Warren Buffett didn't become one of the greatest investors of our generation by investing in gold. In fact, he pretty much hates the shiny metal. Just take a look at part of a speech Buffett gave at Harvard in 1998 when he said of gold:
(It) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
Buffett just doesn't get what all the fuss is about when it comes to gold. The way he sees it, the value of gold is nothing more than our stubborn willingness to protect its value.
However, that's not the worst part of gold in Buffett's view. His biggest issue is the fact that gold is just so worthless. Not in the value someone is willing to pay for an ounce of it, but in its ability to create wealth. In Buffett's opinion, gold is lazy and has no place in an investor's portfolio.
Lazy, good-for-nothing ...
Buffett hammered on gold in his 2011 shareholder letter calling it an "unproductive asset." He said that assets like gold "will never produce anything, but are purchased in the buyer's hope that someone else will pay more for them in the future." He went on to say that the owners of assets like gold "are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but by the belief that others will desire it even more avidly in the future."
Wikimedia photo by Agnico-Eagle (Agnico-Eagle Mines Limited) [CC0], via Wikimedia Commons
The problem with gold is that it has two major insurmountable shortcomings. It is "neither of much use nor procreative" according to Buffett. While he does allow for the caveat that gold has some small industrial and decorative use, the demand for either purpose is insufficient to use up all of the gold we are digging out of the ground just to hide it away again is a bank vault. However, his bigger issue with gold is that it can't be used to produce anything of value. Its value rises and falls based on what someone else is willing to pay for it, not based on its ability to generate income for its owner.
Productivity builds wealth, not gold
Buffett ends his diatribe on gold in that letter by contrasting it to the productive assets he prefers:
Wikimedia photo by Bala (Flickr: Brown/Green) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
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 (Author's note: Gold was $1,240 an ounce at the time this article was written) -- 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 ExxonMobil's (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?
And yet, investors still do choose gold over these productive assets all the time. Assets that will be producing corn and cotton and oil and gas for longer than any of our lifespans. Meanwhile, the gold will be unmoved and still incapable of producing anything. To wit Buffett said, "You can fondle the cube, but it will not respond."
Don't be fooled by gold
There's a real good reason why Warren Buffett hates gold. One who buys gold is hoping for the greater fool to buy it from them for a higher price at some future date. But that's not investing -- it's gambling.
Instead, Buffett seeks to surround himself with assets that are constantly producing value. Income that flows through the business is reinvested in new lines of business that go on to produce more income. It's a never-ending cycle where new wealth is created each and every year. It takes advantage of the wonders of compounding income and leaves behind the folly of being allured by a lazy, good-for-nothing, shiny object.
