I recently received the following PM regarding my post #1733 below. I guess it may represent a view shared by others, so I thought I'd present it, together with my reply ...
"Gold went up 800%....and demand is still increasing. If I were Warren, I would be more concerned why I was under performing the SnP500 over the last few years. Like his investment in Iscar carbide. I helped bring that to the US 35 years ago. I(t) would have been a great buy in the late 80's...not in the mid 2000's."
Here's what I put forward ....
"I take your point about the phenomenal increase in the gold price, which, according to the 22 year long term chart in the link below ....
http://www.infomine.com/ChartsAndData/ChartBuilder.aspx?g=127681&df=19120101&dt=20120308&dr=MAX
..... has gone from its low of approximately $300/oz. to the current $1700/oz.
I make that increase about ((1700-300)/300)x100 = 470% since that low 12 years ago.
Up until then the price didn't vary much. It only really started to take off from early 2005, and, personally, I suspect that probably had something to do with what was happening in the financial markets and the general lack of faith in major currencies, especially with regard to what was backing currencies.
In the "old days" when the dollar, etc.., was backed by gold one at least knew where you stood and printing dollar notes became a lot more problematic. These days a Central Bank puts money into the system by turning on the printing press.
But I guess that's another story ....
With regard to Buffett and gold, he made the following points :-
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(1) Gold has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
(2) What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.
(3) 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. At $1,750 per ounce 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). 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.
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Now, personally, I can go along with what he said, especially in terms of the return one would get from one's investments.
However, what surprises me about Buffett, and maybe this is somewhat where you are coming from, is the following ....
Buffett has a keen and clear insight and understanding about how things work in the world of investment and financials. In addition he also knows what the likely consequences are going to be when the wrong things are done. Think back to his well known warning in 2003 about "financial instruments of mass destruction" .....
http://news.bbc.co.uk/2/hi/2817995.stm
Buffett knew that these derivatives and CDS's, etc.., etc.., were dangerous and unsustainable, going forward, and were very likely to cause major problems in the banking and financial markets. History proved him correct.
Now what has always surprised me is why didn't Buffett put a reasonably substantial amount of his investment cash into Gold. Because, as sure as eggs, if his observation of those "financial instruments" was correct then there would ultimately be a catastrophe in Western financial markets. And when there's a major problem with financials and/or currencies THE FIRST THING THAT INCREASES IN PRICE IS GOLD !!
Therefore, as you alluded to, Buffett could have made a killing of over 400% capital gain in 6 or 7 years.
Of course, it could be that in Buffett's "time scale", 6 or 7 years is a short term investment !! {:-)" |
