04 March 2012

cdixon: “Warren Buffet on gold as an investment”

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 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.
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. Berkshire Hathaway 2011 annual report

Short answer to this: Well, d’oh! Anyone with basic understanding of economics knows this.

Long answer: Lets’ look at this from a different perspective: maybe a century from now global warming will have screwed up the climate so badly that those acres of farmland will be basically useless for growing anything other than weeds. Or maybe – to offer some positive prospect as well – we will develop technologies to mass produce food via bioengineering, making traditional agriculture obsolete. And companies come and go in much less than hundred years – just look at Kodak – so those dividends are far from a sure bet. On the other hand, the gold will still be there, in one form or another, millennia from now. It could easily outlive the human race. And that’s what the people are buying with gold: not the prospect of profit, but the certainty its’ value will not suddenly dwindle to nothing like so many other potential investments. Economics is entirely a game of trust and risk: if you are willing to risk more, to trust a certain company, startup or even country through its currency, you can potentially gain more – or loose everything. With gold on the other hand there is no risk – or let’s say, the least amount of risk possible – and that’s what it makes gold so attractive during crises, when the risks of all other forms of saving or investment become more apparent.

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