obvious reason, but that doesn’t mean people will not choose 90% pile B and 10% pile A. Most people will chose from both piles if they are given the choice. That’s exactly the world today.

  33. I agree. If anything really drives money it is laws. And laws are formed by the people. But there’s nothing unique in these insights. MMTers say taxes are important to a govt money as if that’s some unique insight. Well yeah. The sky is also blue. But your point is an important one. Laws drive fiat money. And laws are simply the social infrastructure of any society. In a free society the laws are formed by the people. So fiat is clearly a creature of the people, for the people and by the people. It’s formed to help the public mobilize resources both in the pvt domain and in the public domain. But the driver of all money is always the same in a free society. It is the desire to mobilize resources in an efficient and accepted way. The fact that we create a specific type of money and apply laws, rules and taxes to it is just an extension of this desire to mobilize resources. There’s nothing unique in the state theory. But yeah, I like your idea that it’s contingent on laws and not just taxes. That’s an important insight as it shows that we are free to choose our currency rather than being coerced into using it by a govt that must fix prices and hire everyone to generate full employment as MMT desires.

  34. I do agree with your analysis of Buffett, so I get that point.

    And as to whether I’m “trading” or “investing”, I guess that’s a matter of perspective. I consider it investing. I’m probably 80% buy and hold at this point in my life, where my purchases outweigh my sales by about an order of magnitude. My goal for the next 10-15 years is capital accumulation/appreciation. I’ve got a day job (as an engineer/innovator, actually, which is why I like this article so much) that provides my income (and also provides me with a lot of useful information to apply in my investing, but that’s another story….)

  35. “Free” isn’t a binary condition, Cullen, nor is “people” a categorical identity. Zimbabwean farmers of the 1990s, German Jews of the 1930s, and Russian business owners of the early 1920s had all their fiat assets (factories, currency, rental property, farmland) taken from them by… well… either “the people”, or a government that was acting as if it was supported by “the people”.

    Laws are established and enforced by governments, not “the people”. And fiat property’s value only exists because of government force. (Completely imaginary libertarian utopias notwithstanding….)

  36. Commodities are necessary for the production process, there is an intrinsic demand for them. Less so for gold, which I agree is mainly an speculative bet based on some market reflexivity assumptions and self-fulfilling prophecies. But still, everything is subject to the evolution of demand, the difference between current and future price is the difference between current expectations (and available information) and reality.

    Productivity is also subject to demand, assets which are productive today may not be so in a year, 5 or 20; human ingenuity is not infallible and that’s why we have market economies and why most corporations which where public at somepoint in history have zero value today. Because what they produce may not be in demand anymore in the future and failed to keep up with the market evolution.

    In a short sentence: the intrinsic value of anything given enough time is zero. This includes corporate shares, debt & property claims or commodities. Actually, this is one of the few constants in our universe, as per the constant rise of entropy and inflation, and in smaller scales (human societies & nature in our world) the same applies (but well this is more a scientific/philosophical discussion, but is curious how some laws replicate at different scales).

  37. if i was mr. equity buffett, i would think the same thing.

    or bob doll…….they have to believe this time is not different and the west can ‘liquify’ its way out of insolvency.

    its gone beyond that, sorry.

    interesting FED pres. Fisher’s SINGLE BIGGEST holding is 1.1 mil$ in GLD.

    it would upset most people too much to pull their heads out of the sand.

    this is far from over.

  38. Well, I disagree with this idea that force is more powerful than acceptance. In a macro and long-term sense, we’re not confined to the rules and regulations that our ancestors have established or the govt regulates, because we can change them. Maybe I am naively hopeful about our constitutional republic, but I think the founding fathers would be saddened to find that their ancestors have succumbed to the notion that the state rules them as opposed to the idea that the people rule the state.

  39. It’s interesting to me how MMTers and gold bugs both agree that the government coerces us into everything. It’s political extremism at work. On one side you have pseudo anarchists who hate the govt force and on the other end you have the socialists who actually want the govt to enact force. Eye opening.

  40. Although Warren Buffet is one of the great investors, his expertise is in selecting undervalued businesses with good management teams, not macro economics and not monetary theory. Sticking to his knitting has made him one of the richest men in the world.
    So his thoughts on the role of gold in this horribly broken global money system is not anywhere near his comfort zone. Gold is NOT an investment: it produces no interest, no earnings, no capital gains, and it doesn’t borrow money, go out of business or skip town. In fact, it usually costs storage fees and insurance premiums to have it just sit there. Not Warren’s cup of tea. However, notice that a large amount of paper dollars have all the same problems. Paper money earns nothing, and costs you money if you keep it in your safe deposit box. Warren would invest it, not store it.
    If Gold is not an investment, it is also not a commodity. Gold is essentially useless, which means it is not consumed as any real commodity would be. So when its price goes up, even a lot, it affects no one. No industry is put under pressure because they can’t afford their supply Gold because there is no such industry. (Jewelers just pass the price of gold on, and electronics firms use only tiny amounts and pass that on as well).
    In simple terms gold is not an investment, it is not a commodity, it is money. In the famous words of JP Morgan: “Gold is money, everything else is credit”.

    Warren doesn’t like gold in the first place, so why listen to him now.

    More importantly, Warren is ignorant of a simple fact: when you screw up you money machine, it has serious consequences for your real economy. His belief is if you get the real part of the economy right, the rest will fall into place. Born in 1930 This has been true for all of Warren’s life after the age of about 10. Our system is based on massive liquidity being poured into the system through credit creation. When the credit creation gets out of hand in a credit bubble, the money pump that keeps everything going dries up. And the economy which is humming along, falters for no apparent reason. Then when the government completely misunderstands the situation, and compounds the credit bubble by printing money like crazy, a difficult situation becomes a catastrophic one. But it isn’t a progressive decline. The government’s largess keeps things looking normal, until is suddenly is obvious to everyone that it is far from normal.
    In that world gold is the only money that won’t loose value. Just think of it as a savings account in a currency printed by God, instead of Ben Bernanke.
    You know, its weird how Warren is a genius at making money, but doesn’t have a clue what to do with it: he’s a moron at spending it. In fact, he doesn’t even know how to give it away; Bill Gates is going to do that for him. My point is Warren is TOTALLY immune to the fear of a downturn. He may loose billions, but he never really needed them anyway, except to collect more businesses. So if your life is vulnerable to a massive downturn, don’t listen to Warren, because he doesn’t care.

  41. You might be a Geologist, but you’re not a miner. At 1 gram per ton Earth based gold mines are barely profitable. If Eros 433 (7.2 e15 Kg) contains the same amount of gold as we’ve mined on earth (161.000 metric tons), that’s .02 grams per ton. Even if you could get it back to earth for free, nobody would bother processing it. Add in the rocket fuel, and cap ex for all that space-worthy mining equipment and paying miners who are part of the astronauts union, I don’t have a clue what you’re thinking.

  42. I guess you could say that Warren Buffett is better able to buffet the headwinds of a downturn than we are.

  43. Buffett could have said the same things about diamonds or art and it would have been just as irrelevant. He is an integral part of the gold price suppression scheme.
    Seriously, how can an asset be so bad when it has risen from $360 when purchased in 2003 to $1750 today? The price merely reflects the ongoing destruction of the currency.
    Pension funds own no gold. The public owns no gold. $1750 will look cheap in the rear-view mirror.
    Personal opinion, of course.

  44. You’re right that Eros would be low-quality ore. (But it actually does have more gold than has ever been mined on Earth.) That’s why I was talking about M class asteroids, where you probably have an average gold content of around 150 g/ton. Of course, you’d pick the ones with the highest gold contents, so we’re probably talking at least 250 g/ton. Yes, paying astronauts would be expensive, but you’d probably make the mission robotic. It doesn’t really need much human input. You just need to take the powdered metal that most asteroids are made of, separate the heavy metals from the lighter ones with a centrifuge, and return the gold-rich heavy metal back to Earth.

  45. A gold backed currency merely controls the irresponsible behavior of the something for nothing political class. One doesn’t need to literally back every piece of paper currency with gold. The threat of redemption is enough. Fiat money is as good as the credibility of the issuer. Politicians unchecked, have little. Gold has a history as old as civilization. Gold doesn’t promise perfection or economic utopia like the denizens of the modern state. It is a store of value and stability over time like no other. The state is a necessary evil which has no authority other than that which was delegated to it by the citizens. With the rise of vulgar keynesian economics it has the rationalization for highly destructive and self-serving behavior while fiat money supplies the means.

  46. Buffet’s argument is specious and relies on the false premise that gold has little value because it is not (mostly) a productive asset. It’s like saying art has no value because art does not produce things we need. And yet, throughout history, all cultures have had a profound need to create art and to experience it. Also throughout history, cultures the world over have had a desire for gold.

  47. “New private sector space ventures like Space X promise to bring launch costs down significantly, and the amount of money to be made in gold is enormous.”

    We’ve been hearing about “the promise” of affordable surface-to-space travel delivered via the private sector for twenty years now. Maybe we’ll get it around the same time we get fusion and Dow 30,000 and all the other sci-fi stuff we’ve been promised by snake-oil peddlers.

  48. The argument for gold is not that it’s an investment, so Buffett’s argument is a straw man.

  49. Buffet is being disingenuous. He took a massive position in silver a while back. Last time i checked, silver was a precious metal. I’ll start listening to Waerren when he can beat the performance of gold, or the S&P for that matter. If buying IBM at all time highs is the smartest idea he has,it could take a while for that to happen.

  50. I think many of the commenters here are missing the point. I’ll use a real world example… Back in 2000 (if memory serves me) Citizens communication bought Frontier Communications for about $1B. The most expensive telecom deal of the day (per phone line bought). Within a year it was obvious Citizens could never make back that billion dollars by selling Frontier; however as a productive asset it has been able to make back its money. If you are the unlucky person to buy gold at its peak, you may never make back your money unless you become a fancy high demand jeweler.

  51. It seems MMTers have a contradiction on their hands then. They can’t say that taxes drive money and money is a creature of law because law is a creature of the people so the power to enforce is inherently less powerful than the necessity to accept. This might work (temporarily) in a statist regime (where Knapp was influenced) but certainly doesnt fly in a constitutional republic like the USA.

  52. So? How many people bought tech stocks in 1999 that they will never make their money back on?

  53. Insurance should be a very small portion of one’s assets. Surely you’re insuring something else, right? What are you insuring? Your equity portfolio? Your savings? How much gold does one need to own to be “insured”? It sounds like you’re using gold as a hedge. In which case you should be using it in a portfolio of other assets. No?

  54. @jaymaster, would you care to share with us just 3 or 4 of your favorite positions you are invested in now? Curious how you have been able to achieve such fabulous returns. Are you more of a short-term trader, or do you buy and hold for months or years, as in the case of Apple?

  55. Mr. Buffet’s article was simply incredible on two major counts.

    First, his argument is a false choice. Gold investors also buy oil and farmland. They are all hard assets, and each has its pros and cons. They arent buying gold instead of oil, they are buying gold instead of cash. Moreover, the really big gold buyers such as China cant buy US farmland (though they are buying in S America apparently). Nor can they buy Exxon. Ha! Can you imagine if they tried? What would Mr. Buffet suggest they buy?

    Second, by choosing hard asset “alternatives” to gold, Mr. Buffet unwittingly made the case for owning gold. Despite their excellent revenues, neither Exxon nor farmland pay any meaningful after-tax income to investors. Exxon pays a dividend of about 2% and farmland for investors not much more than that (in many places the return on farmland is negative due to property taxes). Increasing returns from both these assets rely on higher commodity prices which in turn is dependent (over some period of time) on expanded money supply, i.e. the same basic argument as gold. Yes, China is using more oil and consuming more protein. But it is doing so because it can pay for that consumption. And it can pay for that consumption because there is more money. And of course gold has no operational risk and no tax risk (windfall profits tax, property tax, etc). So the same exact same beta play on money supply expansion without the risk, and with no real give-up in yield – because there is no yield. Gold is the purest money supply expansion investment there is.

    As for ingenuity, I think you have it completely backwards if I am understanding you correctly. Why would you invest in oil and food production if you think humans will be super-ingenious on both those counts? Exxon isn’t going to be worth anything if someone figures out how to make a car run on water. Extreme example, but do you get my point? If someone engineered seeds that could triple the yields on farmland, what would farmland be worth? I think Dylan Grice at ScGen wrote an excellent article on this last year. He basically said the opposite of what you said – that ingenuity would lower the cost of production and thus the value of commodity investments. If the corn crop doubles, trust me the last thing you will want to own will be farmland.

  56. Buffet is a legend and a fluke, as is his 20 per cent return. Gold has a much longer track record. Why does the US keep its 8000 tons of gold? Insurance against fiat currency collapse. That’s why every investor should also have the same insurance policy. How much insurance you buy is a personal choice.

  57. The historical pattern is clear. Gold has a bull market whenever real interest rates are negative. That can happen, as now, when interest rates are artificially low, or as in the 1970s, when inflation is abnormally high.

    Buffett and Cullen may be right that human ingenuity will win out over the very very long term, but everyone has a finite lifespan. Only corporations and nations have no limits to their lifespan, at least in principle. Not only are we in an artificially contained depression (BSR) right now, but we are also near the end of the fossil fuel era. You can’t rule out the possibility that no one alive today will ever see a new era of robust global growth again. In fact, the world may be due to go through a rather horrific era of shrinkage, of both GDP and population. If no real energy breakthroughs are made in time, such a scenario is absolutely guaranteed. Having some gold may be a nice hedge against the worst.

    And to answer “Never Accept the terms of Service”, governments can confiscate your gold. It isn’t as easy as taking paper assets (which can be confiscated by computer remotely), but a ruthless army can put a whole country into total lockdown and go door to door and take all the gold. All they have to do is execute any head of household on the spot if they feel insufficient gold is produced when they come calling. If Germany has Greece put under occupation in the final EuroZone secession endgame, we could see something like this happen soon enough.

    I am not a goldbug. I bought a tiny amount of gold about 10 yrs ago. I wish I bought 100x more back then, given its price rise over the last decade.

  58. There is no way asteroid mining can be profitable unless we either have a huge breakthrough in energy, or find a way to do matter transmission over solar system distances. And even if a way to do the latter is discovered, it will most likely be kept classified top secret by the military of whatever nation discovers it for at least 1000 years. In other words, you won’t live long enough to see asteroid mining.

  59. Buffett runs an insurance company, so his investment income backs the policies he underwrites. Since he buys entire businesses, he is not limited to the paltry dividend yields that the best companies (like XOM) pay to ordinary investors. He isn’t taxed like an individual investor either. And since Buffett is really Berkshire Hathaway – a corporation with no natural lifespan – he really can buy businesses and hold them forever. You can’t.

  60. Gold goes up when real interest rates are negative. So, yes. Gold can go down if the real rate ever becomes positive again. But if the world really is going into an era of drastic shrinkage due to progressively worsening energy shortages, there won’t be any global GDP growth, lots of fiat money will be printed, and the gold bull market could last a very long time.

  61. Centrifuge won’t work unless the metal is molten, and that itself has massive materials containment issues. The metal will either have to be dissolved in acid and chemically separated, or vaporized and fractionated by distillation. Lots of energy will be needed however it is done.

  62. Quoting Cullen’s view: “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.”

    No, you’re betting that human stupidity will *temporarily* overwhelm common sense. And you’re betting that living standards will *temporarily* stagnate or decline. Which they do!… quite frequently.

    Such *temporary* bets are occasionally justifiable. Stupidity and common sense tend to alternate.

    Buffett’s argument seems to be predicated on 100 years of common sense and political stability. But stability is fleeting. Stability begets instability. Gold is a hedge against instability.

    No arbitrarily nominated investment will be substantively “better” over a 100-year period. But over (say) a 15-year period, sometimes the “better” investment is Exxon Mobil, sometimes it’s long-term Treasuries, sometimes it’s cropland, sometimes it’s Eaton Vance, sometimes it’s short-term Treasuries, sometimes it’s Cisco, sometimes it’s gold.

    Change is the only constant.

  63. 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.

  64. 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?


  65. 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.

  66. 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!

  67. 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.

  68. Nobody said owning productive assets were risk free. If you buy gold, or any commodity, the ONLY way to get a return is to sell it at a higher price. With a productive asset you can sell it at a higher price AND OR you can use it to derive an ongoing income from. It’s sole profitable value is not derived from rising prices alone.

  69. I don’t see a contradiction, personally. In a democracy the power to write, uphold and enforce the law is given to the state by “the people”, on the condition that the state doesn’t abuse that power or otherwise act against the interests of “the people”. For the state to have any legitimacy its actions, laws and constitution have to be acceptable to at least the majority (at least in theory if not, unfortunately, always in practice).

  70. FD015:

    “It’s interesting to me how MMTers and gold bugs both agree that the government coerces us into everything.”

    “socialists actually want the govt to enact force.”

    It’s funny how you seem to like making random, completely unsubstantiated stuff up.


  72. First thing you should ask what gold is insuring against. Simply put, it is guaranteeing that you’re not wiped out if the rest of your portfolio goes to zero. The ultra-bears (Marc Faber / Nassim Taleb & Co.) make it clear that they believe there is growing tail risk of a doomsday scenario: systemic political and/or financial risk that will reshape the globe. Western Government failures / World War / global financial panic could easily destroy any investments you’ve talked about. Historically speaking, large international corporates, currencies, and any other AAA rated investments can quickly go to junk should this unlikely event happen.

    I’d agree that it shouldn’t be 100% (or 30%) of a portfolio, just because the future is uncertain and it is extremely remote. What percentage of your portfolio depends on your own expectation on the probability of something like this, plus what your portfolio strategy is. (For example Taleb’s strategy is to make money on extreme tail bets and be risk-neutral on the remainder.)

  73. 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.

  74. 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

  75. 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

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

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


  78. 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.

  79. 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.

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

  81. 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.

  82. 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.

  83. 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).

  84. 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).

  85. 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.