Gold gets dug out of the ground, 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.”-Warren Buffett
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When it comes to bashing gold, few do it as publicly and extreme as the crew at Berkshire Hathaway. The company’s CEO and largest shareholder, Warren Buffett, has provided many analogies over the years involving the precious metal. In a Fortune article earlier this year, the “Oracle of Omaha” cited gold’s limited industrial demand and placed it in a category of assets that “will remain lifeless forever.” Berkshire’s attack on gold grew louder as Charlie Munger, vice chairman, said in a recent interview that, “Gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939, but civilized people don’t buy gold, they invest in productive businesses.” The recent statements by Buffett and Munger have not gone unnoticed by hedge fund manager, David Einhorn.
Buffett dedicated a decent part of his latest shareholder letter to criticizing gold. He painted an analogy of the world’s gold stock as a useless cube that would fit within a baseball infield. Buffett wrote, “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 about $9.6 trillion. Call this cube pile A.”
He then compared pile A to another pile. “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). 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?”
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Einhorn, founder of Greenlight Capital and board member of Hillel: The Foundation for Jewish Campus Life, is long gold and provided an analogy of his own. “The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us,” explained Einhorn in Greenlight Capital’s quarterly performance letter.
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Interestingly, Einhorn does not make any mention about gold in his letter, but instead leads readers to critically think about dollars as a store of value, all while providing an entertaining response to gold critics like Buffett and Munger. Rather than place gold against all U.S. cropland or several oil companies, its role in the financial system should be seen as a store of value that can not be printed at will. The precious metal also offers diversification and is one of the few things that has represented currency for thousands of years.
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Disclosure: Long EXK, AG, HL, PHYS