Buffett’s master class on the problem with gold

ANDREW ROSS SORKIN: The commodity market, and especially gold, has gained astronomical value in the last few years…

Please explain why you are not investing more in commodities…

WARREN BUFFET: [There are] Three main investment categories. And you should think hard about which category you want to be in before you start thinking about the available options in that category.

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

And – if you reach into your pocket – I don’t like doing this but – and take out your wallet –

You are watching a historical event. (Laughter)

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

On the back it says “In God We Trust.” And this is truly false advertising.

— if Elizabeth Warren If he were here, he would quite aptly say that he should have said, “In Government We Trust,” because, you know, if the government does wrong things, God won’t do anything about that dollar bill in terms of keeping it as valuable as when you left it to buy a bond or put it in a bank.

Any investment in currency is a bet on how the government will behave now and in the future.

Over time, the value of almost all currencies has fallen. My point is that it can be established in almost any economic system that it will be easier to work with the value of a depreciating currency than with an appreciating currency, and the Japanese can also confirm this with their own experience here.

So as a class, we don’t think currency-related investments, whether in the United Kingdom or the United States or anywhere else, make much sense – unless we’re getting paid very well for owning them.

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

And the classic example of this is gold.

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

So, you might have a cube – if you have all the gold in the world – you might have a cube that’s 67 or 68 feet on a side.

And you can take a ladder and climb to the top of it and say, you know, I’m sitting on top of the world and you can think you’re the king of the world.

You can caress it, polish it, do all these things with it. Look at this. But it won’t do anything.

All you’re doing when you buy it is hoping that someone else a year from now or five years from now will pay you more money to have something that will also do nothing, but you’re hoping that person will think that five years from now someone else will buy something from it.

In other words, you’re betting not just on how afraid people are of paper money, but also on how afraid people think they will be one year from now, two years from now…

The third category of assets is what you value based on whether it will produce or deliver.

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

And you decide how much to pay based on how much return you think the asset will provide over time. These are the entities that interest me and Charlie.

Now there is a logical sequel to this. If you buy that farm and actually figure out how many bushels of corn it will produce, how many soybeans it will produce, how much I should pay the tenant farmer, how much taxes I should pay, etc. If you think about it, you can make a rational calculation and the success of this investment will be determined in your own mind by whether it meets your expectations of what it will bring.

Logically, you shouldn’t care whether you get a quote for that farm in a day, a week, a month, or a year.

We think the same about businesses.

When we acquired ISCARm [an Israeli precision metalworking company]or we buy Lubrizol or whatever, we don’t go around every week getting quotes and say, ‘Up or down?’ or something like that. We look at the business.

We think the same about securities. When we buy a marketable security, we don’t care if the stock market is closed for a few years.

So when we look at Berkshire, we look at what we think can be achieved from the productive assets we own and how we can use that capital to acquire more productive assets.