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"This is a reflection 10 years ago, does not constitute investment advice, and is now turned out only to share with you. "
Shareholders: With gold prices at record highs, what do you think about investing in gold?
Warren Buffett: The world mines $50 billion worth of gold every year, and there is not that much need for it. The price of gold was $20 an ounce in 1900, rising to $35 an ounce in 1935 and $20 an ounce in the 1970s. Now, the price of gold is $500 per ounce. Gold does not generate income, but rather needs to be stored and insured. The S&P and Dow have outperformed gold, not to mention investing in stocks and dividends. From a long-term investment perspective, gold is not worth investing in. This is certainly the case, because the intrinsic value of gold itself is not high. Oil, as well as some other commodities, have a much higher utility value than gold. I like assets that always make money, and gold doesn't lay eggs.
Shareholder: As you said before, we are living in a special time, especially economically. From time to time, you'll hear disaster scenarios about the imminent collapse of global financial markets, some say that the world as we know it will make significant changes, others say that the resources of the future world will be better measured by the prospects for ensuring our basic survival, rather than by their value as speculative commodities, and so on – and that's where farmland comes into play again.
No one has done a better job of investing than you, and even if you don't invest that way, I'll invest with you because you're honest. I'm here to ask you, would you tell a single mother how to convert her Berkshire stock into gold, and when and under what circumstances?
WARREN BUFFETT: I can't imagine exchanging my stock for gold coins.
I'd rather believe in the intrinsic value of some good businesses – businesses that are run by good managers who sell products that people like to buy. You know, people have been buying for a long time, and then using their future efforts, their wages, to buy Joy candy, or Coca-Cola, or whatever. Instead of digging up some nuggets from South Africa and sending them to Fort Knox (FortKnox's safest vault in the nation), you know, after going through the shipping, insurance, and everything else, the price is going to skyrocket. I've never really been excited about gold. My father was a very keen man on the gold standard. I grew up in a family that loved gold, and even if I didn't own it, I had given it a chance.
I have never understood what the intrinsic value of gold is. You know, we'll sell you some at Bosen Jewelry, but I'm never going to trade the shares for it. The idea of exchanging "productive" assets for "unproductive" assets is new to me.
As far as the prediction market is concerned, it has always had a market. People like to hear prophecies. If I were to say that I was going to give some predictions today, we would estimate that there would be a million people here. I mean, they're hungry for predictions and presentations at senior clubs or strategy clubs or whatever. People just love that. That's what the whole industry is built on, you know, people coming out of Washington love to talk about political projections, and I don't even read that in the newspapers. Because the various predictions are basically just empty fillers.
You mentioned Edgar Casey. Ben Graham knows him well. But I've never seen him say his stuff works. There will be some great surprises in the world. There is no doubt about it. But I don't think betting on a particular market is a very sensible strategy. In fact, we're happy to bet on it when it comes to mega-catastrophes. We are sure that within the next 50 years, there will be an earthquake of magnitude 7.0 or greater in California. But we don't know where or when it will happen. If something like this happens tomorrow, we're willing to pay a lot of money for it. Because people do fear disaster. In this case, this prediction is completely correct and has an insurance value. But in our opinion, forecasting is not at all the right way to live economic life. Charlie?
MUNGER: I think when a single mother wants to own gold, it might be that she's faced with the Jews in Vienna in 1939, or something like that — you can imagine that in some case, some form of transportable wealth, like gold, would be more useful than anything else. But without these extreme conditions, I think gold is useless.
WARREN BUFFETT: It's hard to imagine anything else that could make gold so useful other than fleeing the country. Neither Charlie nor I thought about escaping the country, though. Still, I must say that one thing that I think is reprehensible is that people who make a lot of money in the U.S. and then leave the U.S. to avoid taxes in another tax jurisdiction or something like that. But I'm a little crazy. I really don't mind paying taxes. While there are many legitimate reasons, people who are so well-organized often don't live in their tax jurisdictions. You know, that's not my example.
Shareholders: Good morning, Mr. Buffett and Mr. Munger. My name is Martin O'Leary and I'm from Austin, Texas.
Mr. Buffett, given that you've written in the past about the U.S. dollar and the foreign exchange forwards you hold, as well as the economic policies of many countries that tend to devalue their currencies, do you think gold can be considered a viable investment alternative to paper money?
WARREN BUFFETT: Yes, we're not interested in gold.
Historically, gold has been considered the first refuge from currency devaluation.
But, you know, the same goes for a barrel of oil. The same goes for an acre of land. A piece of Coca-Cola too. So is the Joy Candy.
Joy Candy – If the dollar falls by 50%, we will sell Joy Candy at twice the current price. We will buy the candy at the same actual price.
To buy a pound or two pound of candy in a box, people will work the same number of minutes or hours per week.
So we're more inclined to one – some kind of asset, and it's going to be useful, whether the value of the currency is today, or 10% of what it's worth today, or whether people are using seashells to trade.
Because people will continue to eat, they will continue to drink, and they will do all sorts of things. And their preferences, in real dollar terms, will bring us more or less the same economic benefits.
We don't trade ownership of these assets for a big chunk of yellow metal, which is of little real use except for those who seek to flee the dollar, and it seems to us that they really haven't thought about the consequences of fleeing – where they should flee to.
Charlie?
Munger: yes. If you have a chance like Berkshire Hathaway, then on average, gold is a stupid investment.
Warren Buffett: My father (Howard A. G. Buffett) is an avid gold lover. So I sat around the table – my two younger sisters were also here. They will testify.
We sat together and listened to the merits of gold, which was in 1940, when the price of gold was $35 an ounce. At the same time, we will have some storage and insurance costs.
You know, today, 65 years later. After going through world wars, nuclear bombs, all sorts of things, gold went from $35 to over $400, and after subtracting those fees, the compound interest rate was calculated, and the yield didn't make my salivation.
Shareholder: What I want to ask is, it's a sophistry and a question. This question is about financial education, or the study of financial history, which might help people deal with this market — how to invest at or near the apex of Western civilization. When you refer to your father's advice in the 1930s about "buying gold", then you say, "For 60 years, gold hasn't done very well". We know that gold was fixed at a fixed price for many years in the 30s and was not really released until 1971. And then its performance catches up, probably some kind of rebound. If you look at gold right now, and derivatives and real estate bubbles and many other things, maybe looking at it in the current conditions, gold wouldn't be such a bad investment.
So, my question is, do you think that as a banner of the financial world, do you have some kind of obligation or responsibility to, in a way, focus on classical gold as a benchmark or a cornerstone of the financial system? In your annual letter to shareholders, it might be good to talk about how people can protect themselves from the problems caused by declining purchasing power or our financial domination today in an environment full of bubbles. Thank you.
WARREN BUFFETT: Yes. I would say that gold, as a store of value, would be very low on my list. I mean, I'd rather have a hundred acres of land in Nebraska, or an apartment, or an index fund. We can say that gold was liberated more than 30 years ago. Even though it's market-based, if you go back to 1900, you know, the price of gold was $20 at that time. From 20 to 400 it took 100 years.
The Dow Jones rose from 60 to 12,000 in the same period, and while you have it, it also pays you dividends. Since the beginning of the century, the Dow Jones has returned 66x. I forgot where the end was, but it should be 1.1-12,000 points. Like I said, during this time, it's going to pay you something every quarter. If you own gold, you paid $20 around 1900. And then we'll say that in a hundred years you have $400. At the same time, you pay for the insurance and maybe some storage costs. It's really not a store of value. I'm not arguing about paper money, I think, it makes sense to worry about paper money for a long time, but you know, it's just the last thing I want to have in this situation.
A farm has benefits, an apartment has benefits, and a business has benefits. Some companies will produce these products at real value in the course of their operations. I'd rather be able to sell people a pound of candy in 20 years. If they were selling shells, I could buy some shells instead of paper money.
I just don't think of gold as a store of value. The truth is, it doesn't work very well. But whether it worked well in the last 100 years, or the last 50 years, or the last 10 years, I don't see any reason why, you know, why it will work well in the future.
I forgot whether our gold reserves for a year were three thousand tons or four thousand tons. And, you know, we dug it out of the land in South Africa, we put it in the land in Fort Knox or somewhere else, or at the Federal Reserve Bank of New York. This won't help much for anyone.
Charlie, what do you think of gold?
Munger: Well, I think gold and things like that, if you're a wealthy Jewish family in Vienna in 1935, that's a good thing because you're at risk, and gold has a huge utility for you. But for Berkshire in 2005, we weren't interested at all
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