Warren Buffett’s master class on the problem with gold

ANDREW ROSS SORKIN: The commodity market, and particularly gold, have appreciated astronomically over the last few years…

Please explain why you have not invested more heavily in commodities…

WARREN BUFFETT: [There are] three major categories of investment. And you ought to think very hard about which category you want to be in before you start thinking about the choices available within that category.

Now, the first category is anything denominated in a currency. It could be bonds, it could be deposits in a bank, it can be a money market fund, it can be cash in your pocket.

And the — if you will reach in your pocket — I don’t like to do this, but — and pull out your wallet —

You’re watching an historic event. (Laughter)

If you look at this — and, I might point out, this is a one [dollar bill]. Charlie [Munger, Buffett’s long-time late partner] carries a [hundred] —

On the back of it, it says, “In God We Trust.” And that’s really false advertising.

The — if Elizabeth Warren were here, she would say, quite properly, it should say, “In Government We Trust,” because God isn’t going to do anything about that dollar bill, you know, if government does the wrong things, in terms of keeping it as valuable as it was when you parted with it to buy a bond or put it in a bank.

Any currency-related investment is a bet on how government now, and in the future, will behave…

Almost all currencies have declined in value over time. I mean, it may be built into almost any economic system that it will be easier to work with a value of currency that declines in value than a currency that appreciates in value, and the Japanese might reaffirm that here with their experience.

So as a class, currency-related investments, whether they are in the UK, or the United States, or anyplace else — unless we’re getting paid extremely well for having them — we do not think make much sense.

The second category of investments regard items that you buy that don’t produce anything but that you hope someone will pay you more for later on.

And the classic case of that is gold.

And I’ve used this illustration before, but if you take all of the gold in the world — don’t get too excited now — and put it into a cube, it will be a cube that’s about 67 feet on a side. That would be 165,000 or 170,000 metric tons.

So, you could have a cube — if you owned all the gold in the world — you could have a cube that would be 67 or 68 feet on a side.

And you could get a ladder, and you could climb up on top of it, and you could say, you know, I’m sitting on top of the world, and think you’re king of the world.

You could, you know, you could fondle it, you could polish it, you could do all these things with it. Stare at it. But it isn’t going to do anything.

All you are doing when you buy that is that you’re hoping that somebody else a year from now, or five years from now, will pay you more to own something that, again, can’t do anything, but you’re hoping that the person then thinks that somebody else will buy something five years later from him.

In other words, you’re betting on not just how scared people are now of paper money, you’re betting on how much they think a year from now people will be scared two years from then on…

The third category of asset is something that you value based on its — that it will produce, what it will deliver.

You buy a farm because you expect a certain amount of corn or soybeans or cotton or whatever it may be, to come your way every year.

And you decide how much you pay based on how much you think the asset itself will deliver over time. And those are the assets that appeal to me and Charlie.

Now, there’s some logical follow-on to that. If you buy that farm, and you really think about how many bushels of corn, how much bushels of soybeans will it produce, how much do I have to pay the tenant farmer, how much do I have to pay in taxes and so on, you can make a rational calculation, and the success of that investment will be determined in your own mind by whether it meets your expectations as to what it delivers.

Logically, you should not care whether you get a quote on that farm a day later, or a week later, or a month later, or a year later.

We feel the same way about businesses.

When we buy ISCARm [an Israeli precision metalworking company], or we buy Lubrizol, or whatever, we don’t run around getting a quote on it every week and say, you know, ‘Is it up or down?’ or anything like that. We look to the business.

We feel the same way about securities. When we buy a marketable security, we don’t care if the stock exchange closes for a few years.

So, when we look at Berkshire, we are looking at what we think can be delivered from the productive assets that we own, and how we can utilize that capital in acquiring more productive assets.