The gold rush
In September of 2011, the price of gold hit $1,861 per ounce, which capped off an incredible 10-year run that saw the price of gold rise on average each year by 21%.
If someone had invested $1,000 in gold, it would have turned into $6,830 over those 10 years, whereas a $1,000 investment in the S&P 500 would have only left them with only $1,055.
When gold prices began declining in November of 2011, CNBC speculator Jim Cramer said "the vicious decline in gold is signaling the collapse of the current financial order, an order that's based on printing money to cover up problems." Cramer gave three reasons he thought gold would continue to rise, highlighting that the European banking crisis, the strong demand from central banks and citizens of emerging nations, and the limited supply of gold would help boost prices.
With the prospect of a looming economic collapse in Europe, Cramer concluded:
"Yes, it's true that a severe recession in Europe is bad for gold, but we had one here, and how did gold do? It went up, not down. So keep owning gold. And if you don't own any, I would be buying some here."
With gold garnering all the attention of the financial media, Buffett chose to address the topic in his letter to shareholders in February of 2012, noting there are "assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century."
He goes on to say; "Gold, however, has two significant shortcomings, being neither of much use nor procreative... if you own one ounce of gold for an eternity, you will still own one ounce at its end," before he gave the following example:
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 $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 ExxonMobil (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?
Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
Of course, Buffett proved to be correct, as the fall of 2011 marked the beginning of the end of the run on gold, and currently prices are down 33% from their peak, while the price of the S&P 500 has risen by more than 50% since September 2011. The chart below outlines the dramatic collapse in its value:
Buffett on Bitcoin
Recently we have seen another incredible run in the price of a supposed asset, and that, of course, is Bitcoin, which has watched its price rise more than 9 times (from $128 to $1,182) since June of this year:
This has led to many speculators diving into the currency, including noted investors Cameron and Tyler Winklevoss, proclaiming that the potential market capitalization could rise to more than $400 billion-- versus the current $14 billion.
Yet like gold, Bitcoin has many of the same properties. There's a limited supply, and theoretically an unlimited demand -- however in the end, it doesn't produce anything, and it's only worth something because the market participants say it is.
It is not difficult to imagine a day when Bitcoin is worth exponentially more than it is today just as it is not difficult to imagine a day when it will be worth far less. Yet considering that Buffett has a preference for assets that produce things, versus cubes that sit in baseball fields, and his wisdom that "bubbles blown large enough inevitably pop," it is easy to presume we will not be seeing him purchase a Bitcoin anytime soon.
Fool contributor Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.