by Jesse Anderson, CFA
I recently wrote about how Cash was Today’s Hottest Investment. I made this assumption based off the billions of dollars investors are adding to cash accounts (checking, saving, and money market) and removing from equity funds. This is a great way to track investor behavior. Although cash seems to be where investors are moving money, I hear the most questions about Gold.
Gold has gone on a tremendous run over the last 10 years. In a time period news agencies and investors call the lost decade, people are searching for better answers. Where is the first place investors look? the rear view mirror. Looking at returns over the previous 3, 5 and 10 year periods, it is easy to see gold would have been a good choice. However, hind-sight is 20/20 and very few people made that prediction 10 years ago. Now, everyone wants a piece of the investment that can only go up (their words, not mine.)
The questions range from, What do you think about gold as an investment? to How do I invest in gold? I give our normal recommendation that this is no different than trying to time the market by getting in while the price rises and selling out before the price starts to drop. It is most scary when they want to move a majority of or their entire portfolio into gold. I cannot think of a situation where gold should be the center of anyone’s portfolio. Everyone’s favorite billionaire investor Warren Buffett shares my same opinion.
Buffett fans wait anxiously each year for his annual letter to Berkshire Hathaway shareholders. This year an adaptation was released a little early for an article in Fortune magazine, Warren Buffett: Why stocks beat gold and bonds. In true Buffett form, he breaks down a gold investment in very simple terms.
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.
My favorite part of that entire explanation is in the second to last sentence where he states [gold is] incapable of producing anything. From an investor who sees the value of income and the value of asset production, gold clearly falls short. If we’ve learned nothing from internet stocks or house prices, asset prices can continue to appreciate longer and further than anyone could imagine. This historic run for gold could continue for many years into the future, or fall harder and faster than any other in the past. I’m not betting for or against it. I’m simply staying out of the way. Instead, I’ll choose to put my assets to work and stick to a disciplined investment approach.