Warren Buffett explains why stocks are better than gold

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President Barack Obama meets with Warren Buffett, the Chairman of Berkshire Hathaway, in the Oval Office, July 18, 2011. (Official White House Photo by Pete Souza)

Warren Buffett watchers won’t be surprised by the news that the Berkshire Hathaway CEO is not a fan of gold, and instead prefers investments in real productive enterprises.

In the latest issue of Fortune [2], Buffett has a “preview” of his upcoming annual shareholders letter, which will come out in late February.

In it he acknowledges his dislike of currency based investments, given the ongoing devaluation of the dollar and so on.

But contra many, who like gold as a hedge against devaluation and instability, Buffett still likes companies.

And he provides a simple argument for why.

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.

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?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.

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 (XOM) 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.

Hard to argue with, no?

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